August's decline is not the end of the 2023 rally in U.S. stock market.
August's decline in stocks was driven by reflation fears and persistently high Treasury yields; but now these two trends are expected to reverse!
U.S. core inflation is likely to fall in August, which will reignite disinflationary optimism.
U.S. Treasury yields, which spiked in August, are expected to fall in September as economic and inflation data continue to weaken.
US stocks are poised to soar in September as data shows a reversal in the trend of reflation fears and Treasury yields.
U.S. stocks have risen with great potential in 2023. However, the decline in August once sparked fears of a trend reversal. Currently, it looks like investors were overly concerned. Stocks did pull back about 5% in the first 3 weeks of August, but pulled back in the last week with $S&P 500(.SPX)$ being just one step away from a new all-time high. Get ready for another round of gains in U.S. stocks.
Excitedly, U.S. stocks are set to get a big boost in September thanks to inflation data released this morning.
Specifically, the U.S. Personal Consumption Expenditures report for July showed that core inflation rose from 4.1% to 4.2%, which was entirely due to base effects. According to the more accurate 6-month rolling data, core inflation continued to fall to 3.4%; and the 3-month rolling data fell even further to 2.9%. Both of these numbers are very close to the Fed's 2% target now.
Get ready for a September rally
The reason for this judgment is that the August decline was driven by reflation fears and soaring Treasury yields; but current data essentially eliminated those bearishnesses.
What is clear is that today's so-called reflation--- another rise in inflation, is nothing more than a base effect. Discounting these base effects, the core inflation trend remains downward. What’s more, the base effects are not as pronounced next month, so the Cleveland Fed's Nowcast model expects core inflation to fall again in August.
Without new geopolitical risks and a change in market sentiment, reflationary fears will turn into new anti-inflationary in the coming weeks, which is declining inflation optimism.
Meanwhile, U.S. Treasury yields, which spiked in August, fell sharply over the past week as economic and inflation data continued to weaken. Most leading indicators suggest that the data will continue to remain weak, which means that Treasury yields will continue to slide. The result is that the August spike in Treasury yields will translate into a September plunge.
While we can't predict where the stock market will go, the August decline in U.S. stocks will turn into a September surge based on the short-term data as well as inflation and Treasury yield trends.
$Micro 10-Year Yield - Aug 2023(10Y2308)$ $Micro 2-Year Yield - main 2309(2YYmain)$ $S&P 500(.SPX)$ $NASDAQ(.IXIC)$
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