by Bryan Perry
January 10, 2023
Princeton economics professor and former Vice Chairman of the Fed, Alan Blinder, wrote in The Wall Street Journal last Friday that “the CPI inflation rate over the past 12 months has been an alarming 7.1%. But the U.S. economy got there by averaging an appalling 10.6% annualized inflation rate over the first seven months and a mere 2.5% over the last five. The PCE price index tells a similar story, though a somewhat less dramatic one. The 5.5% inflation rate over the past 12 months came from a 7.8% rate over the first seven months followed by a 2.4% rate over the last five.”
Blinder goes on: “Over the past five months (June to November 2022), inflation has slowed to a crawl. Whether measured by the consumer-price index, or CPI, which most people watch, or the price index for personal consumption expenditures, or PCE, which the Federal Reserve prefers, the annualized inflation rate has been around 2.5% over these five months.”
This is a powerful argument that the Fed’s target has been reached and that further confirmation in the upcoming inflation data could be just what this anemic market needs to breathe life back into the bullish camp. Whether the market can make this transition away from the Fed’s aggressive tone and put together a positive inflation narrative will take some doing, but the Dow’s 700-point surge last Friday was notable.
The rest of January will be huge for market sentiment in that the inflation data for December will be released. Fourth-quarter earnings will also speak volumes as to the health of the domestic and the global economy. Inflation peaked back in June 2022 and has been moving steadily lower since, and some comforting news from corporate America that they see inflationary pressures easing will again…be huge.
The inflation rate slowed for a fifth straight month in November and set the table for this week’s release of the Consumer Price Index (CPI) on January 12, and the Producer Price Index (PPI) on January 18. The CPI carries bigger significance. In November, falling gasoline and fuel oil prices and a slowdown in food, used car, and truck prices were offset by stubbornly high prices for shelter and professional services.
The cost of energy has declined further this month versus December, thanks to a wave of warmer weather, and retail sales are looking to contract this month as consumer surveys are showing a more cautious outlook for discretionary spending. All these factors are part of the Fed’s plan to induce an economic slowdown that may cost the economy several million jobs before the Fed’s 2% inflation target is realized.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While the market has been tone-deaf to the empirical evidence about slowing inflation and more swayed by the Fed’s vocal marching orders of future rate hikes being a done deal, there have been some very pronounced developments that raise both red and green flags for market participants, one of which is the fact that the money supply has turned negative for the first time in 33 years.
As storied NYSE floor broker Art Cashin recently stated, “Keep your eye on the money supply.”
Money supply growth can often be a helpful measure of economic activity, and an indicator of coming recessions. During periods of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by slowing rates of money supply growth. However, money supply growth tends to begin growing again before the onset of recession.
So, the draw-down on M2 can easily reflect the re-balancing of all the stimulus money injected into the system that was a catalyst to current inflation that the Fed wants to drain while they simultaneously raise short-term rates. An effective tool the Fed can use during periods of orchestrated slowing, such as now, is to raise reserve requirements by banks to guard against rising loan default risk as the economy slows.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Considering how much money and stimulus was created by both the Fed and Congress during the pandemic, a determined move to reduce M2 at a time when fourth-quarter GDP is forecast to grow by 3.8% and married to a 3.5% unemployment rate is consistent with letting the economy run on its own. The fact that we might get a sixth straight month of lower-trend inflation smacks of a compelling debate that, just maybe, the bearish camp calling for the S&P falling to 3,000 to 3,300 have it entirely wrong.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Is this a premature call to say when the bottom is in, and the market has begun to pivot? Let the tale of the tape do the talking. What sectors have made the most structural bullish move higher in the past few days? Heavy equipment, chemicals, steel, iron ore, copper, materials, chemicals, new home builders, machinery. These are deep cyclicals. The money flow into these sub-sectors was stunning, and we’ll get confirmation of a soft landing when Wall Street gets around to touting these stocks at six-month highs.
Follow the money. Hunkering down in defensive sectors isn’t what the tape is painting. Seeing 3%-6% spikes in the deep cyclical stocks on big volume during Friday’s session should be a huge wake up call for investors. Institutional money is not only buying into Alan Binder’s “Aha Moment” with mental conviction, it is doing so with hard dollars. It almost never makes sense from a timing standpoint why the most counterintuitive stocks begin to stage a new rally phase when the present headlines are so negative about current economic conditions, so just turn off the news and watch the tape. Don’t get trapped in the minutiae of negativity and all the relativism that permeates all manner of media and entertainment.
Truth be told, Wall Street doesn’t really care about most headline issues, be they Kevin McCarthy, ESG, climate change, or Ukraine. It does care about China, because China can move various needles, but most of all, it cares about the business cycle. Plain and simple, Wall Street is, or is about to have, an epiphany, that inflation is near the Fed’s 2% target. And when the Fed does pivot away from their hawkish tone, as I believe it will at the next FOMC meeting on February 1, the bull train will have already left the station.
The 5-year chart of the S&P 500 shows a textbook double-bottom, higher-low in the making. I might be completely wrong, and the economy tanks into recession. But I don’t think so, not when some of the heavy metal stocks are trading at new 52-week highs! After many years of investing and writing about the financial markets, one learns to respect the tape, while there is time, and then ask questions later.
Price matters. If investors wait for earnings to justify owning economically sensitive stocks that are ripping higher, they will have made a gross error in judgement. This isn’t how smart investing works.
Don’t miss out on the easy money when the market turns. I believe we are at the turning point, with the end of the bear market in sight. And if I am wrong, I’ll be the first to admit it. But I am thrilled to see the rotation into the deep cyclicals at a time when the bearish narrative rules the landscape. A favorable CPI report has the potential to trigger another day like Friday, or bigger. It’s a compelling set up that could take the S&P up and through the bearish downtrend line at 4,100 like a hot knife through butter.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Which Stocks Will Win (or Lose) This Earnings Season?
Income Mail by Bryan Perry
The Market Seems Ready to Pivot Higher on an Inflation Epiphany
Growth Mail by Gary Alexander
Which Will it Be – Another Roaring 20s, Or Stagflationary 70s?
Global Mail by Ivan Martchev
As January Goes, So Goes the Year (Sort of)
Sector Spotlight by Jason Bodner
Low-Volatility and Large Spreads: Who Could Like That?
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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