Stocks just gave us another “head fake.”

For the third time in the last six weeks, the S&P 500 broke below its 21-day exponential moving average (EMA). Historically, this kind of break-down has heralded a short-term top, but in today’s melt-up market, the bulls stepped in, pushing stocks back above this critical line after a single day.

This is a very telling development.

Stocks are up over 30% from their April lows (an annualized rate of over 100%). Time and again, they become extremely overbought and overextended above their short-term and intermediate term trendlines. And yet, every single dip is STILL being bought aggressively. Investors are clearly discounting something major in the markets.

What investors discounting?

Currency devaluation and another round of inflation.

The reality is that the big picture macro framework has changed in the last nine months. Coming into 2025, the Trump administration was promoting austerity: an environment in which the U.S. would balance its budget by cutting government spending via the Department of Government Efficiency (DOGE) while simultaneously increasing revenues via tariffs.

Then the trade war triggered a stock market crash… and the Trump administration pivoted away from austerity towards a “run it hot” framework.

The significance of this CANNOT be overstated.

The U.S. is the largest economy in the world. In fact, its GDP is larger than that of the 2nd,3rd, and 4th largest economies of the world (China, Germany and India) combined. So, the fact the U.S. abandoned austerity has global implications for the financial system.

Put simply, until April 2025, the U.S. was the last hold out in terms of fiscal dominance/ monetary easing. Once the Trump administration pivoted to a “run it hot” framework, it opened the door to a global coordinated easing of financial conditions/ currency devaluation.

This is going to unleash another round of inflation. And stocks, are a hedge against inflation (to a point).

Consider the last bout of major inflation to hit the U.S. in the 1970s.

At that time, the first round took place from 1970-1973, stocks initially ripped higher, before inflation ate into profit margins, triggering a brutal bear market from 1973-1975. Once the Fed stopped raising rates, stocks ignited again as inflation appeared tamed. This meltup saw the market nearly DOUBLE in 18 months before inflation ignited again and a bear market hit.

History doesn’t repeat, but it does rhyme. And the markets today have a LOT of similarities with those of the 1970s.

During the 1970s, an initial wave of inflation saw the markets rip higher from 2020-2022. Then the Fed got aggressive to tame inflation, resulting in a bear market (2022-2023). Then the Fed hit “pause” on its tightening, allowing inflation to return, stocks began a melt up.

Put simply, investors need to ride this melt-up as long as possible, because what’s coming won’t be pretty if history is any guide. With that in mind, you need to be moving capital into inflation hedges here and now before the wheels come off this meltup.

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