Wall Street is known to apply perverse logic to the news, finding reasons for pessimism among ostensibly positive developments.

But sometimes, good news is simply good news. Don’t fight it.

Such is the case with the latest Consumer Price Index (CPI) report, for the month of July, that was released Wednesday. The CPI rose 8.5% in July on a year-over-year basis, versus the consensus expectation of 8.7%.

Sure, inflation remains uncomfortably hot, but the trend is moving in the right direction…down (see chart).

If you extricate volatile food and energy, the so-called core CPI rose YoY only 5.9%. Month over month, the core CPI rose 0.3% in July, a smaller increase than in April, May, or June.

The July CPI report stoked hopes that the Federal Reserve might moderate its monetary tightening, starting with its next policy-setting meeting in September.

On Wednesday, the major U.S. stock benchmarks soared on the CPI news. In pre-market futures trading Thursday, stocks were extending their gains.

In another morale boost for consumers as well as investors, retail gasoline prices in the U.S. fell below $4 a gallon on Thursday, declining to their lowest level since March.

Don’t get me wrong: We still face serious headwinds. Borrowing costs are increasing, and the Russia-Ukraine war could give the world a “black swan.” Russian President Vladimir Putin is a megalomaniac and, in a few months in Ukraine, he faces (ironically) the foe that defeated Adolf Hitler: General Winter.

Putin has shown no inclination of ever giving up, which means energy and food supplies will remain in turmoil into the foreseeable future.

That’s why, although Wall Street’s mood is brightening, it still remains skittish. Brace yourself for further volatility ahead. In the coming months, inflation and economic data could still clobber us with nasty surprises.

Cooling inflation gives the Fed more wriggle room to turn dovish, but don’t expect the central bank to abandon tightening altogether. For September, rather than another 0.75% boost, the markets are currently pricing in a hike of 0.50%. The “real” interest rate still hovers in negative territory.

Regardless, we’re in the midst of a powerful rally. When a rally occurs during a bear market, investors must ask themselves if this will be a multi-year bear market or just a single-year bear market. I suspect the latter.

The market’s guideposts…

In April 2021, the Fed’s policy-making arm, the Federal Open Market Committee (FOMC), stated that it would aim for “inflation moderately above 2% for some time” before hiking interest rates to reach a long-term inflation average of 2%.

The phrases “moderately above” and “for some time” are classic examples of vague Fedspeak. The U.S. central bank purposely prefers oblique language, to avoid frightening markets. But it’s plain as day that the 2% goal is way, way out of reach.

That said, although the Fed’s tightening cycle has a way to go, the markets have already priced in a lot of those rate hikes. And in the context of the July inflation data, the worst of those rate hikes are probably over.

One of the important aspects to remember about the stock market is that values and trends are driven by human beings, in all of their frailty. It’s really not about fundamentals, it’s what you and I think about the fundamentals. Because of that psychological dynamic, earnings estimates, valuations, and other indicators act as guideposts, around which sentiment and prices swing wildly.

When conditions are bad, there’s a tendency for investors to think that weakness will persist; when conditions are good, the assumption is that they’ll stay that way forever. Rationality is usually somewhere in between.

Badly needed good news…

Much remains unclear. The pandemic and Russia-Ukraine war have generated problems that defy textbook analysis. But one thing is clear: We got some badly needed good news Wednesday on the inflation front.

How the market acts from day to day is impossible to predict. Will the market be lower or higher six months from now? Conditions suggest it will be higher.

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John Persinos is the editorial director of Investing Daily.

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