Finally! The inflation fires are cooling and stock market bullishness is back.

The U.S. Bureau of Labor Statistics (BLS) reported Wednesday that the Consumer Price Index for All Urban Consumers (CPI-U) on a monthly basis was unchanged as energy prices overall declined 4.6% and retail gasoline fell 7.7%.

The headline CPI for July rose 8.5% year over year. The consensus had expected headline CPI to increase 8.7% on an annual basis and 0.2% monthly.

Excluding volatile food and energy prices, so-called “core” CPI increased 5.9% annually and 0.3% monthly, versus respective estimates of 6.1% and 0.5%. The following chart tells the story:

Stock futures Wednesday soared on the news. The S&P 500 has railed about 13% since its mid-June lows, due to diminished fears about recession and inflation, hopes for a Federal Reserve dovish pivot, and declining bond yields.

Despite Wednesday’s good news on inflation, last week’s report showing blockbuster gains in U.S. jobs suggests that the Fed will remain in tightening mode in its battle against inflation. That means continued momentum for the rally might be elusive. It’s likely that market volatility will remain with us in the months to come, with Wall Street on edge ahead of each Fed pronouncement.

It’s possible that Fed Chair Jerome Powell and his minions can execute a “soft landing,” a term that means quelling inflation by raising rates but without tanking the economy. However, history shows that such feats are rare.

Regardless, it seems that the bear market, while still with us, has bottomed and we’ve seen the worst of equity valuation declines. It also seems that we’ve seen the worst of inflation.

Debunking inflation narratives…

Most people (especially partisan politicians) don’t understand how dramatically the narrative of “runaway inflation” had collapsed before Wednesday’s BLS report.

The sharp drop in the prices of raw materials and the easing of supply chain bottlenecks have alleviated inflation worries. Retail gasoline prices, which have been plunging, got a lot more news coverage when they were rising. The media’s “negative bias” has been on full display.

Stagflation warnings have been made, despite the evidence, by fiscal scolds who habitually use inflation as a political club for ideological reasons (e.g., all government spending is bad).

However, even though the “transitory” school of inflation proved wrong, there have been no signs of inflation getting entrenched over the long term, which would be necessary to support the stagflation scenario. Wednesday’s report underscores this fact. Trotting out the boogeyman of 1970s-style inflation has been unwarranted and in most cases purposely deceitful.

Take the Inflation Reduction Act, which passed the Senate last Sunday and is due to be taken up by the House this Friday. The act is certain to pass the full Congress and reach President Biden’s desk for his signature.

Read This Story: News Flash: Congress Does Its Job

The Inflation Reduction Act is a sweeping bill that, among its provisions, promotes green energy in general and electric vehicles in particular. The bill calls for spending less than $500 billion over a decade and will actually reduce the deficit, largely via health care savings and better enforcement of the tax code.

Analysts (those that are credible and non-partisan) have determined that the act will have little effect on inflation. That hasn’t stopped some folks from decrying the bill as inflationary.

The big question now is how the Federal Reserve will move at its next meeting in September. There continues to be considerable uncertainty among investors about how extensively prices will moderate in the coming months.

Can the Fed fight inflation without crashing the economy? That remains to be seen. But if you’re properly diversified, stick to your long-range goals and ride out the current bout of turbulence.

The following portfolio allocations generally make sense under current conditions: 40% stocks, 25% hedges (such as gold and other precious metals), 25% cash, and 10% bonds. Tweak these percentages, according to your stage of life and tolerance for risk.

For your portfolio’s stock sleeve, where can you still find solid growth opportunities? I can sum it up with a single word: takeovers. You might have heard them referred to as buyouts, mergers, or acquisitions. But no matter what you call them, when a takeover is triggered, the profits that spill out have life-changing potential.

In this era of war, inflation and pandemic, corporate consolidation is the name of the game. Even the whisper of a “mega-merger” can hand investors enormous returns. My colleague Nathan Slaughter, chief investment strategist of Takeover Trader, just pinpointed a potential takeover deal that could dwarf them all. Want to get in on Nathan’s next big trade? Click here for details.

John Persinos is the editorial director of Investing Daily.

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