Negative headlines without perspective
Here’s the headline that crushed (and continues to crush) the market on Tuesday, August 13: “Inflation increased by 0.1% in August even with a sharp drop in gas prices.” We do not emphasize why the negative (kind of a media thing). I would add that economists estimating these things agreed that the CPI would fall by 0.1%. This represented a 2/10% (a tiny amount) worse performance than economists had estimated. Since economists are always right in their estimates, this number was a big disappointment (NOT). Think about it. A gain of 0.1% yoy would bring our 12-month CPI increase to 1.2%. Of course, this number is a long way off, but in terms of direction, it’s a good number based on what we’ve seen over the past 18 months. However, this positive was not part of the discussion. This sparked a wave of speculation about how aggressively the Fed might hike rates at its next meeting. Markets collapsed as tech-heavy, valuation-bloated innovation stocks (most rate-sensitive names) took the chin (NASDAQ down 5%, with the S&P close behind down 4.3%).
One of my favorite sources is a true value-added economist blogging under that name “Calafia Beach Pandit”, also known as Scott Grannis. Scott Grannis was Chief Economist at Western Asset Management Company, a Pasadena-based manager of institutional bond funds, from 1989 to 2007. He does a good and thoughtful job… his opinion:
“There is ample evidence that inflationary pressures are easing: non-energy commodity prices are low (see my last contribution for many diagrams). Oil is down over 25% in the last four months. The dollar is very strong.”
“Inflation expectations are relatively low and stable (about 2.6% on average over the last 2½ months). Home prices and new mortgage applications are falling as mortgage rates have doubled so far this year (meaning Fed rate hikes are getting a lot of traction). . Rents are still going up, but they’re a lagging indicator (rents are going up about a year after prices went up, so they’re likely to stabilize in about 6-9 months, as prices started falling a few months ago).”
Another point he makes is that it is not the Fed’s QE policy that has caused the current price hike, but government policies (helicopter money) taken during the pandemic.
Importantly, if Grannis is right and the market is forward-looking, we should be buying stocks, not selling them.
The naysayers would counter that we will still see higher interest rates as inflation eases and that will mean bad times for the market. I would say that market history would argue against a poor market outcome from here.
What’s the story you don’t know?
President Harry Truman said, “The only thing that’s new is the story you don’t know.” This is especially true in the stock market and economy, as most people elsewhere are busy earning a living, raising families, and navigating the twists and turns of daily life. Unfortunately, when the financial world invades, the only thing they can rely on is the media. This is sad because the motivation of the media is not necessarily to inform and educate, but to make money. Some of their most successful tools are fear and sensationalism.
Here’s some history that may help you sleep better and be a better investor
– Between January 1, 1975 and November 1980, the S&P 500 went from 68 to 140.
– CPI inflation in 1975 was 9.1%. It peaked in 1980 at 13.5%.
– The yield on 10-year government bonds in early 1975 was 7.5%. It peaked at 15% in 1982 (Fed funds peaked at 20% in 1981).
– The largest fall from 140 on the S&P, as interest rates and inflation peaked, was about 28% (about back to 100) before beginning its rise to 1550 in March 2000.
– Remember again the fun fact number one related to bullets 2, 3 and 4. It goes against today’s conventional wisdom.
The whole Narrative about the negative impact on the market from higher inflation and interest rates just don’t hold up against this factual data from the 1970’s and 80’s.
Why? My best guess is that price inflation was reflected in rising corporate earnings – which companies had pricing Energy. They could charge more as their costs increased. The profit has grown!
What is your opinion?