On Thursday, The Leuthold Group's James Paulsen said that an expected increase in inflation in the past few months indicates that investors should start purchasing stocks. Mr. Paulsen discovered that as long as inflation begins to subside, even while still elevated, investors can start buying equities. Since 1945, when the annual consumer price index inflation rate declined or remained static after peaking, the S&P 500 delivered positive one-month returns. However, on the other hand, an acceleration in the yearly CPI inflation rate when it was already above 4% led to losses for S&P 500 investors in the ensuing month.
Paulsen further commented, "Interestingly, even with today's lofty inflation rate (> 6%), what is key to present-day circumstances is that the level of inflation is not likely to be adverse for the stock market provided it remains unchanged or lessens."The Wall Street Strategist thinks that inflation has certainly peaked, and indicated a number of data points to support his opinion. A fall in freight rates, recent sideways action in commodity prices and wage inflation, and March's core CPI reading coming in below expectations all suggest to Paulsen that inflation is set to subside.