Is the fight against inflation over? Maybe not quite, but inflation is on the ropes and we’re nearing the final round.

The U.S. Bureau of Labor Statistics (BLS) on Tuesday released the consumer price index (CPI) for October and the news gave stocks a shot of adrenaline.

The CPI’s rate of increase from September to October was flat, and 3.2% higher than a year ago. The consensus had been calling for respective readings of 0.1% and 3.3%. Headline CPI had increased 0.4% in September. The following chart tells the story of inflation’s waning strength:

Excluding volatile food and energy prices, the “core” CPI increased 0.2% month-over-month and 4% year-over-year, versus forecasts respectively of 0.3% and 4.1%. The annual core level was the lowest in two years.

The flat monthly reading on headline CPI came as energy prices declined 2.5% for the month. Economic deceleration and worries about China’s economy have been weighing on crude oil prices, which is good news in the slugfest against inflation.

Despite production curbs by OPEC+ to shore up oil prices, the demand equation is in doubt. It appears that the oil cartel has overestimated the world’s thirst for oil, at least over the near term.

In response to Tuesday’s positive CPI report, the main U.S. stock market indices exploded higher, closing as follows:

• DJIA: +1.43%
• S&P 500: +1.91%
• NASDAQ: +2.37%
• Russell 2000: +5.44%

The S&P 500 posted its best day since April. The benchmark 10-year Treasury yield, which unnerved investors when it shot past 5% in October, tumbled below 4.5%. The CBOE Volatility Index (VIX) fell more than 4% to hit about 14, indicating greatly diminished fear in the market.

Tuesday’s rally was broad, even lifting sectors of the market that have lagged this year. The surge in the small-cap Russell 2000, in particular, reflects increasing economic optimism.

Investors are breathing a huge sigh of relief, as the CPI edges closer to the Federal Reserve’s 2% target. We’ll know more about the inflation picture on Wednesday, when we get the producer price index (PPI) for last month. The PPI offers insights into the wholesale cost pressures faced by producers in the U.S.

The PPI’s significance also lies in assessing the health of the manufacturing sector. Analysts expect the PPI to continue its cooling trend, complementing the CPI’s descent.

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Amid reduced inflationary pressures, the Fed has justification to once again “pause” its rate tightening cycle. In fact, the countdown to Fed interest rate cuts has begun.

Wall Street is no longer pricing in an additional rate hike for the next meeting of the Federal Open Market Committee (FOMC), scheduled for December 12-13. The market is now giving a roughly 25% chance of a rate cut as early as March 2024.

The causes behind the inflation slowdown are multifaceted. A combination of supply chain disruptions, pent-up demand post-pandemic, and the initial surge in commodity prices have given way to a more balanced economic equation. As the forces driving inflation lose momentum, investors stand at a strategic end-of-year juncture.

Industries that felt the brunt of inflationary pressures in recent months are now finding relief. Sectors such as manufacturing, which faced soaring raw material costs, are enjoying stabilization and improved profit margins. This shift opens opportunities for sector rotation into undervalued stocks.

Real assets, historically considered a hedge against inflation, may still hold value despite inflation’s slowdown. Real estate, for instance, often remains a solid investment in times of economic uncertainty. As inflation cools, property values may stabilize, presenting investors with a chance to capitalize on real estate assets that were previously overshadowed by inflation-induced volatility.

Bond markets, too, are experiencing a shift in dynamics. Fixed-income investors should find a more predictable interest rate environment, providing an opportunity to reassess their bond portfolios and potentially explore higher-risk, higher-reward options.

Technology stocks tend to thrive in low-inflation environments, as the cost of borrowing remains relatively low. Mega-cap tech stocks have been on a tear lately and their momentum is likely to continue throughout the rest of Q4. In fact, as artificial intelligence-themed stocks pop higher again, I’m detecting the return of the AI hype cycle.

Seasonality also comes into play. The November-December holiday period is typically bullish for equities. Start positioning your portfolio for growth.

That said, risks haven’t disappeared. They never do. Maybe you’re still spooked by market volatility. For market-thumping gains with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

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John Persinos is the editorial director of Investing Daily.

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