Are stocks starting to lose momentum? This week saw the S&P 500 reverse course – its first losing week since early September. Could there be more to come? My answer is yes – perhaps as much as 7-10%. However, it’s a question of timing. Irrespective, paying 22x forward earnings is a higher-risk bet.
"Inflation"
The Fiscal Tailwinds Helping Stocks
Will fewer rate cuts dampen the enthusiasm for stocks? It certainly hasn’t to this point. And could higher bond yields impact stock valuations? So far the market is not bothered. These (and other) questions need to be weighed carefully with the S&P 500 trading ~21.5x forward earnings. And whilst the multiple is heavily skewed by the ‘Mag 7’ – 21.5x is far from cheap. What’s more, from a historical perspective, paying a multiple above 20x offers investors a very low risk premium (e.g., with the risk free rate above 4.0%). But wait… what’s to say stocks cannot rise further? We’ll explore why they can…
The Inflation Puzzle: ‘Services’ Remain Sticky
In a perfect world, inflation should be boring. Boring is good. However, when you inject an additional $6+ Trillion into the economy with far fewer goods being produced, inflation becomes a story. Last month’s inflation report showed headline (and core) CPI ticked higher. However, what caught my eye was “supercore” inflation – something the Fed says is a good predictor of future prices. Suerpcore is services inflation less shelter. This was up 4.4% YoY – also moving higher. The reason: pressures with wage growth – which remains around 4.7% YoY
Powell’s Ready to Cut… And Not Just Once
Today Fed Chair Powell delivered precisely what the market wanted to hear… help is on the way. As a perpetual (closet) dove – Powell did his best to stay balanced however the cat is now out of the bag. Rate cuts are coming. And there will be more than one. Consistent with other meetings – Powell said rate cuts are an option if economic data continues on its current path. In other words, it was the (same) scripted “data dependent” Fed.
However, there were some important nuances.
For a full list of posts from 2017…