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The Worst of Inflation Is Behind Us

Matt McCallMatt McCall's Daily Insight

Peak inflation is behind us.

At least that's what the latest Consumer Price Index ("CPI") report tells us. The numbers came out yesterday, and they clearly indicated that things are moving in the right direction.

Of course, there's more work to do. But consumers and investors can finally start to catch their breath. Let's talk about the result...

Headline No. 1:

Inflation slowed to its lowest level since October 2021.

McCall's Call: Thursday's CPI report showed that inflation rose 6.5% year over year. It was the first time the number was below 7% since November 2021.

On a month-over-month ("MOM") basis, the CPI declined 0.1% – marking the first negative print since May 2020. Declines in energy prices and used car prices pulled down the overall CPI.

Shelter inflation – which my team and I have been watching closely the past few months – remains stubborn, though. That figure matched its largest MOM increase since the 1990s, with a 0.8% rise in December.

But there's a delay in the reporting of shelter inflation. We're actually seeing signs that the housing market is cooling, as apartment rents decline and home price growth slows. So it's only a matter of time before these declines show up in the CPI and push inflation growth even lower.

What does this mean going forward?

Well, if we continue to see inflation decline 0.1% on a MOM basis, the year-over-year CPI reading would come in at 1% by May. Even if inflation rises 0.2% every month, the annualized CPI would still come down to 2.5% by May.

You can see this reflected in the chart below from market-research firm Bespoke Investment. It shows the future path of inflation...

Everything is pointing to inflation coming way down in the next few months. And that means the Federal Reserve can slow the pace of – or even pause! – its rate hikes.

We're already seeing this happen. The Fed raised interest rates 50 basis points (0.5%) last month after four straight increases of 75 basis points (0.75%). Now, the market is pricing in 25-basis-point (0.25%) hikes at the February and March meetings before pausing.

Even with all that "good" news, expect continued volatility in stocks as a result of the inflation and jobs data releases in the coming months.

In the meantime, I'm confident that peak inflation is now in the rearview mirror.

When the rest of the market finally sees this, look for stocks to begin a strong rally. While the action won't go straight up throughout 2023, a spring rally could be the start of a great year for equities.

Headline No. 2:

January is off to a roaring start. What does that mean for the full year?

McCall's Call: Inflation has been a major headwind for stocks over the past year. But as I just showed you, there are a lot of signs that indicate it has already peaked.

So that headwind could soon become a tailwind supporting the stock market.

And if inflation continues to cool, the Fed can finally stop hiking interest rates – which would be yet another positive for the market.

Those two factors – inflation and the Fed – will likely be big topics in the market this year. Only time will tell what happens there. But we're already getting clues that the next big move will be to the upside.

On Tuesday, I talked to you about the "first five days" rule. It tells us that if stocks are strong in the year's first week of trading, they tend to be strong for the following 12 months.

We've already checked that box. The S&P 500 Index notched a 1.4% gain in its first week of 2023.

But we can improve our odds even more by considering some other important periods: The last five trading days of the year plus the first two days of the new year (often referred to as the "Santa Claus Rally") and the entire month of January.

Carson Group Chief Market Strategist Ryan Detrick says that if stocks are higher during the Santa Claus Rally, the first five days of the year, and all of January, odds are that we're in for a great year ahead.

Check this out...

Since 1950, the average annual return for stocks after that confirmed signal was 17.5%. And the market was higher 90% of the time. You can see a summary of these results below.

It's uncommon to get a 90% probability in the stock market. So when I see odds like this, I get excited. I've been steadfast in my belief that stocks will have a big rally in 2023 – despite the pessimistic view of many other talking heads in the media.

So don't let the noise fool you.

Of course, it's a bit too early to begin a victory lap. We're only about two weeks into January. But stocks have started the year on a strong note, and this indicator puts the odds significantly in favor of the bulls.

There are a lot of good things happening in the stock market right now. And they all point to a great year ahead. That makes now the time to be putting your money into well-positioned companies for the long term.

If you wait until the rally has already begun, some of the biggest gains may have already been made.

Here's to the future,

Matt McCall
Editor, Daily Insight
January 13, 2023

P.S. I expect big things from 2023...

More volatility, yes. But that volatility will create countless opportunities to position yourself for the future.

To get ready, I ended 2022 by putting together a list of my top predictions for the new year. They cover a variety of topics – how high the S&P 500 will climb, how gold will perform, what will happen in the energy industry, and even what sports teams will reign supreme.

If you haven't already, click here to access my free report that highlights 10 things I expect from 2023.

But I didn't stop there. I actually came up with 20 predictions... and I published the FULL list for my subscribers.

If you're just as excited about the new year as I am, I urge you to join us on our wealth-building journey. You'll gain instant access to ALL 20 of my predictions...

Plus, you'll be the first to know when I uncover the inevitable opportunities coming our way.

I'm confident that 2023 will be a great year. So click here now to find out how to claim a trial to The McCall Report and set yourself up for success.

Did You Miss My Latest Podcast Video?

On this new episode of Making Money With Matt McCall, I welcome Marko Papic. He's a top-down investor like me and one of my favorite macro analysts. We break down what we're seeing in the global market and drill down into specific sectors and asset classes.

We cover a lot of topics on the show. You'll hear what Marko has to say about inflation, the Federal Reserve, and the consumer. And he highlights specific countries from which he expects outperformance in the future. Tune in for more details – and to find out what investment Marko would own for the next 10 years.