This Fickle Market Spark

The 'Fed pause' is likely sticking around... Key inflation data coming Thursday... Momentum favors the bulls... This fickle market spark... We are seeing deflation already... Raising a glass to the markets...

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Wall Street expects the 'Fed pause' to continue...

A month ago, bond traders were less certain about what the Federal Reserve will do next with interest rates. According to the CME Group's FedWatch Tool, the folks who buy and sell $5 million federal-funds futures contracts saw a 1-in-5 chance that the Fed would hike rates.

That prospect is now completely off the board...

After the last few weeks that have included more and more concerning economic data published, these same big-money traders have been betting with up to 99% certainty that the Fed's rate hike in July was its last one for a while.

Wall Street's consensus thinking is that 40-year-high inflation is conquered, even if it may not feel that way on Main Street... So the Fed won't raise rates again to "fight" inflation. The cost of Uncle Sam's bloated $33 trillion of fiscal debt also contributes.

I (Corey McLaughlin) don't think Fed Chair Jerome Powell will go so far as to unfurl a "Mission Accomplished" banner behind him at his next press conference about inflation. But that's essentially what enough investors would seem to find appropriate...

When the Fed reconvenes in a few weeks for its last policy meeting of the year, the expectation is the central bank will keep its benchmark lending rate steady in a range between 5.25% and 5.5% for a third straight meeting. (The fed-funds rate is actually a suggested range for banks, not a hard number.)

In other words, the "Fed pause" will remain on... And as we've said before, that has historically been good news for stocks – to the tune of double-digit returns for the benchmark S&P 500 Index in the 12 months after the pause begins.

There are two reasons for this. First, a pause means the "cost of money" isn't getting any more expensive. And secondly, it means the economy hasn't gotten to a terrible enough point yet where the Fed thinks it needs to cut rates to juice it. We might get there soon enough, though.

The next possible market catalyst...

The markets have followed their Thanksgiving break with three quiet trading days. But volatility could pick up again later this week. As our Ten Stock Trader editor Greg Diamond wrote to subscribers yesterday...

If we look at the fundamental catalysts, the later part of this week will likely be important.

The Personal Consumption Expenditures ("PCE") data, which the Federal Reserve likes to watch, comes out on Thursday.

As Greg alluded to, the Fed says that the PCE is its preferred inflation gauge. Specifically, it looks for 2% inflation based on the core PCE – which strips out food and energy prices because they're "volatile." (That doesn't make a ton of sense if the Fed cares about everyday people, but that's what the central bank does.)

The latest monthly reading, covering October, will come out on Thursday morning...

It is reasonable to expect the numbers to look a lot like the consumer price index ("CPI") data from October, published earlier this month. It reflected the pace of inflation continuing to cool – and even some signs of deflation in some areas. October CPI grew at an annual rate of 3.2%, down from September's rate of 3.7%. Stocks jumped afterward.

2% inflation is actually in sight...

At least by how the government defines it...

A St. Louis Fed measurement of core PCE for the third quarter is currently sitting at 2.4% annualized growth. That's down from 3.7% in the second quarter and 5% in the first quarter. And it's well off a peak of 6%, which occurred in the second quarter of 2021 and the first quarter of 2022.

The Cleveland Fed's inflation "nowcast" is projecting 3% PCE annualized growth for October... and lower for November.

These are backward-looking numbers we're talking about, of course, but the latest set could act as confirmation for enough investors about the continuing slowing trend of inflation. In the context of some concerning economic data lately, that would reinforce to bulls the idea that the Fed is done with its interest-rate hikes – and be a catalyst for higher stock prices.

Momentum favors the bulls...

Even if we're totally wrong on this potential trigger for the next significant market move, momentum is in favor of the bulls.

As our DailyWealth Trader editor Chris Igou explained today, the S&P 500 gained in four straight weeks thanks to the Fed "doing nothing" with rates at its previous policy meeting and the Treasury's plans to issue less new debt than expected. In total, the index is up 11% since October 27. And that suggests more positive returns ahead...

Chris looked at what would have happened if you'd bought the S&P 500 each time it saw four straight weeks of gains since 1990. You'd have averaged a 9.4% return over the following 12 months – higher than the average otherwise of 7.7% – and would have made money 83% of the time, Chris explained. He added...

What's more, 63% of the gains over the next year were double-digit returns. And the biggest return was 40%.

So, enjoy. Chris' big point in DailyWealth Trader today was that if you feel you "missed" a buyable bottom late last month, don't worry. More upside could be ahead.

Then comes the next thing...

Disinflation – or a slowing pace of inflation – is one thing. It's "good news" that could be perceived by enough investors as bullish fodder... Stock prices can go higher, especially as longer-term yields continue to fall from 15-year highs and the relative strength of the dollar weakens, as it has been.

I want to end today with a warning to not be caught off guard by what might be around the next corner.

Folks telling a disinflation narrative are walking a fine line...

As we mentioned last week, we've heard the other "d-word" more lately, too – like from the CEO of Walmart, America's largest retailer (and grocery store chain). We're referring to deflation, or a cut in nominal prices, which can turn the outlook and calculus for businesses and an economy quickly, even if it might be welcome for a while after the run of high inflation we've seen...

And we are seeing deflation already...

It's not just in the commentary of one CEO. Our colleague Dr. David "Doc" Eifrig and his research team track all kinds of inflation data in his monthly Income Intelligence newsletter, and the latest report may grab your attention...

Economic indicators that they follow show deflation slightly outnumbering inflation, 9-to-7, with industrial and food prices leading the way down...

Again, deflation might hit as welcome news in the very short run for anyone interested in paying lower prices for goods and services (like regular Americans with bills). But persistent deflation (or even just a period of "below trend growth," which has generally been the Fed's goal) will make life tougher for businesses and people in the longer run...

Some possible losers and winners...

Deflationary periods have been few throughout U.S. history, but they're significant when they occur. The U.S. experienced deflation amid the financial crisis in 2009, for example, and during... the Great Depression, when prices fell by about 7% each year from 1930 to 1933.

Even if the headline CPI or PCE numbers don't dip into deflation territory anytime soon (that is, negative 2% or 3% as opposed to positive), it could still be a problem. Falling prices could make it harder to turn a profit, and deflation also makes it harder to repay debt that was incurred in lower-valued dollars.

Such is the trouble with a central bank trying to manipulate a roughly $30 trillion economy and Congress doing its large part to influence things, too. There are always "second order" effects... like first creating 40-year-high inflation with $6 trillion in stimulus and ultra-low interest rates... then making moves to "fight" the inflation with higher interest rates.

Both ends of the great pandemic financial experiment have led to all the serious problems that Stansberry's Credit Opportunities editor Mike DiBiase described so well in yesterday's edition... like record debt levels and costs for households, corporations, and the U.S. government... and outcomes we haven't seen yet or can entirely predict.

Mike expects dire times for the economy, stocks, and bonds in 2024 as the reckoning arrives. (And, for Credit Opportunities subscribers, he expects a huge opportunity to buy the right corporate bonds as panic grips most investors. Click here to learn more about that.)

Ultimately, this confluence of factors might also lead the Fed to cut rates to help the economy... weaken the dollar more... and possibly retrigger high inflation concerns all over again...

You may also have noticed in the Income Intelligence inflation tracker how the prices of gold and silver are two of the things still "inflating." They are real assets, and their relative values are rising while the price growth of other things – including the dollar – is slowing or falling. These precious metals, once again, are proving their worth.

Gold is up 12% since its most recent low on October 5. Silver is up 20% in the same period, while the U.S. Dollar Index ("DXY") is down almost 4% since its most recent high on October 3. Remember, the dollar has had a consistently inverse correlation with stocks for the past few years, as inflation and interest rates have dominated the markets.

For now, momentum also favors the bulls when it comes to stocks, but in closing tonight, we raise a glass: Here's to an optimistic wintertime spark (disinflation and a Fed "pause") not rapidly turning into a wildfire of more deflation and a recession. But we're on the lookout for smoke.

New 52-week highs (as of 11/27/23): Alamos Gold (AGI), Amazon (AMZN), Brown & Brown (BRO), CBOE Global Markets (CBOE), Cameco (CCJ), Cencora (COR), Copart (CPRT), CyberArk Software (CYBR), Denison Mines (DNN), Enstar (ESGR), Kinross Gold (KGC), London Stock Exchange Group (LNSTY), Microsoft (MSFT), Palo Alto Networks (PANW), Qualys (QLYS), Spotify Technology (SPOT), StoneCo (STNE), and Sprott Physical Uranium Trust (U-U.TO).

In today's mailbag, feedback on Stansberry's Credit Opportunities editor Mike DiBiase's Monday Digest about the best investment for the coming market catastrophe... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I read the report that you sent out yesterday. I really appreciate all the effort you put into the verbiage as well as the top-notch graphics. Great insights!

"I'm looking forward to reading more of your works/analysis! Thank you." – Subscriber Kevin H.

"I totally agree with Mike. The Fed has painted itself into a corner (partly because politicians have been crazy stupid, especially the last few years with their tax and spend MO.) A billion dollars to the government is like $20 to the average American. It's just a one and nine zeros. It used to be a big number. Now the big number is trillion. And that has become just a one and 12 zeros. The president writes a check for $100 billion to Ukraine like it's just chump change.

"Every year at the budget meeting they suddenly find out that there isn't enough money left to run the government and what do they do? Just raise debt ceiling!! Stupid is what stupid does. The Fed didn't stop raising interest rates because inflation was cooling, they stopped because they were going to kill off the economy. Now the financial future of the U.S. is so far off the rails, the Fed has only one option. To print more money, inflate the value of our money, and pay future obligations with cheaper dollars." – Subscriber John M.

All the best,

Corey McLaughlin
Baltimore, Maryland
November 28, 2023