The Market Didn't Like Inflation Today
A different market reaction... Another high(er) inflation report... Stocks dip... What the bond market is signaling... U.S. stocks are still the best, though...
This could be a sign of things to come...
Yesterday, Mr. Market ho-hummed another high(er) inflation report. Today, not so much.
Wholesale prices for November, measured by the producer price index ("PPI"), showed 0.4% growth for the month and 3% growth year over year, its highest increase since February 2023.
The PPI represents companies' production costs. The consumer price index ("CPI"), which we reported on yesterday, measures what people pay for goods and services. So the PPI is considered by some analysts to be more of a leading indicator.
The PPI's numbers were higher than mainstream economists' consensus expectations... and they're signaling that the pace of inflation in the U.S. is reaccelerating. That was a catalyst for the major U.S. stock indexes pulling back today.
After hitting a fresh all-time high yesterday, the tech-heavy Nasdaq Composite Index closed 0.7% lower today. The benchmark S&P 500 Index and the Dow Jones Industrial Average were each down 0.5%, and the small-cap Russell 2000 Index fell 1.4%.
Now, many are wondering about the future path of inflation, how that will affect businesses sensitive to interest rates and, notably, the Federal Reserve's future monetary policy decisions...
U.S. central bankers have said they are intent on cutting rates to a more "neutral" stance, but with 75 basis points of cuts in the second half of this year, the Fed may already be juicing the economy (and triggering future inflation) more than it cares to admit.
So the current rate-cutting cycle could come to an end sooner than "everyone" thinks... or at least go on pause sometime in early 2025, meaning a higher cost of capital than many people previously imagined. That's what the Treasury market is signaling, at least...
Bond investors appear to think more inflation is coming...
Even yesterday, when stocks rose amid a higher CPI reading for November (probably because the reading was still "in line with expectations"), longer-term bonds sold off while yields were up (bond yields trade inversely to prices), as our Ten Stock Trader editor Greg Diamond pointed out to his subscribers.
This suggests "smart money" investors are concerned about bonds' present value because of increased growth and/or inflation. Fed policy tends to have a more direct influence on short-term Treasury yields than longer-term yields, which are more set by the free market.
For example, short-term Treasury bill yields have been falling in recent months. Meanwhile, the 10-year Treasury yield rose by about 6 basis points to 4.33% today. And the 30-year bond yield rose above 4.5%, marking five straight days of longer-term bonds selling off.
Jason Shapiro – a bona fide "market wizard," founder of Crowded Market Report, and a former Stansberry Investor Hour guest – also noted bond traders' behavior in a market update yesterday...
I continue to say the Fed cutting rates in an environment where there is so much liquidity in the world is very bearish long bonds. To me, it makes no sense that they're cutting rates, but, hey, if they want to cut rates, bonds are going to get hurt...
You see, every time the odds of them cutting goes down, the long end [of the Treasury curve] goes up, and every time the odds of them cutting goes up, the long end goes down.
This is discounting future inflation. The more the Fed cuts, the more future inflation and growth expectations there are, in particular, in such an environment where there is so much liquidity...
Stock markets are on highs. Bitcoin is over $100,000... I would say that this is an environment that there's no indication that there's a lack of liquidity.
This has been the general story since the Fed first cut rates back in mid-September. Longer-term bond yields moved up substantially that day and in the weeks that followed. Stocks have been pushing higher since then, too. But today, they didn't.
This is a notable signal, as Greg pointed out to his Ten Stock Trader subscribers today while updating a bearish trade recommendation on small-cap stocks...
Stocks are finally starting to realize that inflation isn't going down.
The dislocation between stocks and bonds is increasing market volatility, and that's likely to last for quite some time.
Since the summer, the stock market has been following the Fed's cues on the promise of interest-rate cuts, even with the jobs market holding up and U.S. GDP running at a 3% annualized rate.
And what I just said doesn't even account for any future policies under President-elect Donald Trump, which might stoke more inflation or growth. Bond traders have been preparing.
Stock investors might also be realizing that high(er) inflation might be a risk again. If prices reaccelerate enough for the Fed to change its stance, it could mean fewer rate cuts in 2025 than previously expected, possibly even none.
But it doesn't mean it's time to go "all out" of stocks right now.
For one thing, the short- and longer-term trends for U.S. stocks remain sturdy. The Nasdaq just hit a new all-time high yesterday, and the S&P 500 is close to a new all-time high. But we caution against getting too bullish right now, especially with stocks as "expensive" as they are today.
That said, U.S. stocks remain the place to be...
The S&P 500 is on pace to post back-to-back 25% yearly returns for the first time since the lead-up to the dot-com bubble in 1997 and 1998.
This is a good news, bad news sort of situation. If this year is the equivalent of 1998, that would make next year 1999... when the S&P 500 returned another 21% before all the fun fell apart in 2000.
Still, as we've been saying this week, while U.S. stocks today are "expensive," they're also outperforming the rest of the world. In fact, the valuation gap between the U.S. and the rest of the world is at its widest level ever.
Market strategist Charlie Bilello shared this chart on social platform X the other day...
It shows that U.S. stocks now trade at a forward price-to-earnings ratio of more than 22 times, compared with around 14 times for global stocks excluding the U.S. As you can see in the chart, the two tracked one another closely until the COVID-19 pandemic.
Since then, U.S. stocks have gotten more expensive (approaching decadeslong highs), while global stock valuations remain stuck in the mid-teens.
It's easy to see why. U.S.-based tech companies like Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), and the rest of the Magnificent Seven are in high demand, and investors buying into these stocks have pushed valuations higher.
The type of companies is what matters here. The S&P 500's top 10 companies are mostly high-flying technology stocks. Only Berkshire Hathaway (BRK-B) and JPMorgan Chase (JPM) are nontechnology companies.
The MSCI All Country World Ex-U.S. Index, on the other hand, has pharmaceutical companies, an automaker, an energy giant, and even snackmaker Nestlé. Typically, these types of companies grow at a slower rate than big U.S. tech companies.
This has left international stocks behind. The valuation gap has led some strategists on Wall Street to suggest that global stocks will outperform, or "catch up" to U.S. valuations (or as U.S. stocks come back down to earth).
So what are folks supposed to do? Stay invested in U.S. stocks, or rotate into international companies to try and take advantage of a potential shift in valuations?
Stansberry Research Director of Research Matt Weinschenk has a simple answer...
"Buy U.S., forget the rest."
In last week's This Week on Wall Street, Matt covered the difference in performance between U.S. and everything else. As he wrote...
No matter how you run the numbers, U.S. stocks have dominated the rest of the world.
Whether it's over the past 10 years (where U.S. stocks have outperformed ex-U.S. by 170 percentage points), or over the past year (where the U.S. outperformed by 22 percentage points), the U.S. is still "king" in the global markets today.
Here's another reason for the gap – earnings growth. According to investing giant BlackRock, U.S. earnings have nearly quadrupled since 2010. Meanwhile, the earnings of global stocks haven't even doubled over that time frame.
There will come a time when international stocks outperform the U.S., and the gap closes. That's just how market cycles work. But as Matt writes, folks shouldn't try and time when the "imbalance" will switch.
So if you have more of your assets in U.S. stocks than international ones, that's perfectly OK, he says...
You shouldn't have all your money in U.S. stocks. But giving a little extra weight to the greatest economy in the world likely keeps you on the right side of global asset allocation.
We'll keep our eyes peeled for signs of any weakness – from inflation or any other reasons – but for now, U.S. markets remain the place to be. High-quality businesses are continuing to compound value and trends remain up.
In today's mailbag, a real-world inflation report from an Alliance member stemming from yesterday's edition... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Corey, As I was reading your comments regarding the 2.7% annual increase in the CPI (which I feel is grossly understated) I was opening a communication from United American Ins. informing me that my monthly premium next year for a [medical policy] will increase 13.62%. At the same time, due to increased deducts, my net Social Security monthly payment is decreasing 3.46%. So much for inflation under control." – Stansberry Alliance member Jim G.
Corey McLaughlin comment: Spot on, of course, Jim. Thanks for sharing.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
December 12, 2024