The Week in Charts (12/18/23)

By Charlie Bilello

18 Dec 2023

View the video of this post on YouTube here.


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1) Is the Inflation Fight Over?

That’s the big question for investors. And from the incoming inflation data (CPI/PPI/etc.) to the Fed pivot (projecting 3 rate cuts in 2024) to the equity market response (S&P 500 at a new total-return high), many now seem to believe that the answer is an emphatic “yes.”

Overall US CPI moved down to 3.1% YoY in November from 3.2% in October. This was the lowest reading since June. Core CPI (excluding food/energy) moved down to 4.0% YoY, the lowest core inflation we’ve seen since September 2021.

Here’s a breakdown of the major inflation categories today versus June 2022 when overall CPI peaked at 9.1%. Helping drive the rate down to 3.1% today are a number of areas showing YoY declines, including Fuel Oil (-25%), Gas Utilities (-10%), Gasoline (-9%), and Used Cars (-4%). With the exception of Transportation and Shelter, all of the major CPI components have a lower rate today than back in June 2022.

As CPI’s largest component (>33% of the index), Shelter has the most impact on the direction of the headline index and is even more influential in terms of core prices. It’s been the primary reason why inflation has remained elevated in recent months.

Indeed, if we strip out Shelter US consumer prices rose just 1.4% over the last year, the 6th consecutive month below 2%.

The good news: Shelter CPI has now moved down on a YoY basis for 8 consecutive months, from a peak of 8.2% in March (highest since 1982) to 6.5% today. Given its long lag vs. real-time data (asking rents down 1% YoY), a continued move lower is expected which should lead to a continued decline in inflation in the coming months (assuming we don’t see a spike in the other components).

After understating true housing inflation in 2021 and the first half of 2022, Shelter has been playing catch up, slowly narrowing a gap that has finally been closed. Shelter CPI now shows a 20.6% increase since the start of 2020 vs. a 20.5% increase in asking Rents.

2) More Evidence of Cooling Inflation

In addition to the CPI report, other signs of cooling inflation include:

  • US Producer Prices, which were flat in November and increased just 0.9% over the last year.
  • US Import Prices, which fell 1.4% over the last year, the 10th consecutive YoY decline.
  • 1-Year ahead consumer inflation expectations (NY Fed Survey), which moved down to 3.4%, the lowest since March 2021.
  • Year-ahead business inflation expectations, which moved down to 2.4% in the latest Atlanta Fed survey. That’s the lowest we’ve seen since March 2021.
  • US gas prices, which moved down $3.10/gallon (national average), their lowest levels of the year.

3) The Fed Pivot

There was no surprise in the Fed’s announcement, as they held interest rates at 5.25-5.50% for the 3rd straight policy meeting and continue with plans to shrink the size of their balance sheet.

But it was very much a dovish pause, for they are now forecasting a Fed Funds Rate of 4.6% by the end of 2024 (down from 5.1% in September). If that proves correct, it would imply three 25 bps rate cuts next year.

The market’s interpretation? The Fed will be much more dovish than these projections. Fed Fund Futures are now pricing in a policy rate below 4% by the end of 2024 and 3.3% by the end of 2025.

When are market participants expecting the price cuts to commence?

At the March 20, 2024 meeting (current 69% probability), which is just three months away.

The results of a poll I did on X confirm these expectations, with most respondents saying the rate cuts are coming.

4) Dow 37k

The equity markets surged higher after the FOMC announcement, with the Dow hitting a new all-time high, crossing above 37,000 for the first time. It took 772 days to hit this new thousand-point milestone, which was the longest gap we’ve seen in over a decade.

The Dow closed at an all-time high on Wednesday, Thursday, and Friday of last week, extending its streak of consecutive years with at least one all-time high to 11. The record run from 1989 to 2000 saw 12 straight years with at least one all-time high.

5) The Band is Back Together

The Dow, S&P 500, and Nasdaq 100 ETFs all closed at new total-return highs on December 13. The last time that happened was November 5, 2021.

The S&P 500 Index Total Return Index is back at an all-time high for the first time since early 2022.

Historically, what have all-time highs been followed by? Further gains and more all-time highs (see video discussion here).

6) 2 Years of Returns in 2 Months

US Bonds are now outperforming Cash on the year after one of the biggest short-term rallies in the history of the bond market. Over the past two months, bonds have gained over 9%, which based on their yield is roughly equivalent to two years worth of returns.

What’s been the driving force of this surge higher? Plummeting yields, with the 1-year Treasury falling 59 bps (5.49% to 4.90%), the 2-year Treasury falling 82 bps (5.19% to 4.37%), and the 10-year Treasury falling 106 bps (from 4.98% to 3.92%).

7) Lower Yields, Tighter Spreads

Treasuries aren’t the only yields that have been falling.

The 30-Year mortgage rate in the US has declined for 7 consecutive weeks, moving from its highest level since 2000 (7.79%) down to 6.95%.

US High Yield bonds have seen a 195 bps decline yields (9.45% to 7.50%) while Investment Grade bonds yields are 126 bps lower (6.44% to 5.18%).

Credit spreads are rapidly declining, with High Yield bond spreads at their tightest levels since April 2022 (347 bps) and Investment Grade spreads at their tightest levels since January 2022 (104 bps).

8) The Magnificent 7 and Everyone Else

This has been the year of the “Magnificent Seven.”

Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta have gained 75% in 2023 versus a gain of 12% for the remaining 493 companies in the S&P 500.

Their combined weighting in the S&P 500 of nearly 30% is the largest share for any 7 companies on record with data going back to 1980.

The Magnificent Seven now have a higher weighting in the MSCI World Index than all of the stocks in the UK, China, France and Japan combined.

The question for investors going forward: are expectations too high?

The Magnificent Seven stocks are trading at a forward P/E ratio of 33x versus 21x for the remaining 493 companies in the S&P 500.

9) Is Mean Reversion Dead?

The outperformance of the Magnificent Seven has played a major role in a number of broader secular trends that have been persisting for well over a decade.

Over this time we’ve seen massive relative gains in Large Caps over Small Caps, Growth over Value, and US over International.

Over the next decade, will we see a reversion to the mean or is mean reversion dead?

10) From Fearful to Greedy

Last December, Bears outnumbered Bulls by 32% in the AAII Sentiment Poll.

Today, Bulls outnumber Bears by 32%.

What changed?

The S&P 500 is over 25% higher and the Nasdaq 100 is over 55% higher.

11) A Few Interesting Stats…

a) 7.2% of Black Friday/Cyber Week shoppers used “buy now, pay later” loans, a 25% increase from last year.

b) Manufacturing Construction Spending in the US continues to hit new record highs, increasing 71% over the last year.

c) The S&P 500 is now 8% higher than where it was when the Fed started hiking rates in March 2022.

d) The bottom 3 sectors in 2022 (Communications, Consumer Discretionary, Tech) are the top 3 in 2023. The top 3 sectors in 2022 (Energy, Consumer Staples, Utilities) are the bottom 3 in 2023.

e) The Interest Expense on US Public Debt rose to $949 billion over the past year, another record high. If it continues to increase at the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.

And that’s all for this week. Have a great week!


If we can help guide you on your road to wealth, reach out.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

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