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Stocks hit double-digit returns after inflation peaked, history shows


(Bloomberg) – The euphoria that swept the stock market on Thursday had historically powerful justification: whenever inflation peaks, double-digit gains follow.

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The S&P 500, which is down 18% in 2022, rose 4.7% on Thursday after the rise in the consumer price index cooled in October more than expected, putting the index on track for the… The best CPI day since December 2008. Meanwhile, the Nasdaq 100 Index is up 6.1%. Both indices are on track for their best trading sessions since April 2020.

Unsurprisingly, US stocks struggled while inflation rose, but not after it peaked. Since 1950, the S&P 500 has posted an average total return of 13% over the next 12 months following 13 major inflation peaks, according to Jim Paulsen, chief investment strategist at The Leuthold Group. In the 10 cases where the index rose in the year after the spike in inflation, the S&P 500’s total return increased by an average of 22% the following year, data from Leuthold shows.

While no one knows if the bear market is coming to an end or if it will have to drop further, Paulsen noted that the “bad news” seems to have affected the stock market since the summer much less. compared to the first half of 2022. That comes with cyclical sectors and small-cap stocks that have beaten the S&P 500 in recent months, he added.

In order for the U.S. stock market to rally, the consistently high rate of inflation must fall at a faster rate, although investors could miss out on those huge gains if they wait too long. because markets tend to start rising from market lows before economic data bottoms out, according to Jimmy Lee, chief executive officer of The Wealth Consulting Group.

“Investors really need to be well positioned before the Fed signals a pause as the stock market is likely to move significantly higher from here by the time those words come out of the mouth of Fed Chair Powell, ‘ said Lee.

In the post-World War II cycles when consumer prices rose to 5%, the benchmark’s average returns six months, one year and two years later were 5%, 12% and 15%, respectively, according to Strategas. Research Partners.

Federal Reserve officials have aggressively raised borrowing costs in an effort to cool inflation that is near a 40-year high. The central bank raised interest rates by 75 basis points for the fourth time in a row last week, bringing the benchmark’s target to a range of 3.75% to 4%. Fed Chairman Jerome Powell told reporters after the decision that recent disappointing data showed interest rates would eventually need to move higher than previously expected, while also suggesting the central bank could adjusted to increase the scale right after December.

Philadelphia Fed President Patrick Harker and Dallas Fed President Lorie Logan recently said they expect the central bank to slow down the pace of rate hikes in the coming months as U.S. monetary policy approaches limits. But Logan noted at a conference hosted by her bank in Houston on Thursday that “it shouldn’t be seen as representing easier policy.”

However, the past eight rate hike cycles have seen the Fed continue to raise borrowing costs until well above CPI, according to Carson Investment Research. Market bets on the Fed’s policy rate have peaked at 4.8% in the first half of 2023, down from above 5% last week. That means there could still be more room for the Fed to raise rates to tame high prices.

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