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Inflation

Dec 20 2022

Marg-flation

  • Dec 20, 2022

The 2022 bear market will be remembered as a year when collapsing growth stock valuations and rising interest rates doomed almost every asset class to return purgatory. Hopes for avoiding a second down year rest with a potential top in interest rates and solid earnings underpinning the stock market. Wall Street strategists have a year-end 2023 price target of just over 4,000 for the S&P 500, a few percentage points of upside from today but hardly reason to toast a prosperous new year.

Dec 07 2022

Goodbye Inflation, Hello Recession?

  • Dec 7, 2022

Unlike the five prior cycle peaks, this year’s inflation peak materialized during an ongoing economic expansion. That implies the “post-peak” monetary policy has never been tighter than today—making a soft landing even more improbable.

Dec 06 2022

Research Preview: Inflation And Margins

  • Dec 6, 2022

A new study looking at the relationship between inflation and profit margins is introduced. The goal is to understand how the latest margin peak was reached in mid-2021 and what impact inflation might have on margin forecasts underlying next year’s earnings estimates. Full report will be sent mid-month.

Nov 18 2022

How This Year’s Inflation Peak Differs From Its Predecessors

  • Nov 18, 2022

Our studies of economic and stock market history are meant to provide perspective, not an investment roadmap. But occasionally a current trend will resemble the past so closely it’s eerie.

Take the current inflation cycle. If (as we believe) June’s CPI inflation rate of 9.1% represents the peak for this business cycle, then many of its characteristics have lined up almost perfectly with the “average” of past inflationary episodes.

Oct 07 2022

Roaring Good Times...

  • Oct 7, 2022

Boy, were the pundits ever right about the Roaring Twenties. Less than three years into the decade, the animal they fear most has already roared two times. Actually, the first one, in the first quarter of 2020, was more like a piercing “yap,” taking the S&P 500 down almost 34% in just 23 trading days. The second roar has been a deeper, more guttural one that’s lasted nine months and is probably not done.

Sep 16 2022

Labor: Snatching Defeat From The Jaws Of Victory

  • Sep 16, 2022

This year it’s been popular to say the Fed will hike interest rates until it “breaks something.” Has that not already happened? Pull up charts of the Japanese yen, the British pound, and the euro, among others. And stateside, the Fed has broken one of economists’ favorite toys: the Phillips Curve.

Sep 15 2022

#54 - Inflation Fever Not Broken

  • Sep 15, 2022

The CPI figures were hotter than expected and point to more Fed intervention. Barring a 2020 collapse in the price index, year-over-year figures are going to remain high for quite some time.

Sep 08 2022

It’s Been Ugly Across The Board

  • Sep 8, 2022

Aside from a couple specialized approaches, 2022 is shaping up as the second-worst year for “multi-asset” investing since at least 1973. It seems money printing supported more than just the equity subset.

Sep 08 2022

No Rest For The Weary

  • Sep 8, 2022

If there’s a polar opposite to “Goldilocks,” this must be it. Not too hot and not too cold? What about both? Job growth and inflation are hot enough to force the Fed to follow through on its hawkish promises. But the leading indicators continue to warn us of oncoming cold. The odds that the porridge settles at the right temperature, without an intervening recession, look longer by the day.

Sep 08 2022

Inflation Reduction Act—Corporate Tax Hike Implications

  • Sep 8, 2022

We take a look at the impact of past corporate-only tax hikes versus tax hikes of any type (personal income, corporate, capital gains). The gist is, there isn’t much difference at all.

Aug 05 2022

Valuations: Living Beyond One’s Means?

  • Aug 5, 2022

We won’t dispute that investors were not genuinely frightened at the June market lows, or that fears have evaporated following a 13% rally in the S&P 500. The distress is understandable: For 26 traumatizing days in 2022, our S&P 500 Normalized P/E multiple traded below its 1957-to-date top decile!

Aug 05 2022

Bear Market Rallies In Context

  • Aug 5, 2022

The 2022 bear market is the 13th cyclical bear since 1950, and it’s already joined the mightiest half of its predecessors based on the fact that it’s actually contained a bear-market rally. Six of the prior 12 bear markets weren’t interrupted by even one rally of at least 10%.

Jul 08 2022

Remember When?

  • Jul 8, 2022

Remember the good old days (like even a year ago) when one didn’t need to mentally tabulate investment results in inflation-adjusted terms? For a blissful couple of decades, nominal and real returns were so close together that the latter figure seemed irrelevant.

Jul 08 2022

More Signs Of Peak Inflation

  • Jul 8, 2022

As suggested in our June 24th, Chart of the Week, the peak in consumer inflation (+8.6% in May) has likely either occurred or is imminent. Consumers should thank the stock market, which in 2022 has taken up its occasional role as inflation-fighter after the Fed abdicated throughout 2021.

Jul 08 2022

Break Out The Checkbook!

  • Jul 8, 2022

We apologize for that terribly misleading teaser of a title, but the bills for the stock-market mania of 2020-2021 are piling up. Inflation is one of them, lately increasing each month as relentlessly as cable TV used to. And for the 10% of households who own 90% of the stocks, market air-pockets such as June’s are like “surprise” medical bills: There’s rarely just one

Jun 24 2022

If Inflation Has Peaked, Thank The Stock Market—Not The Fed

  • Jun 24, 2022

High inflation continues to dominate the headlines, but it is only one piece of the “weight of the evidence” that’s stacked against the stock market. Still, in ironic fashion, stock-market action itself suggests that inflation is set to peak.

 

Jun 07 2022

Your “Free Lunch” Comes With A Tab

  • Jun 7, 2022

The market impact from money printing has been underwhelming when adjusted for the inflation it’s unleashed. Measured from the peaks associated with the first attempt at Quantitative Tightening, in inflation-adjusted terms, Small Caps, EAFE, and Emerging Markets all have losses.   

Jun 07 2022

Should An Inflation Peak Be “Bought?”

  • Jun 7, 2022

Many economists recommend equity investors to instinctively and aggressively “buy” the inflation peak. History is on their side, though not as overwhelmingly as they might believe.

May 06 2022

Stocks, Inflation, And Reverse Causality

  • May 6, 2022

Forget interest-rate hikes and quantitative tightening. There exists a very important weapon in the fight against inflation that the Fed did not have at its disposal in the 1970s: an overvalued stock market.

Apr 07 2022

Consumers’ Misery Is Also The Fed’s

  • Apr 7, 2022

An already-low unemployment rate has dropped another 0.3% YTD (to 3.6%) and stocks’ rebound in the second half of March took the S&P 500 to within 3.5% of its all-time high. Yet Consumer Sentiment has sunk to 59.7—a reading that’s 15 points below the average seen at the last six NBER business-cycle troughs. Why the long faces?

Apr 07 2022

Signs Of “Demand Destruction?”

  • Apr 7, 2022

They are simple measures, but our “NOPE” Indexes capture (as well as anything) the escalating inflation squeeze on businesses and consumers. To recap, the NOPE is the spread between the ISM New Orders Index and the Price Index, which can be calculated for both the Manufacturing and Services sectors.

Mar 05 2022

Inflation: More Lighter Fluid!

  • Mar 5, 2022

For months, we’ve argued there are two ways of thinking about the current economic cycle. Economist types are likely to side with their brethren at the NBER, who say the recovery has entered its 23rd month. But those observing the broad range of economic and financial gauges might view this cycle as a  single economic expansion dating back to mid-2009.

Mar 05 2022

Market Gets A Speeding Ticket

  • Mar 5, 2022

PPI and CPI inflation reached levels that were “too hot to handle” last April and July, respectively, yet the blue chips kept going up through year-end. Large Cap investors who trimmed stocks in response to the violation of these long-time inflation speed limits, however, haven’t missed out on much, and Small Cap investors who did so are happy.

Feb 05 2022

What “Causes” Inflation To Decline?

  • Feb 5, 2022

Last year’s consensus view that inflation would prove “transitory” missed the mark. There’s no reason for shame; inflation forecasting hadn’t been a required investment skill for the previous 30 years.

Feb 05 2022

“Collared” By The Fed?

  • Feb 5, 2022

In late January, the S&P 500 was down so much (almost 10%!) that it revived talk of investors’ favorite “safe” security. No, not T-bills—and not even Amazon or Apple common stock—but the Fed “put.” Years ago, we called it the “hypothetical” Fed put. But by now, we’re believers.

Dec 07 2021

An Inflationary Wealth Effect

  • Dec 7, 2021

Causation between the economy and financial markets is never a clear thing. The optimistic group formerly known as “Team Transitory” believes a peak in the inflation rate is near, presumably clearing the way for even greater P/E multiple expansion than already seen in this cycle.

Dec 07 2021

A 2023 Inflation Peak?

  • Dec 7, 2021

We don’t profess to be professional inflation forecasters, but are struck by a sort of “temporal” mismatch in the arguments used by those who believed the inflation pick up would be temporary. Specifically, the most commonly-cited bullish inflation arguments have been secular in nature, based on long-term trends in technological innovation, demographics, and free trade.

Dec 07 2021

Is Powell A “Phillips Curve” Guy?

  • Dec 7, 2021

With consumer price inflation raging at 6.2% and few indications of an imminent rollover, Jay Powell has waved the white flag and retired the ill-begotten “transitory” descriptor. The timing of Powell’s concession is intriguing—perhaps he’s a fellow follower of a simple inflation model: the Output Gap.

Nov 18 2021

Powell’s Dovish Accomplice

  • Nov 18, 2021

Last week we argued that U.S. money growth remains way too high to reasonably expect a peak in consumer price inflation during the next few months. At the peaks of the last five bouts of inflation of 5% or more, real growth in the M2 money supply had turned negative in four cases and had slipped to less than 1% in the other one. Today, real M2 is growing at nearly a 7% rate.

Nov 12 2021

Timing Is Troubling For “Team Transitory”

  • Nov 12, 2021

From the start of the inflation upswing this spring, pundits cited well-known disinflationary factors they believe will soon halt the current inflationary upswing—like free trade, the speed of technological advance, and aging populations globally. 

Nov 05 2021

A Marginal Measure Of Margins?

  • Nov 5, 2021

For those believers in a new economic- and stock-market era, there’s good news. The CPI-PPI spread has not been an effective proxy for profit margins during the 1995-to-date “New Era.” But, the failure of an inflation measure during a mostly non-inflationary era shouldn’t come as a surprise.

Nov 05 2021

Manufacturing: More Citations For Speeding

  • Nov 5, 2021

It is much easier to predict inflation, itself, than to predict when investors will become traumatized by it. Some of the most helpful measures for the latter task come from the ISM Manufacturing Report. October’s readings saw three key measures above the statistical “speed limits” we calculated years ago.

Oct 07 2021

Are Price Hikes The “New” Rate Hikes?

  • Oct 7, 2021

Notwithstanding the hit to consumers’ pocketbooks, it’s been amusing to follow the Fed’s recent evolution with its mindset regarding inflation. A year ago, the hope was for “symmetry”—Fed-speak for allowing inflation to run above its long-time 2% target, since it had previously undercut that level for awhile. Then, early in 2021, the word “transitory” entered the lexicon; yet months of debate and tens of thousands of utterances on financial television have clarified nothing about the Fed’s characterization of that term.

Sep 08 2021

What’s Your “Number?”

  • Sep 8, 2021

Those in their peak earning years (40s and 50s) who’ve also enjoyed the stock market’s windfall gains are very likely to have seen their annual expenses climb much higher than the Consumer Price Index over the last several years.

Sep 08 2021

Let Us Add To The Bullish Cacophony

  • Sep 8, 2021

It’s been a heck of a stock market year, and there are still four months left. What else could go right? Monetary conditions, for one thing—at least as proxied by our Dow Bond Oscillator (DBO).

Aug 06 2021

The “Rule Of Twenty” Revisited

  • Aug 6, 2021

Pundits could reasonably argue the market has never been more expensive in light of the prevailing rate of inflation. That’s the conclusion of the “Rule of Twenty,” which proposes that the stock market’s P/E ratio and the trailing 12-month Consumer Price Inflation rate should sum up to 20.

Aug 06 2021

Not All Inflationary Periods Are Equal

  • Aug 6, 2021

What matters is whether an inflationary period is driven more by “demand pull” or “cost push.” Demand pull inflationary periods seem far more favorable than cost push periods, which, more often than not, occur in a “stagflation” macro context.

Jul 16 2021

A Closer Look At The “Rule Of Twenty”

  • Jul 16, 2021

Inflation and its potential impact on the stock market is the topic du jour, resurrecting ideas that were in vogue 30- to 40-years ago.

Steve Leuthold’s 1980 book, The Myths of Inflation and Investing, provided an exhaustive review of the evidence. But for lighter reading, more appropriate for a summer Friday, we revisit the “Rule of Twenty” developed by strategist Jim Moltz in the early 1980s.

Jul 08 2021

Why The Fed Is Hog-Tied

  • Jul 8, 2021

We’ve long considered ourselves lucky to have escaped from our graduate-economics program after only a year. Among the few nuggets we managed to retain was the startling conclusion to a paper written by a famed department professor asking, “Do Large Deficits Produce High Interest Rates?”

Jul 08 2021

Are High Prices A Form Of “Tightening?”

  • Jul 8, 2021

It’s certain that today’s cyclical bout of inflation will prove “transitory,” if only because the word itself is practically meaningless. Our time on earth will also prove transitory, and so too will the current stock market mania—to the shock of most of the nearly 20 million “investors” on the Robinhood platform.