No Corrections In 2021?

Finally Used Vehicle Inflation Will Fall

We’ve been calling for used vehicle inflation to fall for a few months. We were too early on that. Finally, as we lap the tougher comps, used vehicle inflation is set to fall this summer. As you can see from the chart below, the Manheim wholesale index’s yearly growth peaked in April when the comp was negative. It has already fallen significantly in the past 2 months. Used vehicle CPI bucked that last month, but it will fall in June. The string of much tougher comps starts in September. This will keep a lid on inflation which will be pushed up by rent prices this summer.  

Fed Won’t Hike In 2022

The market now thinks the Fed will hike rates for the first time in late 2022. That’s probably too soon because next year inflation will fall due to tougher comps, peak growth, and less fiscal stimulus. As you can see from the chart below, the 2nd hike is expected in 2023. That’s much different from current Fed guidance.

The Fed is likely to start ending QE in the first half of next year. The first sign of lower inflation readings will give the Fed an excuse to call off rate hikes in 2022, not they are being planned anyway. The trend in the dot plot is not your friend. FOMC members are caving to the market, but they will switch course when growth falls.

Conclusion

There might be a correction in the next 6 months, but not because it is the 2nd year of a bull run. The big tech stocks need to fall to get the S&P 500 to correct. Issuances have exploded. Solid businesses are buying back their stocks now. IPOs are becoming more popular because of the current loose financial conditions. Used vehicle inflation will fall in June and normalize in September once higher comps kick in. The market is at least a couple of quarters early in its prediction for the first Fed hike. This prediction will change after CPI falls.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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