The Big Inflation Lie

Stock Traders Believe the Hype and Hopium!

Is it seasonality, or just window dressing for fund managers to post year-end gains for their clients? Either way, Santa Claus arrived early and brought outsized stock-market returns for investors in December, irrespective of whether they were naughty or nice in 2023.

No matter how you try to explain or justify it, there’s no denying the euphoric feeling in the air on Wall Street lately. Large-cap stock traders are conveniently ignoring the troubling headlines in the news as they gleefully buy everything in sight, including the so-called “Magnificent Seven” tech stocks.

Meanwhile, economists are busy deciding whether 2024 will be bullish, ultra-bullish, or mega-bullish for stocks. Think back to late 2022, though, when analysts predicted poor stock-market returns for this year.

They were wrong then, but most retail traders will forgive and forget the economists’ wrong predictions because they don’t want to miss out on the next “moon shot.” Thus, we have five consecutive weeks of large-cap stock gains and possibly a sixth week in the works.

Still, people need an excuse to continue buying the “Magnificent Seven” stocks, even if it’s a false excuse. In this case, the prevailing narrative is that the Federal Reserve rode in on a white horse and defeated the inflation monster.

So, now we can all rest easy and assume that inflation will reach the Fed’s 2% target in short order. Then, the central bank can start chopping down interest rates like a lumberjack.

A whole lot of assumptions are being made here. First and foremost, you’d have to actually believe that the Fed defeated inflation. On Main Street, as opposed to Wall Street where everything is rainbows and unicorns, people are paying nearly $3,000 per month on new mortgages.

You can believe that the inflation rate is 3.1%, or you can look at the actual prices of groceries, rents, vehicles, and other essential items versus a year ago. Evidently, the Bureau of Labor Statistics wants us to believe them instead of what our eyes and bank accounts are telling us.

It’s not difficult to report a seemingly low inflation number when the prices of oil and natural gas happen to be down. The Federal Reserve can’t take credit for that, but they’ll gladly take credit for the false headline numbers and the sudden upswing in the stock market.

They’d rather not mention that October home prices rose 4.8% year over year, marking their biggest gain in 2023. They also don’t want to talk about the nation’s mounting student-loan debt; currently, around 7% of student-loan borrowers owe more than $100,000.

Both the data and anecdotal evidence show that many Americans are still feeling the pinch of inflation in late 2023. If the main factor holding headline inflation down is relatively low oil prices, then a big bounce in the petroleum price could bring inflation right back up to 2022 levels in a heartbeat.

Then, the Fed wouldn’t have its excuse to cut interest rates three or more times, which is what the stock market has already assumed and priced in. Still, we’re certainly not telling anyone to avoid stocks; we’ve discussed stocks as being an inflation hedge over the years, and it has in fact been such.

At the same time, there’s no need to pile into overpriced “Magnificent Seven” stocks if they just rallied in December based on false assumptions. There are pockets of value in the market if you know where and how to look for them; there are small-cap and mid-cap companies that we’re conducting our research on for the coming year.

2024 will be a memorable year, but not for the reasons that the analysts and most retail traders think it will be. Keep your eyes on the real economy and find value where it actually is, not where the pundits and politicians tell you where it is. And above all, don’t believe the big inflation lie, even if the narrative feels good in the moment.