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Random Gleanings: Deflation Possible Soon??? Thumbnail

Random Gleanings: Deflation Possible Soon???

Random Gleanings

In this Random Gleanings Chris & Jesse are celebrating lower prices at the pump!  Chris offers some history on how falling gas prices - or even stable gas prices - have historically had a very desirable correlation to the direction of inflation moving lower.  With inflation being the scary headline du-jour, if inflation does begin to abate in relation to falling gas prices we begin to ask: could "less bad" news start to become good news for markets?

The fellas go on to provide some additional evidence in support of the possibility of lowering inflation numbers and some reasons to get a little more constructive in the face of such negativity.  Then, for you college football fans, Jesse invites Chris to wax philosophical on the potential quarterback controversy brewing in Tiger-town.  

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Charts & Write-up below...

 In this “Just the Charts” write-up of our Random Gleanings video from September 9th, 2022, the gist coming from the team is that a pretty solid argument can be made for inflation coming down faster than is currently expected.  If this is the case, it begs the question of whether the Wall Street axiom “Less Bad = Good” may come into play for markets in the near term.   With that set-up, we encourage you to ponder if the charts help make this case.


Jesse presented the data on the good vibes we’ve all been feeling on falling prices at the pump.  The national average price of gasoline has fallen from $5.016 on June 14th to $3.764 as of the time of recording the episode, with the benefit to those of us in South Carolina getting an additional 40¢ of the national average.  We’ll take it!

 Research partner Fundstrat shares with us a chart of the national average gasoline price since the start of the year.  Chris emphasized the point that a 25% drop in prices since mid-June is akin to a falling rock.  And as it turns out, CPI (see: INFLATION!) has historically fallen when gas prices simply stop going up.

Another Fundstrat chart shows some historical evidence of falling inflation numbers (CPI) when the rise in gas prices stalls or even slows from its trend.   The point here is that with gas prices now 25% lower in two months, such evidence would seemingly bode well for some parts of inflation cooling off.


 Chris went into the examples shown in the prior chart.  This chart shows what happened between Springtime 1974 and End of Year 1976 with gas prices (purple line), Inflation Rate (blue line) and the S&P 500 Index (orange line).  A 14.34% stock return over that 2 ¾  year period saw a bottom (October 4, ’74) to End of Year ’76 return of almost 73%.   Would have been nice to have had some dry powder at or near those lows to invest!

Similarly, in the Jan ’81 – Dec ’83 span, gas prices cooled off, inflation plummeted and the stock market took off.  

 Chris then brings us up to the present day and asks the question if the setup now has the potential to be similar this go around?  Can we see inflation numbers cool off and have a more positive outcome from the stock market like other times in history?  Perhaps… but Jesse is curious if there is any other supporting evidence for inflation coming down?

Chris shows this (above) chart from Bespoke Investment Group which graphs out the recent data from the Institute for Supply Management (ISM) representing that prices paid and supplier delivery times have improved (read: lowered and sped up, respectively) from the highs created by the economic shutdowns due to COVID. 


 The graphical chart prior is broken out in numbers fashion here by Fundstrat, which confirms that more businesses are, in general, paying less today for their goods than they were back in May of this year when inflation was still in the uptrend.  A downtrend in inflation would be welcome news for us all as consumers, for businesses looking to manage their cashflow and profitability, and therefore hopefully a benefit to markets having a chance to get more positive for future expectations.

One more piece of evidence (out of Fundstrat’s research) that Chris presented was a chart showing what Inflation Swaps (part of the derivatives market) are showing as odds for Month over Month (MoM) inflation rates through the end of 2023.   The point Chris emphasized (as reflected in the boxed in area) is that this market is not expecting any rise in the inflation rate through the end of 2022.  How do these month-over-month numbers play out for the year-over-year CPI numbers??   See below…

This chart from Bespoke shows some month-over-month paths to the CPI numbers we’re all more accustomed to (2.5-4.0%) that would likely bring some more positivity to markets.  If this begins to play out, and the market participants interpret the news as “Less Bad = Good”, it would seem that some of the negativity of markets may abate for a period.

In this graphic the point the guys make is that the Fed, while resolved in their intent to tamp down inflation may accomplish a good bit with talking tough, the bond market is a bit more sanguine… and the typical stock investor remains very bearish. We’ve talked in the past about how investor sentiment tends to get very negative right about the time markets begin to turn more positive, which begs the question… is it time to get more positive?


One final “nugget” of positivity Chris & Jesse cover is this note from Nick Colas at Datatrek, which provides an additional piece of constructive data about the looming concern of corporate profits falling in this environment.   Based on Datatrek’s information, history would suggest the signal of rising unemployment should come before you’d expect to see earnings fall, which definitely is not happening currently.

Friends, as always, we are here for you and your family.  This is a challenging time, and we are here to provide advice, plan for the future, and execute your plan.

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