Inflation is easing in a big way…

December’s Consumer Price Index (“CPI”) reading came out two weeks ago. It showed that U.S. inflation fell for the sixth straight month.

This is an important shift. The move in inflation rates is crucial to whether stocks rise or fall in a given year.

Inflation caused most of the troubles that investors faced in 2022… But now, we have good reason to expect inflation to fall. And while most folks won’t believe it, that means the odds of a stock market rally this year are darn high.

Let me explain…

Inflation peaked at 9% year over year in June, seasonally adjusted. It has fallen every month since… And December’s seasonally adjusted reading came in at 6.4%.

More important, the monthly rate has slowed to a crawl since July. The average monthly increase was below 0.2%. And if that trend continues, inflation will only fall further this year.

It’s a critical trend for investors to understand. That’s because stocks have a history of soaring in years when inflation falls.

To see it, I studied the data since 1950. I looked at whether the year-over-year inflation rate rose or fell during each year… and then what stocks did during that year.

Obviously, it’s tough to know in advance what inflation will do. But this is a case where you can be pretty certain a further decline is coming. And if so, we can expect double-digit gains in the S&P 500 Index. Take a look…

Since 1950, the average annual gain for stocks was 9.1%. And the market was higher 73% of the time.

That’s the baseline overall. But it’s clear that the direction of inflation is crucial…

Stocks were higher 77% of the time during years when inflation was down… leading to 12.2% gains. That’s more than double the gains from years when inflation was up. It’s also worth noting that inflation rises about as often as it falls.

Even more, the six best years in history happened when inflation was falling… And nine of the 12 worst years happened when inflation was on the rise.

Inflation trajectory matters for the market. When it’s falling, stocks tend to do well. That will likely be the case this year… And it means stocks could have one of their best years on record – with 25%-plus gains completely in reach.

This isn’t the consensus view. Most investors are waiting for the other shoe to drop. But stocks already took a beating last year. And this year, the inflation rate is likely to keep dropping.

The odds that stocks will rise this year just keep getting better. And if you’re willing to be a contrarian, buying stocks is the best move right now.

Good investing,

Brett Eversole

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Source: Daily Wealth