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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
Are Chinese Stocks ‘Investable’?
The recent rally of over 25% in Chinese was something we’ve not seen in over a decade. Beijing’s ‘stimulus blitz’ excited both institutional and retail investors alike. As context, China has struggled with deflationary pressures due to a prolonged real estate downturn and weakening domestic consumer confidence. In addition, a slew of economic data in recent months has missed expectations, raising worries the world’s second largest economy may not achieve its 5% full year growth target. The question is can the central government turn things around with more stimulus? I doubt it….
Growth Defies Fear
In my experience – growth ultimately defies fear. And whilst stocks will always climb the wall of worry – over time – growth prevails. The challenge for investors is the pathway is rarely in a straight line. Put another way, markets are constantly in a tug-of-war between opposing forces. Consider what we see today… we have a surprisingly robust US economy, defying expectations of a slowdown. Tailwinds include Fed easing, disinflation and a consumer which continues to spend. The counterforce to the further growth are escalating geopolitical tensions in the Middle East – which threaten to disrupt the global economic order