The S&P 500 fell for the second week in a row, but the losses were minor. Many of the formerly high-flying tech stocks sank hardest last week. The technology sector fell 3.0% on the week, but it is still up more than 33% for the year. Below the surface, however, energy stocks are roaring back, up 3.4% last week, while industrials are also in the green. In other words, while big-cap tech companies have pulled back, the entire market is not in line to fall too. In fact, there appears to be a rotation taking place, and cyclical value is a potential benefactor to tech’s weakness.
- Right on cue, seasonal weakness is taking place with technology leading the way down. Below the surface, areas such as energy and industrials are performing quite well.
- Credit card debt broke the $1 trillion mark for the first time ever. However, equity is soaring, which makes rising debt unsurprising.
- Disinflation is underway. Headline CPI inflation has run at a 1.9% annual pace over the past three months, and core inflation has downshifted to 3.1%.
- Core inflation is likely to moderate further over the next few months as vehicle and shelter inflation pulls back.
- A September interest rate hike by the Fed may be off the table given how inflation is progressing.
Interestingly, the chart below shows that years in which the S&P 500 had risen more than 10% by the end of June, such as it did in 2023, tended to see stocks peak and consolidate over the following months. This doesn’t mean a massive correction is imminent, but it could mean continued volatility as the market catches its breath. The good news? Higher prices are due later in the year, which is one reason we remain overweight equities.
$1Trillion in Credit Card Debt
It finally happened. U.S. consumers officially have more than $1 trillion in credit card debt, an all-time record. Not surprisingly, many economists claim this is a sign the consumer is tapped out and simply buying on credit. However, we don’t believe it’s that simple. In fact, we believe the consumer is still financially healthy.
Net worth has exploded over the past few decades, so more credit debt shouldn’t be a huge surprise. Overall net worth has increased significantly over time, from $44 trillion in 2000 to close to $150 trillion today.
We call this “denominator blindness.” Much is made about the numerator at a new high, but in many cases the denominator has been soaring too.
Taking that same denominator-blindness approach and reviewing the percentage change of credit card debt and net wealth shows a much improved backdrop. Since 2000, credit card debt has gained 106%, but net worth has risen nearly 250%.
In addition, credit card debt as a percentage of disposable income is 21%, which is still lower than it was at the end of 2019, when it was 22%, and well beneath the 2003-2019 average of 26%. In other words, people have been making more than they have been adding to their credit cards over the past few years.
Disinflation is Happening, and There’s More to Come
Inflation has been top of mind for investors over the past 18 months, both from an economic and monetary policy perspective. So, the latest release of the consumer price index (CPI), which tracks a basket of goods and services purchased by households, looms large every month. The big question going into the latest report was: Inflation has pulled back, but will it continue that trend?
Based on the July report, the answer is yes.
Headline CPI rose 0.2% in July, as was expected. Inflation was up 3.2% year-over-year, a tick below expectations for a 3.3% reading. That’s well below the June 2022 level of 9%. As the chart below shows, energy, food, and vehicle prices have driven inflation lower. Over the past year:
- energy prices are down 12%;
- food inflation has eased to 4.9% (it was 11% in July 2022); and
- used car prices are down 6%.
Year-over-year numbers can be misleading, because they’re dependent on year-old data, which is not particularly helpful to understand what’s happening currently. However, monthly data can be noisy. The three-month average is a more useful indicator. As of July, headline inflation has run at a 1.9% annual pace over the past three months.
Furthermore, there is encouraging news on core inflation, which removes volatile components such as food and energy and is the Federal Reserve’s preferred indicator. Core inflation rose 0.2% in July, and over the last three months it has run at an annual pace of 3.1%. That’s a decisive shift lower from what has taken place over the past 18 months.
There are two significant reasons core inflation is pulling back: vehicles and shelter. These sectors make up 50% of the core inflation basket, making them critical components.
As noted above, used car prices are falling. In fact, private data indicate that used car prices have fallen 11% since March. That decline is yet to be fully reflected in official data, so there is further room to fall over the next couple of months. Also, new vehicle prices have fallen about 0.5% since March, and this trend could continue as auto production improves and inventories rise.
Shelter inflation has been decelerating for a while now. It was running at an 8-10% annual pace at the beginning of the year. That slowed to 6-7% between March and May, and over the last two months, it’s moved below 6%. That’s progress, albeit slow.
However, we know there’s a lot more room to fall based on what’s taking place in the rental market. Note that official shelter inflation does not include home prices and is simply a measure of rents. Rental vacancies are up, and data from Apartment List shows the national average rent is down 1% over the past year, as of July.
Official shelter inflation may not decline as far, but it is heading significantly lower. Shelter inflation averaged 3-3.5% between 2018 and 2019, which was consistent with core inflation running at 2% (the Fed’s target). Based on what we know now, shelter could fall to an annual pace as low as 2.5%, and that would be a significant downward force on inflation.
Beyond vehicles and shelter, there are positive signs.
Many supply-chain-impacted categories, such as household furnishings and apparel, are also seeing disinflation. Airfares have fallen for four straight months, with prices 20% lower from March. Even hotel/motel prices are down 4% over the same period. Of course, this is unlikely to continue, but it is more than welcome.
The notable takeaway is that disinflation is underway and is likely to continue. This also means the Federal Reserve is less likely to raise rates again at its September meeting. If the inflation data progresses as we expect, the July rate hike may have been the last of the cycle. That will be encouraging news for investors as we head into the fall and winter.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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