Published May 17, 2024
Below we catch up with our friends at Delta Research. Their recent comments have covered inflation, the Fed, stock buybacks, and the Misery Index. Enjoy!
“Inflation depends, in part, on what consumers expect it to be. If consumers expect prices to be higher in the future, they buy now which creates inflationary demand pressures now. In the Fed statement and press conference held this week, the Fed said inflation expectations are anchored. The 5-year forward inflation expectation rate is 2.37% currently. For the past two years, the expectation rate has been bounded between 2% and 2.5%.
The Fed is also anchored. It is holding off on rate cuts while the economy is strong and the downtrend in inflation remains stalled. The Fed believes inflation will trend lower later this year. If and when lower inflation becomes evident, the Fed will lift anchor and drift rates lower. The Fed has said it is unlikely that there will be rate hikes and they are optimistic that inflation will trend lower once lag effects subside. This week’s inflation data showed inflation continuing to trend downward, albeit slowly.
The supply of U.S. stock has been contracting over the past three years as stock buyback volume outpaces new volume creation from initial public offerings (IPOs) and secondary offerings. This week, Goldman Sachs raised its 2024 buyback forecast to $925 billion, up 13% year-over-year. For 2025, they predict buybacks to rise by 16% year-over-year.
In the last four years, the Magnificent 7 large-cap technology stocks (Microsoft, Apple, Nvidia, Amazon, Alphabet/Google, Meta and Tesla) increased their annual buyback spend by $83 billion as compared with the remaining S&P 500 companies buyback spend declining by $17 billion over the same period.
In an uncertain market, rising stock buybacks should directly help support the largest companies in the S&P 500 and indirectly support the overall index. As of March 31, the 10 largest stocks in the S&P 500 represented 33.5% of the index.
Misery Index Improving
Over the years, we periodically mention the Misery Index. The Misery Index is an economic indicator gauging how the average citizen is doing economically and is calculated by adding the unemployment rate to the annual inflation rate. As of March, the unemployment rate is 3.8%. Inflation measured by the CPI is 3.6%. The Misery Index is 7.4% down from 13.5% in June 2022 and well below the 3-year average of 10.2%. The glass looks half full.”
Market Update
Investors focused this week on two inflation updates – producer prices and consumer prices. Markets ran in place Monday ahead of those inflation reports. The Tuesday report on prices of wholesale goods offered a mixed picture. But investors appeared to be encouraged as money flowed into interest rate-sensitive growth stocks sending the Nasdaq higher by +0.8%. The consumer price report on Wednesday furthered the bullish cause as inflation eased while retail sales came in softer than expected, supportive of a lower rates. Stocks rallied to all-time highs on the news with the S&P 500 closing up +1.2%. It was the 10th consecutive day of gains for the index as interest rates have fallen throughout the month. It has been a complete reversal for both stocks and bonds from their April moves. Stocks ran in place Thursday and Friday as investors digested the shift in inflation expectations. Investors now give a 75% chance the Fed will begin cutting rates in their September meeting.
The S&P 500 closed the week at a record high, rising +1.65% this week, its fourth straight week of upward price action. The Nasdaq 100 (QQQ) gained +2.19% to also close at a record. Small-cap stocks added +1.85% this week but remain well off their all-time highs, hit three years ago. Small-cap stocks have been significantly more impacted than larger stocks by the rise in interest rates over the past couple of years.
Warm wishes and until next week.