Weekly Update

Inflation Comes Down and Markets Cheer

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Published November 17, 2023


This week, we catch up with Blaine Rollins and his picks of interesting recent financial and economic reports. First up is a dive into the components of inflation, shifts in the market as inflation has come down, and where stocks are still quite cheap relative to historical norms. Here’s Blaine:

“The 2024 projections will soon begin to hit your inbox at a rapid pace. From the early reads, it looks as if the strategists and economists are narrowing in on a soft-landing or no-landing scenario for the U.S. And with inflation continuing to slow and household and corporate balance sheets remaining in good shape, the investment outlooks are favorable towards fixed-income and equity holdings. Some lean more toward international stocks, most towards smaller cap companies, and many feel safe to own credit over risk-free bonds. Of course, as always, all bets are off if a geopolitical event occurs or if the U.S. government shuts down for an extended period. But for now, things look to be in better shape today than one-year ago.

It is inflation week, and the trend continues to be the friend of the Federal Reserve and investors of risk-based assets…

As the core PCE falls towards 2%, the question remains if it will hit the Fed’s goals or bounce. Only time will tell.

2024 Inflation Outlook: Final Descent

Inflation has fallen sharply from its pandemic peak and should begin its final descent in 2024. Core PCE inflation is down from a 5.5-6% to a 2.5-3% sequential annualized pace (see below), and other measures of the underlying trend such as the trimmed mean and the median have softened significantly as well.

Core inflation has fallen sharply from the peak and is on track yo fall further in 2024

Goldman Sachs

As Goldman Sachs lays out, there are weaker prices ahead in the form of auto and shelter costs which are significant weightings in the consumer inflation readings…

We see further disinflation in the pipeline from rebalancing in the auto, housing rental, and labor markets. In the auto market, it took longer than expected but eventually fixing supply chain problems, restoring production to normal levels, and rebuilding inventories reintroduced competition among dealers and manufacturers that has begun to reverse shortage-driven price spikes. Inventory levels have more room to recover in 2024, and new and used car prices have further to fall (see below, left).

In the housing rental market, normalization of elevated pandemic demand and a large increase in apartment supply has slowed leading indicators of new tenant rent inflation to a 1-2% annualized pace this year (see below, right). The official housing inflation numbers have slowed less because they also cover continuing tenant rents, which fell behind the rapid growth of market rates in 2021 and 2022 and have been catching up. But we estimate that the gap between market rates and continuing tenant rents has fallen from 7.5% to around 2%, meaning that catch-up is coming to an end and the official numbers should converge more quickly toward the slower pace of the leading indicators next year.

There is more disinflation in the pipeline on the goods side from autos and on the services side from shelter

Goldman Sachs

It is not a core price item, but anyone needing a pit stop is going to see much lower fuel prices…

Gasoline is not a major component to most consumers, but for those with a long commute in an ICE vehicle, you are seeing a current benefit to your wallet.

AAA national average gasoline prices (regular unleaded)

The Daily Shot

Gluten lovers should also feel a fatter wallet…

If you are a lover of rolls, sandwich bread, croissants, or ramen noodles then enjoy the lowest prices in two years as global grain stores are full and U.S. grain exports are the lowest in twenty years.

CBOT hard red winter wheat (1st nearby)

The Daily Shot

And all meat prices should benefit from decade low corn exports colliding with a bumper U.S. crop…

Chicago corn futures on Monday hovered near three-year lows as the market absorbed last week’s U.S government forecast that farmers will produce the biggest corn crop on record this year.

Farmers will produce the biggest corn crop on record this year

The Daily Shot

“Objects in mirror are closer than they appear”…

Unfortunately, many vocal consumers have tossed their reading glasses in favor of their cars’ sideview mirrors.

Inflation out of control

In fact, many economic sentiment surveys have become nearly worthless as they don’t reflect actual behavior…

As it turns out, the big economic story of 2023 is not a recession, as many had predicted — it’s the disconnect between consumer sentiment and behavior.

Higher than normal inflation over the past two years is an obvious reason that people would be down about the economy. The puzzle is why people are still behaving as if their economic situation is good. Inflation-adjusted consumer spending is way up: Not only above 2019 levels, but above the pre-pandemic trend. In fact, it’s largely the reason that US economic growth is above expectations. And yet consumer sentiment is at levels typically seen only in a recession.

Economists tend to believe actions over words. You can insist that you prefer a vegetarian diet, but if you keep eating hamburgers, we will conclude that you actually prefer an omnivore diet. So if you say the economy is terrible but spend like it’s 1999, some economists will tend to trust what you do over what you say — and question the reliability of the polls.

These economists argue that the data showing a strong economy, including outsize consumer spending, imply that people are not being honest about how they feel about the economy. Instead, they are aligning their views with their political preferences. This argument maps on to the large disparity between Republican and Democratic views of the economy, a gap in attitudes that is not matched by a gap in their economic experience.

While inflation is the obvious pain point in the economy, it has also been substantially reduced — from a high of more than 9% last year to 3.7% today. Hopefully it will continue its decline, but the current rate is within historic norms for the US, and even a bit lower than it was in 2011.



The inflation slowdown is not only a U.S. phenomenon…

Encouraging news for risk-based assets overseas as those Central Banks follow the map that the Federal Reserve drew up.

Soft Landing

Goldman Sachs

And because natural gas is such an important input into paying for European winters, we would highlight that the current tanks haven’t been this filled in the last 10 years…

GIE europe natural gas storage % full

The Daily Shot

Given the European weather outlook, natural gas prices may have only one downward direction this year…

Europe’s winter forecast pointing at an unseasonably warm outlook, which will likely reduce the need for heating fuels over the coming months.

CWG winter outlook Europe

BofA Global

Speaking of Europe, have you even tried to book a trip overseas for 2024?

If Taylor Swift and Beyoncé were the hot tickets in 2023, I think a coach ticket from the U.S. to any European city destination will be the tough find for 2024. After talking to a vacation travel company last week, all I could say is, plan ahead and be flexible.

US consumer plans to vacation in a foreign country

Apollo Academy

Here is a good gathering of the NFP payroll estimates for 2024…

Remember when not too long ago some firms were projecting negative monthly results? Well, not anymore. First up Goldman Sachs.

Payroll growth is expecting to slow

Goldman Sachs

Then Morgan Stanley…

@carlquintanilla: MORGAN STANLEY: “We expect nonfarm payrolls to fall below the replacement rate in 1Q24 – decelerating from an average 233k/month in 3Q23 to:
• * 150k/month in 4Q23
• * 110k/month in 1Q24.
• * 70k/month in 2Q25. #NFP

Payroll growth fall

And on the lower (but still positive) side, BofA Global/Merrill Lynch…

BofA forecasts US payrolls

BofA Global

High growth and inflation from COVID/Ukraine sent the Treasury market into its longest and sharpest drawdown in ninety-seven years…

U.S. Treasury bonds losses


But as the stars lined up two weeks ago for lower inflation, steady growth and a more dovish Fed, investors fast-forwarded into credit funds…

Flows of HY bonds and bank loans

The Daily Shot

The last hike was at the end of July, so you want to look for the lines titled 3m & 4m in the below table…

@dailychartbook: “After the final Fed hike, bond yields always fell.” – JPMorgan

U.S. 10Y bond yield move

Another reminder that the smartest CFOs and Treasurers were acting well ahead of the rise in rates as they refinanced and extended their company’s debt at historically low rates…

@dailychartbook: “US nonfinancial corporates’ net interest payments as a percentage of profits after tax have declined from 18.1% in 1Q22 to 11.9% in 2Q23, the lowest level since 2Q59.” – Jefferies, Christopher Wood

U.S. nonfinancial corporate net interest payments

As a result of the Finance team’s actions, corporate bankruptcies are much more controlled than anyone would have expected after a 400-basis point jump in the risk-free rate…

@SPGMarketIntel: S&P: “.. a total of 50 companies filed for bankruptcy in October, down from 61 in September, according to the latest S&P Global Market Intelligence data. This was the second-lowest monthly total for the year so far …”
U.S. Bankruptcy filings

Last week’s Senior Loan Officer Opinion Survey on Bank Lending showed an improvement in credit…

@BittelJulien: Latest SLOOS reported fewer banks tightening credit standards on C&I loans. Yes, conditions remain tight but what’s important here is that the worst of the tightening is behind us and this is what equities started to price in back in Q4 ‘22 when the liquidity cycle bottomed.

U.S. C&I Loan Survey: credit standards

With the big earnings largely behind us, one can see why investors prefer to lean into big technology companies…

But while the big companies continue to deliver and get rewarded, at what point do valuations come into play? “Alexa, what was the ‘Nifty Fifty’?”

Big technology companies still preferred investments


Interestingly, the ‘Magnificent Seven’ was not just a U.S. event…

Europe also had an outperformance concentration at the top of their market. Asia even had a small one, although the returns were negative. It even existed in Japan – though if you were overweight Japan, congrats.

Total return performance since first Fed hike in March 2022

Goldman Sachs

Today, five companies have a bigger weight in the S&P 500 then Apple did 10 years ago…

Here is a glance at the increase in concentration over the last 10 years. I also added the 10-year performance for the ‘Magnificent Seven’ just so you can see the level of outperformance.

25 largest S&P 500 stocks


So much for my thoughts of a broadening market during the recent summer months. Time to test the 2020 low in breadth…

@LizAnnSonders: Getting much closer to retesting September 2020 low for ratio of equal-weighted S&P 500 relative to cap-weighted S&P 500.

S&P 500 equal weighted index

Another milestone as Microsoft becomes the second company to become worth more than the entire market cap of the Russell 2000…

@bespokeinvest: Microsoft $MSFT has joined Apple $AAPL as the 2nd individual company that has a bigger market cap than the combined market cap of all stocks in the small-cap Russell 2,000:

Apple, Microsoft and Russell 2000 market cap

Speaking of U.S. small cap companies, their relative performance to the S&P 500 is approaching 23-year lows…

@_rob_anderson: Small-caps are trading at their lowest level vs. the S&P 500 (total return) in almost 23 years! $IWM is just 2% above its record relative strength low.

iShares Russell 2000 / S&P 500 return

Small caps now make up less than 4% of the total U.S. stock market…

@dailychartbook: Small-caps now represent less than 4% of the total US equity market. via Jefferies

Small Caps as % of total market

As for small-cap valuations, they currently trade at 60% of the valuation of the large-cap index…

Mid-caps are not much better at two-thirds the valuation of the S&P 500. Pretty easy to see how the big companies could just go on a feeding frenzy and buy all the small companies they want to add growth using their premium stock price currency value.

Forward P/E ratios for S&P stock price indexes


When small-caps have traded at 12.3x forward earnings in the past 38 years, they often annualized at a near double digit rate over the following 10 years…

Do not forget that the small-cap company investing environment is a most frequent one for the private equity industry.

Forward P/E ratio for Russell 2000

BofA Global

Here come the 2024 market forecasts…

Goldman Sachs kicked off the 2024 market forecast prediction season last week. Falling inflation, economic growth and low chances of a recession has led them to project double digit global equity gains and good returns from risk-free bonds as well as credit instruments.

2024 Returns Forecast

Goldman Sachs

Make sure that you keep your Boeing news feed up to date this week…

Making the very profitable 737 again for China is a big deal.

Stock in commercial aerospace giant Boeing stock was on the rise early Monday after a media report said that a yearslong freeze on sales in China could soon be lifted.

The Chinese government is considering a commitment to buy 737 Max jetliners as President Joe Biden meets Xi Jinping in San Francisco this week, Bloomberg reported, citing unidentified people familiar with the plans. The commercial aerospace giant hasn’t made any significant sales of the 737 in China since 2018, before the model was grounded after two crashes in March 2019…

A return to normal in China is good for Boeing shares. So are more plane orders from other airlines. Boeing announced Monday that Turkish-German airline SunExpress will buy up to 90 of the 737 MAX Jets. Long-haul carrier Emirates also announced an order of 90 777X jets early Monday.

“Emirates is the biggest operator of Boeing 777 aircraft, and today’s order cements that position,” Emirates CEO and Crown Prince of Dubai Sheikh Ahmed bin Saeed Al Maktoum said.

Also, interesting to read where ExxonMobil is going to use its fossil fuels exploration technology to drill for lithium in Arkansas. Interesting…

ExxonMobil plans to begin producing lithium in 2027 in a major strategic pivot, as the biggest western oil producer bets it can use its expertise in drilling and processing to become a leading player in the battery metal.

The company said on Monday it had begun work to extract lithium from underground brines in the southern US state of Arkansas, where it has acquired the rights to 120,000 acres of land in the Smackover formation.

“We think we’re going to build a profitable and high-growth business for the long term here. So it’s a big deal,” said Dan Amman, head of Exxon’s low-carbon solutions business, adding that the project built on the company’s “existing knowhow”.

“We’re drilling wells 10,000 feet underground into these saltwater reservoirs. That’s obviously directly in our wheelhouse and capability skillset,” Amman said in an interview with the Financial Times.

The move comes as the energy transition drives a surge in demand for the battery metal. The International Energy Agency has predicted consumption could increase by a factor of more than 40 between 2020 and 2040, on the back of rapid growth in the use of lithium-ion batteries needed for electric vehicles and energy storage.
Financial Times

Interesting to see green technology demand driving the need for trees…

VIDALIA, Ga.—Electric cars. The solar build-out. Washington’s rural-broadband initiative. Utilities bracing the grid for stronger storms. They all depend on the same thing: big trees.

The utility-pole business is booming, thanks to a flood of public and private infrastructure spending. So the hunt is on for the tallest, straightest, knot-free conifers, which are peeled, dried and pressure-treated at facilities such as Koppers Holdings’ pole plant in southeastern Georgia’s pinelands.

Employees cruise surrounding pine plantations, marking pole-worthy loblolly and longleaf and making offers. The bigger, the better these days, given how much more equipment and cable poles must hold in the era of fiber optics and electric cars, said Jim Healey, Koppers’ vice president of utility and industrial products.

For landowners, especially the families and individuals who grow much of the South’s pine, the pole boom means higher prices for standout trees than what sawmills pay.

Shareholders of the two firms that dominate the American pole business—as well as railroad ties—have also been winners. Over the past year, Pittsburgh’s Koppers and Montreal’s Stella-Jones are up 49% and 87%, respectively, compared with a 16% rise in the S&P 500 stock index.

“Demand right now in North America for utility poles is outpacing capacity,” said Stella-Jones Chief Executive Éric Vachon


Market Update

Stocks have rallied the past two weeks as sentiment has shifted to a seasonally bullish mode in hopes that interest rates have peaked. This week’s inflation report would be the next test for that newfound bullishness. Monday brought a flat day despite a big move in shares of Boeing. The airline received a massive order from Emirates for new airplanes. Stocks ripped higher Tuesday when the consumer price report showed no change from October. This left inflation at a 3.2% year-on-year growth rate. The report reassured investors on interest rates and cleared the way for a continuation of the recent rally. Shares of interest rate-sensitive groups took flight with homebuilders and real estate rising 6-8% on the day. The broad market pushed +2% upward. Stocks held flat from there through the end of the week, overcoming disappointing earnings reports from Cisco Systems and Walmart and continued selling in the oil patch. The most beaten-down stocks generally saw the biggest gains. For example, beleaguered Target popped +20% while Gap jumped +30%, both retailers had seen their share prices cut at least by half the past two years.

Investors continued to return to stocks pushing the S&P 500 index (SPY) higher by another +2.31% while the Nasdaq 100 (QQQ) added +2.02% to reclaim the $380 price level for the first time since the beginning of 2022. Smallcap shares (IWM) leapt +5.43% but remain well behing their largecap brethren.

Warm wishes and until next week.