Understanding that anything can happen in the financial markets as we move forward and that the financial press exists to attract eyeballs, The Wall Street Journal strikes again! With U.S. inflation, as measured by the Consumer Price Index, accelerating to 3.7% in September, the publication in its top story on Thursday saw fit to quote a Wall Street economist who shouted, “At this point we’re at dangerously elevated levels of inflation.”
To be sure, rising inflation doesn’t help consumer pocketbooks, and 3.7% is above normal. However, we are struggling to understand why the current level is “dangerous” when one considers a century of economic data, with many periods of “elevated levels of inflation,” including as recently as April 2021 through May 2023 when the measure was at a higher level for 25 straight months.
We also note the long-term evidence for subsequent equity returns when the CPI is above and below the latest 3.7% rate. Indeed, the history books argue that stocks, ON AVERAGE, perform fine either way, but Value, Growth, Dividends and Non-Dividend Payers over the ensuing 3, 5 and 10 years do better, yes better, when the CPI is high than when it is low.
Of course, the Core CPI, which excludes volatile food and energy prices, stands at “just” 2.6%...which is well below the historical average increase of 3.7%,...
…and Value and Dividend Payers, like the equities we have long championed, have had better subsequent returns historically with higher as opposed to lower Core CPI readings, again ON AVERAGE.
Certainly, we understand that many are worried that higher inflation will compel the Federal Reserve to hike interest rates and there are two to three increases of 25 basis points in the cards over the next 12 months if the Fed Funds futures market is to be believed,…
…but that key lending rate actually is low today (and would still be below the long-term average even with three more hikes) by historical standards,…
…and the long-term numbers tell us that stocks, ON AVERAGE, have preferred a higher rate than a lower one.
That high inflation print out Wednesday AM precipitated a big jump in interest rates…oh wait, it was a big drop as the benchmark yield on the 10-Year U.S. Treasury fell from 5.21% the night prior to the release to 5.07% by the end of the week,…
…with the steep skid in interest rates leading to a big three-day rally…oh wait, it was a big drop, in the broad-based S&P 500 index.
While the supposed market experts had been telling us that higher interest rates were bad for stocks, the inverse would then have to be true…except market history shows that equities have performed fine, ON AVERAGE, whether the 10-Year Yield is higher or lower than the recent level AND they have done better when that rate is above 5.07% than when it is below.
We understand that the above sounds like we think stocks will rise no matter what, but even though this has been the case in the fullness of time throughout history,…
…we always try to be balanced in our writings, as we know very well that equity returns have been negative on a monthly basis more than a third of the time dating back to 1925,…
…with October the second-weakest month statistically on the calendar,…
…while 5% pullbacks happen three times per year, ON AVERAGE, 10% corrections take place once a year and even official 20% Bear Market losses occur every 3.7 years.
True, though the table above shows that the advancing regimes last longer and produce larger gains than the declining regimes,…
…there is no assurance that past performance will repeat or that stocks will produce positive returns. We also respect that this time is different (but every time is different) with a whopping $40 trillion of debt on Uncle Sam’s books, which we can’t argue isn’t something about which to be concerned.
However, it was a concern when the debt hit $1 trillion during the Reagan Administration on October 22, 1981, and $5 trillion during the Clinton Administration on February 23, 1996, and $10 trillion during the Bush (W) Administration on September 30, 2008, and $20 trillion during the Trump (45) Administration on September 8, 2017, and $30 trillion during the Biden Administration on January 31, 2022.
Not to sound cavalier, but it wouldn’t have been so grand to have bailed on stocks in 1981 (the Dow Jones Industrial Average was then in the 800 range) due to deficit worries,…
…missing out on an 11,623% total return (11.16% per annum) in that index over the ensuing 45 years, especially as the U.S. economy,…
…and corporate profits, the ultimate drivers of stock prices continued to grow handsomely over the last four and a half decades.
Anything can happen as we move forward, but the latest estimate for real (inflation-adjusted) U.S. GDP growth for Q3 from the Atlanta Fed stands at an impressive 3.6%,...
…and the profit outlook for the S&P 500 continues to call for robust EPS growth through 2028.
So, while we always remain braced for downside volatility (the orange dots in the chart below), which happens each and every year,…
…and our sales this year have left most of our portfolios with extra dry powder for new opportunities, we continue to see no reason to alter our enthusiasm for the stocks we recommend, especially as we think the Value indexes still trade at reasonable valuations.
Stocks in the News
