My Inflation Prediction Might Be a Good Sign for Stocks

Yet again, one of my predictions came true.

I just wish it was one of my predictions about “good stuff” coming true instead of more bad stuff.

See, in last month’s issue of Living Rich Monthly, one of my flagship newsletters, I predicted “a rough September for stocks.”

“September has almost always been a bad month for stocks,” I wrote.

Because of aggressive interest rate hikes, because of inflation, and because of other seasonal effects, September looked like it would be terrible for investors. And indeed, it was terrible.

The market fell -9.5%, seemingly in anticipation of high inflation.

Not only did I predict the market decline in September, I predicted what the next inflation reading would be… down to the decimal point. 

In the most recent Heritage Quarterly Report, I wrote that “inflation is likely to hover around 8% year-over-year for several months before it starts declining.”

What was the basis of my prediction?

Arithmetic.

From the September inflation numbers, I created 5 scenarios: what would happen if the current CPI increased by 0% per month, 0.1% per month, 0.2% per month, 0.3% per month, and 0.4% per month.

On October 13, the U.S. Bureau of Labor Statistics found that inflation went up by 0.4% in September, making the year-over-year inflation rate 8.2%.

These numbers were exactly in line with my model.

While energy prices declined in September, food prices continued to climb at an extraordinary rate (which I also predicted in one of my paid newsletters). The cost of rent and housing rose as well.

And yet, despite this bad news, the market reacted generally favorably the day these numbers were announced, swinging from deeply down to an incredibly high one-day gain.

It remains to be seen whether we should be optimistic.

Personally, I am becoming increasingly bullish — at least temporarily.

According to my inflation models, including the one above, even if inflation continues to go up at this current elevated pace, we’re going to see year-over-year inflation decline below economist expectations by April 2023.

Additionally, the final three months of the year is typically the best time to own stocks, since this is when most companies do the most business and stocks have historically risen the most.

Will this happen? It is too soon to tell.

It is entirely possible that we will see a “bear market rally,” with stocks rising temporarily before declining again in December or January 2023.

However, if corporate profits and economic growth are good for the final few months of 2022… and if there’s a “disinflationary shock” in 2023… we could see an outstanding year in the stock market.

The situation right now actually reminds me of 1974/1975.

In 1974, the market fell about -30%. But in 1975, the market roared up over 31%.

But if you look at both years back to back, something becomes very clear…

The only way anyone could have captured those big gains in stocks was if they bought in the last few months of 1974, near the lowest point of a deep, deep bear market and during some incredibly frightening economic conditions.

That’s why I am cautiously optimistic and gradually adding a little bit of money into my stock holdings each month.

And I certainly hope you are too.