This Will Be Brutal

The stock market is melting up, delivering a 40% return over the last 12 months.

This also happened in 2 notorious periods:

• Late 1990s during the dot-com bubble
• Late 1920s before the Great Depression

2 periods where we know the uptrend was unsustainable.

The Real Picture: Adjusting for Inflation

Looking at the inflation-adjusted S&P 500, we see something concerning:

The market appears overextended relative to its long-term trend, similar to levels seen before the 4 largest market crashes in 110 years.

This chart shows the inflation-adjusted S&P 500 typically moves up and down within a relatively stable range.

The moments where it hit the top of this range were particularly significant:

• 1913
• 1929
• 1965
• 1999

Each instance preceded extremely poor times to be invested, leading to an average 60% decline in inflation-adjusted terms.

The 1929 crash was even more severe…

Without inflation adjustment, the numbers tell one story:

• S&P 500 return since 1921: Over 65,000%
• So, $1,000 invested in 1921 = $650,000 today

But adjust for inflation, and reality hits:

• Real return over 100 years: 5,000%
• Impact of inflation is massive over long periods

This dramatic difference explains the famous phrase “stocks only go up” – but it’s not the whole story.

Periods of Severe Market Pain

Despite the long-term uptrend, investors have faced devastating periods.

For example, if you had invested $1,000 in March 2000, it would have been worth just $500 by 2010.

Investing in August 1929 would have yielded similar results, a 50% loss in value over the next 10 years.

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The Inflation Question

But, just because inflation-adjusted returns drop doesn’t mean the S&P 500 itself has to fall, particularly if inflation runs out of control.

Let’s look at Turkey’s case:

This is the Turkish stock market adjusted for inflation.

On an inflation adjusted basis, the Turkish stock market has virtually gone nowhere over the last 20 years, providing a 0% return since 2006.

Now, when we look at the Turkish stock market that isn’t adjusted for inflation, it has yielded over a 2000% return over that same period.

This gap, of course, can be explained by the hyperinflation in Turkey.

So high levels of inflation alone can push the stock market higher.

Can we really expect a hyperinflation meltup today?

The current inflation rate in the US is hovering at 2.5%.

For a hyperinflation meltup to occur, inflation would need to be significantly higher.

For example, if we compare the Turkish inflation rate over the last few years, we see it’s currently at around 50%. That’s about 20x more inflation than the US today.

U.S. Inflation Spikes and Stock Performance

We don’t believe the argument for a hyper inflation melt up in the US stock market makes much sense.

Additionally, every significant US inflation spike has led to stock market declines.

That’s because higher inflation means higher interest rates. That typically puts downwards pressure on US stocks.

That’s exactly what happened in the 1970s,

Despite high levels of inflation, the stock market had multiple 30 to 50% declines.

This is a much more realistic scenario if inflation were to rise again today.

If inflation picks back up, it would cause interest rates in the US to rise and pull the stock market lower.

But for now, there isn’t any signs of inflation picking back up in the US:

• Wheat prices down 10%
• Boneless chicken down 10%
• Oil prices down 20%
• Natural gas down 30%

While housing costs continue rising, overall inflation has slowed considerably across most sectors.

Low Inflation Scenario

So what happens to stocks if inflation never picks back up?

The market could start to look like the late 1990s and the late 1920s. These periods of low and stable inflation led the stock market to melt up higher.

We also saw something similar in the 1980s, where low inflation led to a stock market meltup. It was eventually followed by Black Monday.

In fact, each of these great meltups eventually imploded one way or another.

Our Current Market View

The reality is that today inflation is heading downwards.

This environment is pushing the stock market higher just like it did in the 1920s and in the 1990s.

We’ve been of this view over the past year and we’ve helped our clients profit from this bull market with some great trades.

• Average profit in 2024 = 17.37%
• Average loss in 2024 = 3.78%

Now, we did turn a little bit more cautious in the short term as we think we could see a pullback towards 5650 points. But overall, the low inflation environment doesn’t look like it’s about to kill the stock market just yet.

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Read more: The Stock Market Is About to Get Rug Pulled (This Week)