Inflation is dead. In its place, a new era of a low-inflation stock market has been born.
OK, so inflation isn’t completely “dead.” But at 2.9% in July, as reported Wednesday morning, it has now (narrowly) reentered the Federal Reserve’s magical 2% realm for the first time in nearly three and a half years – since March 2021.
For all the inflation angst during those past three and a half years, the market has fared pretty well overall – the S&P 500 is up just over 30% since the first CPI print north of 3% was reported in mid-May of 2021.
On a per-year basis, that only slightly trails the average annual return in the large-cap index of 9.90% since its inception in 1928.
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So….no harm, no foul? Sort of. We did have to endure a bear market when inflation was peaking in 2022. And when the dust settled on all the selling and a new bull market emerged in late 2022/early 2023, the divide between “haves” (Magnificent Seven/mega-cap tech/artificial intelligence stocks) and “have nots” (basically everything else) was more pronounced than at any other time in the market’s history.
Thus, it hasn’t always felt like a true bull market these last 22 months, and unless you loaded up on mega-cap tech and AI plays, odds are your portfolio’s return these last three-plus years has trailed the 30% return in the S&P.
Bull Market Far from Over
The good news is, the bull market isn’t over! Even 10 days ago, when the VIX spiked above 65 (!) for just the third time in its history, I didn’t think this was the end – even though things were looking quite precarious after a 13% correction in the Nasdaq and 8.5% pullback in the S&P on the heels of a less-than-stellar U.S. jobs report, escalating tensions in the Middle East, and the dreaded Japanese “carry trade.” Sure enough, stocks have gotten in gear in the last 10 days, with the S&P up more than 6% and the Nasdaq up more than 7%. It appears the worst is behind us, at least for now.
Does that mean the next leg of the rally will be more egalitarian than it has been for most of the last 22 months? We’ll see. There have been stretches – like in the spring of 2023, November and December of last year, and this July – during which participation in this bull market has been more widespread, with small caps, value stocks and many unloved sectors joining the party. But those stretches have been fleeting.
The Last Time We Had a Low-Inflation Stock Market
Hopefully, a low inflation rate will translate to better market breadth, as it did from 2012-2020, a nine-year stretch in which inflation never topped 3%. During that low-inflation stock market environment, the S&P Equal Weight Index (+179%) mostly kept pace with the S&P 500 (+193%), despite often heavy weightings from the likes of Apple (AAPL), Amazon (AMZN), Google (GOOG) and some of the other usual Big Tech suspects.
Hopefully, this new period of low inflation will produce similar across-the-board returns.
To take advantage of a potential coming boom in the many sectors that have been overlooked and undervalued over the past two and a half years, I have a portfolio full of growth-at-value-prices stocks in my Cabot Value Investor newsletter. To learn their names, click here.
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