Welcome to The Predictive Investor weekly update for September 15th, 2024!
Stocks rallied sharply after the market digested the latest inflation numbers, although I’m not totally convinced the selling is over. The S&P 500 has been stalling just below the July highs, and volume since the August low has been below average on most days.
The next move largely depends on how traders react to the Fed’s moves this week.
Headline CPI came in at 0.2% in August, in line with expectations. Core CPI, which excludes food and energy, came in at 0.3%, slightly above the 0.2% that was expected. The increase was entirely driven by the lagging shelter data. Excluding shelter, inflation is back to pre-pandemic levels. And rents continue to fall in several major markets.
What matters here is that the overall trend for inflation continues to be down. The Fed should cut by 50 basis points this week. But I expect them to cut by 25.
Here’s my takeaways from the week.
Can you trust economic data?
A number of incidents recently have raised concerns about whether the BLS can be trusted to report economic data in a way that’s fair and accurate. (Read)
Longer term challenges remain, including declining response rates to its surveys, the fragmentation of American society and changing economic trends post-Covid.
I don’t think any of these speak to the root cause of the declining trust in our economic institutions. The real issue is that the numbers that get reported have been manipulated for a long time.
Let’s take inflation as an example. If the CPI were calculated the same way as it was back in 1990, inflation would be about 8%. (Read)
This should be no surprise to anyone who’s had to pay for education, health care and housing over the last decade. Prices for many necessities have been rising rapidly for a long time. These increases were just masked by changes in how the CPI is calculated.
Obviously some adjustments are necessary when it comes to measuring an economy that has changed significantly over time. But when every adjustment seems to deliver the government’s desired result, one must question its accuracy.
We have to pay attention to some of these macro numbers because they’re important to the market. But an over-reliance on them can lead to some very flawed analysis.
No recession in sight
The NBER is the official arbiter of recessions in the U.S. And despite the media headlines insisting that a recession is imminent, none of the indicators the NBER uses are pointing to a recession.
The media is now in the business of sensationalizing the news in order to sell ads. If you want to make money in this market, turn off CNBC.
Forward earnings revisions surge higher
American companies continue to guide higher, with forward 12-month earnings being revised upward by an average of 9.3%. This is far above the long-term average of 6.2%.
Despite all the talk of a bubble, the fundamentals continue to support higher equity prices. This has to be the most hated bull market of all time.
Mag 7 continues to underperform
Two weeks ago, I flagged the potential for a change in market leadership, after the Mag 7 had its worst month relative to the S&P 500 since December 2022.
The underperformance of big tech continues. Over the last 2 months, the Mag 7 has underperformed the S&P 500 Equal-Weight Index by nearly 5%.
If the bull market broadens out as I expect, the risk to indexers is that most stocks could go up while the index remains flat. Given how concentrated the SPX is, investors would be wise to add exposure to other areas of the market.
