What if I told you last year that inflation was going to go down…a lot? You would have bought stocks and bonds until your head caved in. Well, I did tell you that. And it’s not like I’m bragging—there were a lot of people in the market who were saying that inflation was peaking. So, did you buy stocks and bonds? Nooooo, writes Jared Dillian, editor of The 10th Man.

One thing I’ve learned about investing over the years is that the simplest explanation is usually the right explanation. People on Twitter like to post all these convoluted charts and infographics, and I just shake my head. Inflation down, stocks up. So easy a caveman could do it.

It is the natural tendency of the human brain to overcomplicate things. Well, what about this? What about that? What if this happens, then that happens, then this happens? What about this small-cap underperformance? What about the poor breadth? What about the Fed—what’s it going to do? What about the low volumes? What if, what if, what if?

I see people tie themselves up in knots all the time. But inflation down, stocks up is a good rule.

What now? Based on our experience with the ’70s, I would say that inflation is going to decline to between 2%–3% and stay there for a while before it goes back up. But that might not happen for a couple of years or longer.

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Believe it or not, there is a limit as to how far the Fed will hike rates. I believe the Fed will stop hiking rates once Fed funds get to be 2% above inflation. Right now, inflation is 4%, and Fed funds are 5.25%, so we still have a little way to go. But inflation will continue to fall, and at some point, policy will be too restrictive.

Yet nobody is happy. Nobody is happy because of our experience in 2022. People are still scarred by it. Everyone is waiting for the next shoe to drop. What if there is no shoe? What if the next two years in the market are peaceful and uneventful?

Just spit-balling here. But people are starting to come to the realization that the bottom last October was the bottom, given that we’re less than 10% away from all-time highs at this point. I don’t know how many bears read this newsletter, but I would say that you are swiftly running out of arguments.

It’s tough to see out a year. That’s why year-end predictions always go horribly wrong. But I believe it is possible to see out a few months or so. And I’m not seeing any flashing warning lights over the next few months. If the market can withstand 500 basis points of rate hikes, it can probably withstand another 100 basis points of rate hikes.

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