Correlating US Inflation Rate vs SP500

In this article we have put together the US Inflation Rate YoY with the US SP500 index with the intent to find if we can somehow positively or negatively correlate the two charts and possibly forecast what is coming up next for the US Indices as well as the underlying stocks.

Note, the chart is on the 6 months time frame, logarithmic scale and the inflation rate goes back until the 1917’s – that is our starting point. Since 1917, approximately, the inflation rate picked ~17 times and reversed lower. Out of these approximately ~17 times, the inflation rate dragged ~11 times the SP500 index lower since 1917 with most notable effects during the years of 1929, 1937, 1946, 2000 and 2008.

As it can be seen from the chart, the inflation rate has picked again and currently retracing lower. That could suggest that the SP500 index can have some more room lower before completing the Jan 2022 bear cycle from the 4800’s high. If that ends to be the case, I would expect an extension towards the 3000 level which the level at the middle trendline of the raising channel since 1931.

Despite the odds look favorable for the above scenario, the last doji closed 6 months candlestick from July 2022 for the SP500 cold be suggesting a different point of view aka, the bear market ended at the 3500’s lows. If that is the case, the index could see new highs in the next few years. The same occurred back in 1942 when the inflation rate reversed from the 11% level and the SP500 index started to climb until 1946 when the index reversed in correlation with the inflation rate from 18%. Almost the same occurred in 1951 (the index was already climbing) as well as during 1990 after a six month correction for the SP500 index.

Overall, despite the fact that there is some type of correlation between the inflation rate and the US index when the rate reverses after extending higher, it is not clear what will be the case this time. It is almost certain the inflation rate is reversing from the recent high of 9%, that suggests a move is coming for the SP500 and underlying US stock markets, either to the upside or to the downside.

Trade safe.