Wall Street had its worst day in over two years Tuesday after the August consumer inflation report came in hotter than expected.
The Dow Jones dropped 1,300 points. The S&P 500 shed 4.3%. The Nasdaq tumbled 5.2%. Cryptos lost more than 10%.
It was an ugly day on Wall Street. But it was also a gross overreaction.
There are five major reasons the stock market should rebound from Tuesday’s big inflation crash and continue its summer rally. Based on our fundamental and technical analysis, we think the market will rally 20% into December. And certain high-growth breakout stocks will surge 50% higher or more.
1: Inflation Is STILL Falling
So, what was lost in all the rhetoric yesterday about how “bad” the August inflation print was? The fact that inflation rates are still falling.
Consumer prices rose 9.1% in June. They rose 8.5% in July and 8.3% in August. Now, I’m no mathematics wizard, but I’m pretty sure that 8.3% is less than 8.5% – and that both are less than 9.1%.
Clearly, inflation is still falling.
Therefore, everyone isn’t freaking out because inflation has suddenly heated back up. It hasn’t. Instead, everyone is freaking out because inflation didn’t cool down as much as expected. Specifically, it cooled down by 20 basis points and not the 40 anticipated.
In other words, the stock market had its worst day in two years because of 20 basis points. That’s 0.2%. We dropped more than 5% on the Nasdaq because of a 0.2% miss on headline inflation. And that headline inflation is STILL trending in the right direction (lower).
Seem like an overreaction? It is.
Everyone’s extrapolating too much from too little here. There’s a lot of noise in the CPI calculations. Month to month, you can get a lot of variances in the numbers. Investors shouldn’t react to slight beats and misses but, rather, pay attention to the trends.
The trend has been, still is, and will likely remain decelerating inflation.
Therefore, following yesterday’s kneejerk and snowball reaction, investors should come to more rational senses in the days ahead. “Wait a minute… that inflation print wasn’t so bad… maybe we should buy this dip…”
A short-term rebound seems likely.
2: Stubbornly-High Shelter Costs Are Just Now Starting to Fall
If you dig into yesterday’s inflation, you’ll find something a bit shocking. The “beat” was pretty much entirely driven by shelter costs.
That is, most components of the CPI dropped in August. The percentage of CPI components growing by more than 4% annually dropped by 200 basis points in August. Disinflation was found everywhere in the print, except for one place – shelter costs.
Rents and home prices stayed stubbornly high in August. And because shelter costs are such a huge portion of consumer budgets, these stubbornly high shelter costs pulled inflation rates higher. Absent the shelter costs, inflation rates would’ve plunged last month.
Here’s the bullish thing. Rents and home prices are just now starting to fall.
For the first time in 20 months, asking rental prices in the U.S. dropped in August 2022, according to CoStar Group (CSGP). That’s important because asking prices are a leading indicator of actual rental prices. If asking prices dropped for the first time in August 2022, real rental costs will likely start dropping in September or October – the next inflation print, not this one.
To be sure, it was just a 0.1% drop in July 2022. But a drop is a drop. And it’s the first one since December 2020 (when inflation started becoming a problem). According to CoStar’s National Director:
“We’re seeing a complete reversal of market conditions in just 12 months, going from demand significantly outstripping available units to now new deliveries outpacing lackluster demand.”
Meanwhile, in the housing market, home prices declined in July 2022 for the first time in nearly three years, according to BlackKnight. That drop was more significant – 0.8% – the largest monthly drop since January 2011.
Things have slowed even further since then.
According to the most recent batch of data from Redfin (RDFN), 20% of home sellers dropped their asking prices in August. Median list prices dropped 3%. And the average home sold in August actually sold for less than its list price – a first in over 17 months.
The big picture: Shelter costs are starting to come down in a big way.
That’ll show up in the next inflation print and the one after that and the one after that. So, in context, this month’s inflation “beat” should prove to be an anomaly. Inflation rates will likely fall by more than 50 basis points in each of the next few months.
If that happens, stocks will roar back to life into the end of the year.
3: The Market Is Way Overpricing Hawkish Fed Policy
In response to the hotter-than-expected August inflation print, the market revised its future Fed rate hike expectations higher. Makes sense.
But the revision is way overdone.
Yesterday, the market strongly believed that the Fed would hike 75 basis points. Odds of a 75-basis-point hike stood at 91%. Some folks thought the Fed would be more dovish. The odds of a 50-basis-point hike were 9%. But the odds of a jumbo 100-basis-point hike were zero. It wasn’t even in the realm of possibility.
One not-that-hot inflation report later, and the market is now at 33% odds of a 100-basis-point hike.
In other words, in 24 hours, the market has gone from thinking that the Fed will 100% either hike 50 or 75 basis points to thinking there’s a significant chance the Fed hikes 100 basis points.
That’s a sharp pivot. Indeed, it’s too sharp.
This Fed does not like to surprise markets. A 100-basis-point move would be a surprise move.
Not to mention, many FOMC members have stressed many times over the past few weeks and months that 75-basis-point hikes are enormous by themselves and that 100 basis points is a bit “overkill.”
Could the Fed hike 100 basis points in two weeks? Yes. Are the odds of that hike as high as 30%? No. They’re more like 5%.
Therefore, we think the market needs to recalibrate its rate-hike expectations toward more rational levels. As it does, stocks should rebound.
4: The Stock Market Remains in a Technical Uptrend
Yesterday’s selloff was nasty. But all it really did was wipe out about four days’ worth of gains. We are simply back to where we were four days ago – and actually a little bit higher. We are most certainly well above the lows of June.
To that end, this selloff has happened within the bounds of a technical uptrend that the market’s formed since June.
Since then, the S&P 500 has formed a clear uptrend channel with a very reliable support line that’s been tested by three local minimums. It was tested a fourth time yesterday, and we held.
Just as important, this upward-sloping support line from mid-June is getting close to converging on a downward-sloping resistance line from early January. This technical formation is called a “symmetrical triangle.”
Typically, when a symmetrical triangle forms and converges, the convergence sparks either a breakout or breakdown, depending on the course of the asset heading into the triangle. If heading higher, the symmetrical triangle usually results in a breakout. If heading lower, the symmetrical triangle usually results in a breakdown.
Thanks to the summer rally, stocks are heading into this symmetrical triangle on an uptrend. Therefore, textbook technical analysis tells us that the convergence of this triangle will spark a technical breakout. If so, we see more than 20% upside in the S&P 500 into the end of the year.
If we do get that big rally in stocks, certain high-growth breakout stocks are going to soar a lot more!
5: An Ultra-Rare, 100%-Accurate Contrarian Buying Indicator Flashed Yesterday
Stocks fell by the most they have in over two years yesterday. But something else also happened for the first time in two years. Not a single big tech stock rose.
That is, not a single stock in the Nasdaq 100 rose yesterday. Not one! All 100 declined! That’s incredibly rare. The last time it happened? March 12, 2020.
You know what happened a week later? Stocks bottomed from their Covid selloff and roared higher into a new bull market.
This is not an anomaly. It happens every time.
Over the past 30 years, there have been only 13 days when every stock in the Nasdaq 100 closed lower. Nearly 80% of the time, stocks were higher three months later. About 85% of the time, they were higher six months later. And every single time, stocks were higher a year later, with an average gain of over 20%!
In other words, this is yet another 100% accurate historical technical indicator that suggests tech stocks will rally big over the next year.
As much as I love a good argument, that’s something not worth arguing over. The conclusion is pretty clear. It’s a great time to buy tech stocks so long as you’re planning on holding for at least a year.
The Final Word on August’s Inflation Fiasco
Let’s not sugarcoat it. It was the worst day of the year for Wall Street. In fact, it was the worst day in over two years for stocks. And by many metrics, it was the worst day since a pandemic shut down the global economy back in March of 2020.
But for all the “bad” that yesterday was, the stock market is simply back to where it was four days ago. Many growth stocks are back to where they were just two days ago!
In other words, we just had one of the worst days in years for the stock market. And yet, we only gave up a few days’ worth of gains.
Keep that in mind before you get spooked by yesterday’s selloff. Was it awful? Yes. Does it change anything? Not really.
Headline inflation rates are still falling. The one component of inflation that remains hot – shelter costs – is rolling over as we speak. That’ll show up in next month’s print.
The Fed is still due for a 2023 pivot as inflation crashes. Stocks remain in a technical uptrend. Bullish sentiment and technical indicators are flashing everywhere. Valuations remain discounted.
Honestly, after yesterday’s huge selloff, we are as bullish as ever.
Fortunes aren’t free. And if you want to make fortunes in the stock market by investing in bear-to-bull-market transitions – which is the best way to do it – volatility like yesterday is simply the price of admission.
Pay it. You won’t be sorry. By simply ignoring the day-to-day volatility and staying focused on the generational market turnaround at hand, you stand to make fortunes in the market over the next 12 months.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.