A key market catalyst is delivering another spark for the bulls.
Since September, the Federal Reserve has cut interest rates several times… including yesterday’s December 0.25% cut.
Falling interest rates can boost stocks in several ways.
Holding on to cash becomes less attractive when you’re getting a lower return. So lower rates push money into stocks.
Lower rates raise the value of future corporate earnings too. In turn, that drives stock market valuations higher.
That’s why the recent rate cuts have boosted the S&P 500.
The S&P jumped to new all-time highs right after the Fed cut rates for the first time in over four years back in September.
There’s even talk among Wall Street strategists of 7,000+ price targets heading into next year. (The S&P is currently just over 6,000.)
But the interest rate catalyst behind the bull market could vanish quickly.
The Fed might even move in the other direction on rates… which helped cause the last bear market.
So today, let’s look at some warning signs to keep an eye out for in 2025…
“Disinflation” Stalling Out
Back in 2020, the Consumer Price Index (CPI) started rising. It kept going until reaching 9.0% in June 2022.
That was the highest level in over 40 years.
The Fed began increasing interest rates in response. The Fed funds rate went from zero to 5.5% in just 16 months, as you can see in the chart below.
But since the CPI peaked in 2022, a period of “disinflation” has emerged.
Disinflation means inflation is still rising… but it’s doing so at a slower pace. (Note that this does NOT mean inflation is falling, aka deflation.)
In the most recent report, the CPI gained 2.7% compared to last year. Many Fed officials voiced confidence that inflation would keep falling toward their 2% target.
That’s why the Fed started cutting rates a few months ago.
In fact, the Fed was so confident that the first rate cut was 0.50% instead of the usual 0.25%. (An outsized cut is usually reserved for economic emergencies.)
But now the disinflation trend is stalling out.
Core CPI strips out volatile food and energy prices to get a clearer picture of underlying inflation trends.
It stopped falling back in July and currently sits at 3.3%.
And to make matters worse, a recent signal suggests that inflation could actually be on the rise again…
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Inflation’s Crossover Signal
There are several ways to measure inflation.
The CPI looks at consumer inflation, whereas the Producer Price Index (PPI) looks at inflation for domestic producers of goods.
Changes in the inflation trend will often show up in the PPI before the CPI feels them.
Take a look at the chart below.
The red line is the core PPI, while the blue line is the core CPI. Notice that the PPI tends to change direction well ahead of the CPI.
For instance, the PPI started rising in June 2020. It crossed above the CPI in early 2021 and led inflation higher.
This time, the PPI stopped falling a year ago.
And the PPI just crossed above CPI again. PPI is back above CPI in the most recent figures released for November.
So inflation could once again become a big problem heading into 2025.
That will force the Fed to reconsider rate cuts… which will remove a huge catalyst for the stock market’s rally.
And I recently spoke with a reporter at CNBC about how the stock market is already showing hints of anxiety.
There have been more declining stocks in the S&P 500 than advancing ones for 11 days straight. That’s the worst stretch since at least 2001.
So keep a close eye on inflation trends.
Rosy market outlooks for the year ahead could be derailed if inflation forces the Fed to pivot on interest rates…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict