A Second Wave of Inflation for the United States?

Is there a potential for a second wave of inflation in the U.S.? Drawing comparisons to the inflationary period of the 1970s, we saw three major waves and a 70% market drop. The recent wave of inflation, the highest since the 1970s, led to a 25% market decline in 2022. Economists, including former Treasury Secretary Larry Summers, warn of a possible second wave driven by high government and deficit spending.

Super core inflation, excluding volatile food, energy, and shelter prices, rose in early 2024 but has since cooled, suggesting a sustained second wave may not be imminent. However, metrics including energy, food, and shelter prices are crucial, as rising costs in these areas can impact overall inflation. Gasoline prices have been declining since mid-2022, and food inflation is currently at a manageable 2%, showing no signs of increasing.

The stock market is significantly influenced by inflation and the Federal Reserve's actions. Despite high inflation, the market rose until the Fed began discussing rate hikes, leading to a 25% drop. The Fed has maintained interest rates above 5% since August 2023, with potential rate cuts likely to drive market gains. Recent meetings have seen a more hawkish Fed stance, though the S&P 500 surged afterwards.

The equal-weighted S&P 500 index, balancing the influence of major stocks, has been trending down, indicating potential market corrections or future rallies. Core inflation is at its lowest in four years, which could prompt more aggressive Fed rate cuts, potentially driving the market higher. The article concludes that lessons from the 1970s highlight the severe impact of inflation on the stock market, and investors should monitor comprehensive inflation metrics and Fed policy moves to navigate the economic landscape ahead.