Stocks and bonds are breathing a sigh of relief today as a reading of inflation did not come in as badly as feared. Inflation as measured by the Consumer Price Index (CPI) was up 7.7% versus a year ago. Core inflation excluding food and energy was up 6.3%. While these show that inflation is still very high, the results were better than expected and lower than last month’s readings. The sharpness of today’s rally in financial assets indicates that markets have heavily priced in the concerns people have about the economy.

That said, I think it is premature for all of us to don our party hats and break out the noise makers. The most reliable prognosticator for the direction of the economy in my view is the yield curve that compares the yield of the 3-month Treasury bill versus the 10-year Treasury bond. This just finally gave in and went flat and inverted, meaning the yield of the 10-year bond is now lower than that of the 3-month bill. This phenomenon has historically preceded recessions by roughly 6-12 months. It implies that the Fed has indeed gone too far, too fast with their increases in the Federal Funds rate. They are expected to raise rates another 50 basis points (0.50%) in December.

So, while the improved inflation data and today’s rally are certainly encouraging, volatility over the months ahead seems inevitable. This frankly isn’t a very profound statement as anybody who has been an investor for many years knows that stock markets often are volatile. Volatile or not, valuations in many stocks are very attractive which bodes well for long-term returns. We are also now in what typically is a very strong period for stocks based on seasonal market trends tied to the four-year Presidential cycle, regardless of what political party is in this or that branch of government.