Let the Good Times Roll – For Now

Taking stock of the latest inflation report... Another Fed 'pause' could be coming... That has been bullish for stocks historically... Let the good times roll – for now... How playing it safe can double your money...

August hasn't gotten off to a great start...

But for just the second time in the past seven trading days, the benchmark S&P 500 Index, tech-heavy Nasdaq Composite Index, and sturdy old Dow Jones Industrial Average each closed in positive territory today – though not by much.

The catalyst was the latest inflation report from Uncle Sam, which we noted on Monday that we'd watch for given that it could stoke some volatility for stocks.

The consumer price index ("CPI") for July came out this morning... And for the second month in a row, the numbers beat Wall Street's expectations, meaning they showed the pace of inflation last month was less than anticipated.

(Again, before writing in to tell me that these government numbers are unbelievable... know I am also a skeptic as well. Still, enough folks with enough money in the publicly traded markets care about the data, so here we are.)

The latest CPI report showed prices accelerating at 0.2% for the month. That was in line with the consensus estimate... But the year-over-year CPI checked in at 3.2%, slightly below the 3.3% expectation. And core CPI – excluding food and energy – was 4.7%, the lowest since October 2021.

Those are still historically high numbers, but they continue a trend of decelerating inflation from a peak of around 9% in June 2022.

In particular, the 0.2% month-over-month rise in prices measured by the CPI is more in line with what had been "normal" over the past few decades, before the pandemic and the U.S. government's stimulus response took inflation on a wild ride.

So, all in all, investors celebrated today, on balance. As our Ten Stock Trader editor Greg Diamond wrote to his subscribers in a market update today, bonds, stocks, and precious metals were up and the U.S. dollar was down.

 Another 'pause' might be coming...

I (Corey McLaughlin) am talking about a pause in the Federal Reserve's interest-rate hiking spree of the past year-plus...

We have talked less than usual about interest rates this month, thanks in part to special reports lately from our colleagues Dr. David "Doc" Eifrig (on trading options) and Dave Lashmet (on the leaders in weight-loss-drug development).

But today's inflation data – coupled with the latest monthly jobs report last week – makes for a good time to handicap the likely next step in the Fed's monetary-policy plans. We now know the unemployment rate just fell again while inflation the past two months has slowed by more than the markets expected.

Wall Street's latest consensus view is that the Fed will likely keep its benchmark bank lending rate where it is – in a range of 5.25% to 5% – when it meets next month on September 19 and 20. There is logic to this one.

Last month, Fed Chair Jerome Powell said the central bankers wanted to see inflation keep decelerating if they were to ease off the inflation "fight." As we wrote on July 26, Powell said at a press conference...

We'll be looking at everything. And of course we'll be looking to see whether the signal from June CPI is replicated, or the opposite of replicated, or somewhere in the middle.

We'll be looking at the growth data, the labor-market data very closely, of course, and making an overall judgment. It's the totality of the data, but with a particular focus on making progress on inflation...

As of today, the string-pullers at the Fed have seen the same story on inflation – again, as far as their own considerations are concerned, not how it might show up in your budget – for two straight months. One more CPI report, covering August, is due before their September meeting.

Notably, the core personal consumption expenditures ("PCE") index that the Fed says it weighs most heavily also dropped to 4.1% year-over-year growth in June. That follows three straight months of 4.6% increases.

And the Fed folks won't say this out loud, but they are also cautious – or frightened – about doing too much. (It's probably even more so now that two of the big three ratings agencies have come out to play with recent downgrades on government debt and U.S. banks.)

Dan Ferris and I have had a laugh or two talking about the CME Group's FedWatch Tool on recent episodes of the Stansberry Investor Hour. As we've observed, its reported odds on rate hikes constantly change – sometimes wildly and quickly.

But it is good for tracking the leading view of bond traders with real money in the markets.

Today, this tool shows that federal-funds futures traders are putting a 90% probability on the Fed pausing rate hikes again at its meeting next month. That's up from about 70% just a month ago, and 82% last week.

What this means is that investors are thinking, once again, that the Fed is closer to the end of its rate-hike plans than to the start.

Over history, that has been good for stocks...

Back in a May 9 issue of our free DailyWealth e-letter, Stansberry Research senior analyst Brett Eversole analyzed why stocks soar when the Fed pauses. He wrote then...

The answer isn't what you might intuitively expect. But it's good news.

Over the past 40 years, stocks have a history of soaring after the Fed pauses rate hikes. And it means we could see the markets soar 20% over the next year.

Now, since Brett published this piece on May 9, shortly after the Fed put its first "pause" earlier this year on the possibility table, the S&P 500 is up about 8%. Should another Fed "pause" be in the offing, another leg higher for stocks could get going soon.

In my narrow central-bank analysis... so long as the Fed sees a reason to possibly pause, but also the possibility of raising rates in the future, it means the central bank thinks the economy is still in a position of relative strength.

Inflation numbers are coming down and reported unemployment is low, but the economy is not weak enough where the central bank thinks it needs to cut rates to goose growth. And as Brett shared...

Remember, the stock market is a forward-looking machine. It prices in whatever we expect to happen over the next six to 12 months.

Because of that, buying when the Fed pauses rates is a smart bet. The table below shows what happened a year after each pause in the rate-hike cycle over the past four decades.

Take a look...

We've seen six other rate-hike cycles in the past 40 years. In five of those cases, stocks were dramatically higher a year later. And the average gain was an impressive 19.5%.

As Brett continued in the May 9 issue of DailyWealth...

These numbers might not gel with your expectations. But the forward-looking nature of the stock market really does explain what's going on. Just think about our current situation...

Stocks fell 25% peak-to-trough last year. During that time, unemployment fell... the worst of inflation passed us by... and the seemingly inevitable recession never materialized. Stocks lost a quarter of their value anyway. And that happened because the market had already priced in the likelihood that those bullish trends would reverse.

The stock market's forward-looking mechanism doesn't always do a perfect job. But most of the time, if folks are worried about something in the future, the market has already discounted prices based on that possibility.

That's why when the Fed pauses, stocks tend to soar. Even though the worst of the economic pain isn't over yet, it's already priced in... which puts a floor under expectations. That means stocks tend to move higher, and fast.

Enjoy the good times – for now...

Today, the S&P 500 bounced right off its 50-day moving average, its technical short-term trend. And about 63% of stocks in the benchmark U.S. index are trading above their 200-day moving average, or technical long-term trend. Take a look...

In the meantime, the dollar – measured relative to other major world currencies – is still in a downtrend that began last fall. As we've described before, a weakening dollar benefits U.S. stock prices and anything else denominated in dollars.

The chart of the U.S. Dollar Index ("DXY") is almost a mirror image of the S&P 500. If the Fed's plans don't change materially, this relationship could continue.

But also remember, these times will not last indefinitely...

There are always risks out there that could upend the status quo. A rebound in inflation (quite possibly with energy prices moving the way they are) could move interest-rate expectations higher again, hurting stocks.

Alternatively, a dose of deflation in specific industries or broadly, like what's happening in China now, could change the game. So could mounting job losses. A credit crisis is possibly ahead, too. Any or all of those situations would likely push the Fed to cut rates because the economy will need a boost.

This is when you'll see the elusive Fed "pivot." And it probably won't be good for stocks...

In June, we reviewed the history of similar time periods. Specifically, we looked at times in which inflation was this high and the yield curve was as inverted for as long as it has been today in the months ahead of the Fed cutting rates. It hasn't happened often... just twice in the past several decades. But stocks fell about 13% both times.

This could be in the cards should an "official" recession show up later this year or in 2024. As we wrote in the June 28 Digest, that's not the worst pullback in recorded history, but it's notable.

The other good news is...

Even if you're skeptical of the recent run-up in stocks or whether it will continue, you don't need to take a lot of risk to make money right now in this market.

That's the message Dan Ferris is sharing right now. It's tough to say if or how long this trend higher for stocks will continue, but with his approach, it doesn't matter.

You'll hear more from him tomorrow as usual, but I did want to mention this today. In a new video, he explains how "playing it safe" with his latest recommendations can double your money or better in the months ahead.

Click here to get all of the details now. In the presentation, Dan also talks about how, before joining Stansberry Research, he got burned by bad investment advice and vowed to turn his life around. That's how he found value investing. It's a story worth hearing.

RFK Jr.'s Plans and the Next Big Threat to America

Edward Dowd, co-treasurer to Robert F. Kennedy Jr.'s presidential campaign, talks about the candidate's recently announced plan to back the dollar with hard currencies like gold, silver, or bitcoin.

"Robert's introducing the conversation into the electorate. The current monetary system, as it stands, is debt-based. Might is created through debt. We've reached the endpoint, so there has to be a new system," Dowd tells our editor-at-large Daniela Cambone...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and X, formerly Twitter.

New 52-week highs (as of 8/9/23): Covenant Logistics (CVLG), Fortive (FTV), Eli Lilly (LLY), VanEck Oil Services Fund (OIH), Phillips 66 (PSX), SLB (SLB), Walmart (WMT), and West Pharmaceutical Services (WST).

In today's mailbag, feedback on Stansberry Venture Technology editor Dave Lashmet's update in yesterday's Digest about the companies leading the weight-loss-drug race... and another reply to Tuesday's report on credit ratings agency Moody's downgrading several U.S. banks... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dave Lashmet continues to amaze me with his stock research over the last decade. His picks of NVDA and NVO, and almost 30 others have led to sizable gains for my portfolio. I am anxiously waiting for the next stock beginning with the 2 letters NV, which could stand for aNother Venture (NV) stock." – Subscriber Steve H.

"Hi Corey: In the August 8th Stansberry Digest article 'Another Day, Another Downgrade Story...' the discussion centers around Moody's downgrade of a handful of small-to-medium-size banks and their warning that several large banks are being considered for downgrades.

"Unlike Fitch's downgrade of U.S. Government debt, Moody's focus is on the unraveling of the threads that form an important part of the fabric of the U.S. economy. Moody's actions and thinking supports Mike DiBiase's and Bill McGilton's prediction that bankruptcies – both corporate and individuals (with massive individual bankruptcies leading to corporate bankruptcies including the banks and other lenders) – will create a further unraveling of the U.S. economic fabric and a severe recession (I think depression).

"What readers should understand is that the economy and stock markets do not have to be in the ruinous conditions they are in today. If some semblance of proper fiscal and monetary management at the Federal Government level had continued to be practiced from January 2021 until now, the U.S. economy and stock markets would be sizzling; we would have overcome the inflation caused by the Trump Administration's spending to get the U.S economy running again after the COVID-inspired shut down; and a reasonably healthy financial condition of individuals and corporations would be the norm.

"Our economic and stock market problems are of our Federal Government's making. They have been purposely caused by a handful of those in Washington that want to fundamentally change America into a Third World nation so they can personally enrich and empower themselves.

"The conditions that have resulted in Fitch's and Moody's actions have been intentionally created. Thank you for the interesting information." – Subscriber Michael U.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 10, 2023