Waiting for the Coast to Clear on Inflation – The Wealth of Common Sense

The Fed is likely to start cutting interest rates in the coming months, with good reason.

Last week it sounded like a victory against high inflation:

Now we have not had an increase in prices to the general inflation rate for two months.¹

Some experts still aren’t convinced it’s time to take the win just yet.

What about the 1970s?

There was a spike in inflation at the beginning of the decade, it fell, then accelerated again:

There are many differences between this economic period and the 1970s. People who want to use the analogy of the 1970s always fail to mention that inflation fell in the middle of the decade because of a severe recession. The stock market experienced a major crash in 1973-74.

This time we brought down inflation without recession.

Moreover, inflation was global in nature and fell at the same time across developed countries:

Inflation is in a better place than it was 18-24 months ago.

However, some people want to wait for the coast to be clear to ensure that this period of inflation is over.

That’s right.

The stock market is not waiting for the coast to be clear.

The S&P 500 fell as inflation topped 8% late in the fall of 2022:

Inflation had come down slightly from the peak but if you go back and look at the headlines in October 2022, nobody thought the big pain was over. The recession was the consensus forecast:

Stagflation. It is high for a long time. Pain in the front. Things looked bleak.

The S&P 500 is up more than 50% since inflation topped 9% in June 2022.

Look, it’s always easier to talk about stock markets with the benefit of hindsight. No one knows how bad things will get when we live in the middle of a bad recession.

But the point here is that buying opportunities in a bear market always seem clear and easy after the fact, but never in real time.

Economists can wait for the coast to clear before taking a victory lap on inflation and reducing prices.

The stock market does not stand still.

There is no sign when the coast is clear. No one rings the bell downstairs to let everyone know it’s time to buy. The stock market doesn’t wait for good news to happen; yes anticipate (sometimes right, sometimes wrong).

You can’t wait until the coast is clear to invest during a bear market. The bear market will be over before the economic data turns positive.

Michael and I talked inflation, the stock market, Kevin Bacon and more in this week’s Animal Spirits video:

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Further reading:
Why Today’s Inflation Is Not a Repeat of the 1970s

So here’s what I’ve been reading lately:

Books:

¹Inflation never “does” in the sense that prices always go up. It is rising at a reasonable rate.