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The most important charts and themes in markets and investing…
1) What a Difference a Year Makes
Only a year ago we had the highest inflation rate in the US since 1981: 9.1%.
But since then, we’ve seen 12 consecutive declines in that inflation rate…
- Jun 2022: 9.1%
- Jul 2022: 8.5%
- Aug 2022: 8.3%
- Sep 2022: 8.2%
- Oct 2022: 7.7%
- Nov 2022: 7.1%
- Dec 2022: 6.5%
- Jan 2023: 6.4%
- Feb 2023: 6.0%
- Mar 2023: 5.0%
- Apr 2023: 4.9%
- May 2023: 4.0%
- Jun 2023: 3.0%
Overall US CPI is now at 3.0%, its lowest level since March 2021. Core CPI (excluding Food/Energy) has moved down to 4.9%, its lowest level since October 2021.
What’s driving the move down in inflation?
Almost everything. As compared to last June, we have lower rates of inflation in Fuel Oil, Gasoline, Gas Utilities, Used Cars, Medical Care, Apparel, New Cars, Food at Home, Electricity and Transportation.
Shelter is the only major component that has a higher inflation rate than a year ago and that’s only because it’s a wildly lagging indicator. But there too, the trend has already changed, with the Shelter CPI rate moving down to 7.8% YoY from a peak of 8.2% two months ago. This decline should continue in the coming months as it starts to reflect the big move lower in actual housing inflation (home prices and rents down YoY).
With CPI moving down to 3% and wage growth above 4% in the last year, we now have real average hourly earnings in solidly positive territory, a great sign that hopefully continues.
This is not going unnoticed by the American consumer, with sentiment in the University of Michigan poll rising to its highest level since September 2021.
2) Higher For Longer?
CPI isn’t the only indicator pointing to lower inflation:
- The 0.1% increase in US Producer Prices (PPI) was the lowest since August 2020.
- The 6.1% decline in US Import Prices was the largest decline since May 2020.
- The 12% decline in US Export Prices was the largest decline on record.
We also have Truflation’s real-time inflation gauge moving down to 2.1% from over 11% a year ago.
Taken together, one might assume that these data points would be enough to convince the Fed to hold rates at current levels. But that assumption would be wrong, with market participants pricing in a >90% probability of another hike on July 26 (to a new range of 5.25-5.50%).
After that, current expectations are for the Fed to pause for the remainder of the year, essentially staying higher for longer.
If those expectations end up being correct, it would mark a big change in character from a Fed that has largely pursued an easy money agenda since the Global Financial Crisis in 2008.
With a Fed Funds Rate now more than 2% above CPI, this is already the tightest monetary policy we’ve seen in over a decade.
But to truly break the back of inflation, that may be what’s necessary. And with the “long and variable” lags that monetary policy is know to feature, we likely have yet to see the full impact this will have on the economy.
3) A Global Trend
The US is not alone in experiencing declining rates of inflation. We’re seeing a global trend of lower CPI, the opposite of what we were witnessing a year ago.
In terms of monetary policy, that too is in a markedly different place than last June, when real central bank rates were uniformly negative. Today there is more green then red, and countries like Brazil and Mexico are likely approaching the start of an easing cycle. While the US is expected to be done with its rate hikes this month, the Eurozone and UK remain behind the curve with more tightening expected to come.
4) All-Time Highs in 2023?
Entering the year, it seemed highly unlikely that the S&P 500 would continue its streak of all-time highs that began in 2012.
But after a 17% rally, one of the best starts to a year in history, the odds have changed.
The S&P 500 is now only 6% below its January 2022, up 29% from the October lows.
When I polled people back in early January, only 14% said the S&P 500 would hit a new all-time high this year. Today that number stands at 45%.
5) Don’t Fight the Fed?
One of the most repeated maxims in investing is the saying “don’t fight the Fed.”
The implication: you should not be long stocks when the Fed is tightening policy.
While that seemed to work well in 2022, it has not worked at all in 2023.
The Fed has now hiked rates 500 basis points since March 16, 2022. And lo and behold, the S&P 500 is now 3% higher than where it stood when rates were last at 0%.
Does this fact run counter to the historical record? Not at all.
On average, the stocks have posted positive future returns regardless of Fed policy. And looking ahead 10 years, the stock market has actually has done its very best following the highest Fed Funds Rate (both on a nominal and real basis).
Which of course means that monetary policy is just one of many factors influencing stock prices, and a highly overrated one at that. Ignoring the Fed has historically been the best strategy for long-term investors.
6) Selling Low and Buying High
Active managers had less than 20% exposure to equities last October when the S&P 500 was at 3,500. Today, their equity exposure has jumped above 90% with the S&P 500 at 4,500.
This is nothing new for active market participants, who tend to sell low and buy high, again and again.
7) An Insult to Drunken Sailors
It’s been a little over a month since the “Debt Ceiling” was suspended. What has transpired since? A borrowing binge for the ages, with National Debt increasing by over $1 trillion.
To say that the government is spending money like a “drunken sailor” would be an insult to drunken sailors who at least a) were spending their own money and b) quit when they ran out of funds.
Not so for the US government, which continues to borrow from the future to spend more money today. In June, the federal budget deficit rose to $2.25 trillion, its highest level in 17 months.
The interest expense on that debt continues to grow, rising to a record $852 billion over the last year.
8) Manufacturing Downturn / Manufacturing Construction Boom
The last 3 times ISM Manufacturing was this low, the US economy was in or about to be in a recession. You have to go back to 1995-96 to find a lower reading with no recession.
Interestingly, at the same time we’re witnessing a boom in new factories being built. Manufacturing Construction Spending in the US continues to hit new highs, increasing 76% over the last year.
The key driver of this boom: government subsidies, with the “CHIPS and Science Act” and “Inflation Reduction Act” passing in August of last year.
9) Lower Used Car Prices Ahead?
After a move higher earlier in the year, wholesale Used Car prices have come right back down. Prices are 10% lower than a year ago and now back to August 2021 levels. This should translate into lower retail prices in the coming months.
The decline in Tesla used car prices has been unrelenting, with the average price of a used Tesla now down to an all-time low of $43,904. That’s over $24k lower than the average price at the peak last July.
Tesla’s push to gain market share through price cuts seems to be working, with an 83% increase in deliveries over the last year.
The #1 and #2 selling electric vehicles in the first half of 2023: Tesla’s Model Y and Model 3.
10) Slower Dividend Growth
Earnings season is just beginning but we have full data on dividends from the seconds quarter from S&P Dow Jones.
The results: the 3% year-over-year increase in dividend payments was the slowest growth rate since Q2 2021.
Market participants haven’t cared much about dividends of late, with the focus back on growth. Companies in the S&P 500 that don’t pay a dividend were up 18% in the first half of the year vs. a 4% gain for dividend payers. That’s the biggest underperformance in dividend stocks since 2009.
11) The Mortgage Predicament
30-Year mortgage rates in the US are approaching 7% again, up from an all-time low of 2.65% in January 2021.
Assuming a $3,000 monthly budget, a 2.65% mortgage rate in January 2021 could have bought you a home worth $641k while a 6.96% mortgage rate today could buy you a home worth $444k. That’s a $197k (31%) decline in purchasing power.
The result: a collapse in demand due to a lack of affordability, but also a collapse in supply as existing homeowners are not giving up their low mortgage rates. Active listings of homes for sale in the US are 14% lower than a year ago.
12) The Upside of Downside
The first half of 2022 was one of the worst 6-month periods for US equities in history. A year later: stocks are 19% higher. That’s the upside of downside.
13) Some Interesting Stats
a) The top grossing movie tours of all-time. Taylor Swift’s current tour is expected to surpass them all (over $1 billion in projected revenue).
b) The world’s happiest countries.
c) Earnings growth in Texas/Florida has widely outpaced NY/California over the past year.
d) The average wait time at Disney’s Magic Kingdom was 27 minutes this July 4th, down from 31 minutes in 2022 and 47 minutes in 2019.
e) Americans believe they will need to save $1.3 million for retirement. The average amount currently saved: $89k.
And that’s it for this week. Have a great Sunday and week ahead!
-Charlie
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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.
