Inflation’s significant drop in 2023, not seen since 2009 and 1982, preceded periods of sustained growth in the S&P 500, raising the possibility of another bull market. This decline is measured by the Consumer Price Index (CPI), which tracks the price change of a wide array of goods and services. The U.S. Federal Reserve, aiming for a 2% annual CPI increase, adjusts the federal funds rate to influence overall interest rates, impacting asset prices including stocks, bonds, and housing. The decline to 4.1% in 2023, from a 40-year high of 8% in 2022, mirrors conditions that historically led to market upturns.
The rapid response to high inflation, with the federal funds rate hike from 0.25% to 5.5% within 18 months, paralleled strategy shifts following past inflationary peaks, subsequently kickstarting periods of significant market recovery. For instance, post-2009’s CPI drop, a series of strategic interventions, including quantitative easing and maintaining low interest rates, spurred a nine-year S&P 500 rally. Similarly, the early 1980s saw a robust market rebound following aggressive interest rate adjustments by the Fed.
Notably, the current economic context suggests potentially favorable outcomes for growth stocks, as predicted CPI decreases may prompt the Fed to lower interest rates, enhancing funding access for businesses and making stocks more attractive compared to safer investments like CDs and bonds. Despite the current quantitative tightening, the S&P 500’s recent performance hints at the start of a possible new winning streak, reminiscent of the rebounds seen after the significant CPI drops of 2009 and the early 1980s.
