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Month after month, Wall Street’s brightest minds gather around the latest economic data releases like ancient priests reading goat entrails. Inflation up? Stocks fall. Inflation down? Stocks rally. Or do they?
If you’ve been watching markets long enough, you’ve seen the contradiction firsthand. The Fed kept cutting rates even with inflation persistently above target. The market topped in early 2022 despite no obvious economic catalyst. And now, after a year of “disinflation,” stocks have been floundering instead of soaring.
So what actually matters?
Liquidity, Not Inflation, Moves Markets
These charts tell the story. Inflation measures? Rangebound. The PPI final demand consumer goods, swung wildly, but the two-month average shows it’s just noise. CPI? Stuck in a well-defined range for over a year.
Inflation Measures Year to Year Change
Meanwhile, changes in financial system liquidity levels, and the cyclical swings of herd behavior—have done far more to dictate market direction than any CPI print ever could.
Markets float up and down on a sea of liquidity. Investor moods change because of liquidity. The more money that’s available, the more bullish the crowd is. Money levels also feed the economy. Investment animal spirits and business animal spirits go hand in hand. But they are corollaries. There’s no cause and effect. Liquidity is the cause. Inflation didn’t make 2022 a bear market—tightening did. Inflation didn’t make 2023 a bull run—liquidity infusions did.
The trend of securities prices is all that matters. Price itself is the only indicator that never lags. Price is the final arbiter. The analysis of price patterns gives you all the information you need.
So What’s Next?
Is the recent PPI reversal a sign of something bigger, or just another data blip? Does it even matter? If history is any guide, watch liquidity—not the headlines.
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