Latest Inflation Numbers and Discussion

[audreyh1]

Low over last 12 months too.

The Producer Price Index for final demand declined 0.5 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices were unchanged in February and increased 0.4 percent in January. (See table A.) On an unadjusted basis, the index for final demand advanced 2.7 percent for the 12 months ended in March.

The report from BLS: https://www.bls.gov/news.release/ppi.nr0.htm

 

[Montecfo]

Certainly seems meaningful in the context of all the recent news pointing to lower inflation and a slowing economy.

PPI readings can be volatile but last 3 month figures point steeply down (as Audreyh1 points out):

Jan 0.4%
Feb 0.0%
Mar -0.5%

 

[FREE866]

Higher rates drive equity values lower. Lower equity values reduce taxable gains. Reduced taxable gains equal reduced tax receipts.

The recession, which Fed staff now says is likely, will also reduce incomes and tax receipts and no doubt be met with choruses of voices demanding extended unemployment, enhanced food stamps, eviction moratoria and other largesse from the pandemic era. Deficit hiking.

And of course calls to cut interest rates. Which will be heeded.

And US yields will remain attractive as they are higher than other sovereigns.

"Higher rates drive equities lower" is a false premise. We have decades of history that disprove that notion. If it were only that simple!

 

[Koolau]

"Higher rates drive equities lower" is a false premise. We have decades of history that disprove that notion. If it were only that simple!

Yeah, I always chuckle when I see the talking heads telling us the markets did this or that because of such and such. If they were smart enough to know such things to such certainty, I'm guessing they'd be FIRE'd by now with a nice nest egg of their own.

 

[Montecfo]

"Higher rates drive equities lower" is a false premise. We have decades of history that disprove that notion. If it were only that simple!

That higher interest rates tend to reduce equity values is a rather well understood and accepted rule of thumb, and candidly I am not sure I could find any credible authority suggesting the counter views, being either:
1. Higher rates drive equity values higher or
2. Higher interest rates have no effect on equity values

But if you wish to present any credible economist, economic or finance textbook supporting your view, that would be interesting.

If your counter view is "it's not that simple", I agree there is more to valuation than interest rates. But that is a different point than the one I made.

 

[FREE866]

That higher interest rates tend to reduce equity values is a rather well understood and accepted rule of thumb, and candidly I am not sure I could find any credible authority suggesting the counter views, being either:
1. Higher rates drive equity values higher or
2. Higher interest rates have no effect on equity values

But if you wish to present any credible economist, economic or finance textbook supporting your view, that would be interesting.

If your counter view is "it's not that simple", I agree there is more to valuation than interest rates. But that is a different point than the one I made.

Just to clarify I’m not saying “ higher rates drive equity prices higher”. I’m saying we have hard data going back decades that show there isn’t a strong correlation either way.
If it is an “
Accepted rule of thumb “ , and I’m not sure it is those people have to look closer at stock returns in high rate and low rate environments.
here’s a good article with a chart at the end. Check it out.
https://awealthofcommonsense.com/2023/02/will-high-risk-free-raters-derail-the-stock-market/

 

[FREE866]

https://awealthofcommonsense.com/2023/02/will-high-risk-free-raters-derail-the-stock-market/

Article above.

 

[Montecfo]

https://awealthofcommonsense.com/2023/02/will-high-risk-free-raters-derail-the-stock-market/



Article above.

The article does not prove your premise. It says higher rates may not mean lower returns. I don't disagree.

But higher rates are a headwind regardless. Higher rates reduce the value of equities. This is not in serious dispute by anyone.

If you want to test it in the real world, holding earnings steady, look at how bonds react to higher rates. Bond coupons generally do not vary, but higher rates reduce bond values. Any bond investor who did not understand this has learned it the hard way over the past 12 months or so.

They have a similar impact on stocks. They drive values lower which means higher rates are a headwind stocks must overcome in order to move higher.

 

[FREE866]

The article does not prove your premise. It says higher rates may not mean lower returns. I don't disagree.

But higher rates are a headwind regardless. Higher rates reduce the value of equities. This is not in serious dispute by anyone.

If you want to test it in the real world, holding earnings steady, look at how bonds react to higher rates. Bond coupons generally do not vary, but higher rates reduce bond values. Any bond investor who did not understand this has learned it the hard way over the past 12 months or so.

They have a similar impact on stocks. They drive values lower which means higher rates are a headwind stocks must overcome in order to move higher.

You said higher rates = lower stock prices


I refuted that.....


the chart he shows at the end of the article spells that out....



I don't know what else to add...


The highest average yields occurred in the 1980s, which was also one of the best decades ever for stocks. Yields were similarly elevated in the 1970s and 1990s but one of those decades experienced subpar returns while the other saw lights-out performance.


I also looked at the performance of the stock market when 3-month T-bill yields averaged 5% for the entirety of a year (which could happen this year). That’s been the case in 25 of the last 89 years.
The annualized return for the S&P 500 in those 25 years was 11%. So in years with above-average risk-free rates, the stock market has actually seen above-average returns.

 

[copyright1997reloaded]

You said higher rates = lower stock prices


I refuted that.....


the chart he shows at the end of the article spells that out....



I don't know what else to add...


The highest average yields occurred in the 1980s, which was also one of the best decades ever for stocks. Yields were similarly elevated in the 1970s and 1990s but one of those decades experienced subpar returns while the other saw lights-out performance.


I also looked at the performance of the stock market when 3-month T-bill yields averaged 5% for the entirety of a year (which could happen this year). That’s been the case in 25 of the last 89 years.
The annualized return for the S&P 500 in those 25 years was 11%. So in years with above-average risk-free rates, the stock market has actually seen above-average returns.

Theoretically higher rates should result in lower PE ratios because debt instruments act as competition for funds that would go into equities. You can think of equities sort of as a perpetual bond, i.e. eventually having dividends (or stock repurchase) based on cash flow from the business.

This is why (ironically) the run up in rates had a greater effect on companies with no dividends, as their expected return of capital is longer duration (and thus more impacted by competition from yield on debt).

All one has to do is look here on ER.org to see examples of allocation changes - with rates at 5% many more of us have been allocating delta funds to bonds or in many cases selling equities and redeploying the capital into fixed.

In terms of the 1980's, one has to remember that the big run up in rates was late in the 70's and early in the 80's. Most of the 80's had declining rates, which would make (on the margin) equities more attractive.

 

[FREE866]

All one has to do is look here on ER.org to see examples of allocation changes - with rates at 5% many more of us have been allocating delta funds to bonds or in many cases selling equities and redeploying the capital into fixed.

Right...and stocks are basically flat from 11 months ago, and up double digits in the last 6 months.

 

[Montecfo]

You said higher rates = lower stock prices


I refuted that.....


the chart he shows at the end of the article spells that out....



I don't know what else to add...

You did not refute my point. The article, the one article you offered, did not reach my point. And it did not reach the conclusion you suggest.

And you have provided exactly zero credible economists, economics or finance textbooks or expert sources who share your view.

And because my view is so widely accepted, I am not sure why you wish to claim otherwise.

But with that if you wish to declare victory then have at it.

 

[copyright1997reloaded]

Right...and stocks are basically flat from 11 months ago, and up double digits in the last 6 months.

Which is irrelevant in terms of the theory, e.g. things like the Gordon Growth Model. Stocks are down since rates started to rise, cherry picking the last six months aside. Side note: In terms of behavior of crowds, a large movement out of equities into fixed (as seen on ER.org) could be an indicator that the worst of the equity decline is over (i.e. early this year was a good time to buy stocks). Time will tell.

 

[milford]

You said higher rates = lower stock prices


I refuted that.....


the chart he shows at the end of the article spells that out....



I don't know what else to add...


The highest average yields occurred in the 1980s, which was also one of the best decades ever for stocks. Yields were similarly elevated in the 1970s and 1990s but one of those decades experienced subpar returns while the other saw lights-out performance.


I also looked at the performance of the stock market when 3-month T-bill yields averaged 5% for the entirety of a year (which could happen this year). That’s been the case in 25 of the last 89 years.
The annualized return for the S&P 500 in those 25 years was 11%. So in years with above-average risk-free rates, the stock market has actually seen above-average returns.

Might I add the dreaded words "This time is different" as the debt levels (both national/corporate) weren't this high in the 80s/90s as such companies could keep chugging along. If the feds were to keep raising rates or even just holding the rates steady at around ~5 for a year or two... I could see a good portion of companies going under (zombie company) if they don't have access to cheap credit anymore and can no longer constantly refinance.

Also part of the current rally is that the market is betting the Fed's will pivot soon thus potentially saving some of the zombie companies. The rally is also fueled mostly by large caps and FAANGs meaning the market knows the zombie companies aren't out of the woods completely.

 

[FREE866]

You did not refute my point. The article, the one article you offered, did not reach my point. And it did not reach the conclusion you suggest.

And you have provided exactly zero credible economists, economics or finance textbooks or expert sources who share your view.

And because my view is so widely accepted, I am not sure why you wish to claim otherwise.

But with that if you wish to declare victory then have at it.

I'm not "claiming victory" I provided an article with historical data that shows that higher interest rate environments do not always result in lower stock prices.



The narrative of high rates=low stock prices that may be widely accepted is false, but it gets a lot of headlines and negativity which is what media via "experts" do.

 

[FREE866]

Which is irrelevant in terms of the theory, e.g. things like the Gordon Growth Model. Stocks are down since rates started to rise, cherry picking the last six months aside. Side note: In terms of behavior of crowds, a large movement out of equities into fixed (as seen on ER.org) could be an indicator that the worst of the equity decline is over (i.e. early this year was a good time to buy stocks). Time will tell.

Its "irrelevant " to you because it doesnt jive with your theory, but the numbers are what they are.

 

[NW-Bound]

Theoretically higher rates should result in lower PE ratios because debt instruments act as competition for funds that would go into equities. You can think of equities sort of as a perpetual bond, i.e. eventually having dividends (or stock repurchase) based on cash flow from the business...

+1

In terms of the 1980's, one has to remember that the big run up in rates was late in the 70's and early in the 80's. Most of the 80's had declining rates, which would make (on the margin) equities more attractive.

+1

The declining rates caused the phenomenon of "P/E expansion". And this was the reason for the wonderful gain in stock prices, in addition to the better earnings from corporations.

And with the collapse of the Soviet Union, we had the "Peace Dividend".

And the increased productivity brought about by the PC. Companies got rid of their IBM Selectrics and trained people to use WordStar, then WordPerfect, and Lotus 123. No Internet yet until the mid 90s though.

Oh, does that memory of the good ole time bring tears to your eyes?

 

[copyright1997reloaded]

+1



+1

The declining rates caused the phenomenon of "P/E expansion". And this was the reason for the wonderful gain in stock prices, in addition to the better earnings from corporations.

And with the collapse of the Soviet Union, we had the "Peace Dividend".

And the increased productivity brought about by the PC. Companies got rid of their IBM Selectrics and trained people to use WordStar, then WordPerfect, and Lotus 123. No Internet yet until the mid 90s though.

Oh, does that memory of the good ole time bring tears to your eyes?

Indeed good times, and good times to be in software development. More to the point, a good time to be young.

 

[Koolau]

Oh, does that memory of the good ole time bring tears to your eyes?

I don't know about tears to the eyes, but my ability to call myself financially independent occurred pretty much within a couple of years in the mid 90s. Megacorp stock (which I'd been accumulating for 25 years) suddenly exploded about the same time Megacorp allowed us to take it out of our 401(k) and transfer it to any IRA we wanted to. So I was able to diversify my winnings and secure my Early Retirement. This was all before I even knew about FIRE.

So, yes, good times indeed. (Heh, heh, still good times as Megacorp has again exploding stock values on what stock I kept in the 401(k). Who knew?) Better lucky than good though YMMV.

 

[NW-Bound]

In the heydays of the 80s and 90s, I was so busy with work and raising a family and did not have time to follow the market. I also was ignorant about investing, but knew enough to max out our 401k contributions to get our companies' matching.

I think we both did 50/50 AA in those 20 years. If I knew more, I would have gone more aggressive, although thinking back bond funds would do a lot better than they do recently due to the then falling rate.

It was only when the startup companies I cofounded with friends started getting in trouble in 1998-1999 that I looked at all the unopened statements from MF and 401k accounts, and found out that they added up to a lot more than I thought. And I also discovered that had I paid more attention, perhaps I could have done better.

I got to watch my 7-figure stash on the MS Money screen for a while. And seeing everything going up by leaps and bounds scared the heck out of me. It could not be right. Nobody would have to work with manna falling from the sky. We all stayed home and lived off our stocks. No can do! It was so irrational. It was so wrong.

And then, the dotcom and tech stock implosion happened. And 9/11 delivered the coup de grace to the economy.

As I was the last guy who literally shut down our office, I contemplated how to make a living for the rest of my life. I decided to be a part-time contract worker, so I could work my own hours, and took time off whenever I felt like it. About my investments, this time, I knew to spend time to watch them better.

My records show that from the top on 3/24/2000 to the bottom on 10/29/2002, I was down to 56c on the dollar. The NASDAQ was down to 22c, the S&P 51c, and the Dow at 66c. I was not being singled out for punishment. Heh heh heh...

I regained the old top on 11/17/2004. It took me 2 years to double the money to get back. Yes, I know because I keep daily records.

In 2005, with my portfolio going great gun, I decided to buy a 2nd home in the high-country boondocks, so I could escape the summer heat when I did not feel like working. And I started to travel more, which I could with my part-time work. In 2012, I decided that my portfolio generated way more money than they could pay me to work, so I quit for real. Quitting was hard, because the work could be interesting. If it was boring, I would not take the assignment. Alas, the politics canceled out the fun, and the money just was not enough to compensate.

Life has been great.

 

[Montecfo]

Higher rates drive equity values lower. Lower equity values reduce taxable gains. Reduced taxable gains equal reduced tax receipts.

The recession, which Fed staff now says is likely, will also reduce incomes and tax receipts and no doubt be met with choruses of voices demanding extended unemployment, enhanced food stamps, eviction moratoria and other largesse from the pandemic era. Deficit hiking.

And of course calls to cut interest rates. Which will be heeded.

And US yields will remain attractive as they are higher than other sovereigns.

Government now reporting tax receipts for April 18 lower than expected.

Here we go.

Default risk now becoming top of mind.

 

[NW-Bound]

I just got billed for auto insurance. It went up 7.3% compared to 6 months ago, and 10.75% compared to 1 year ago.

The CPI number for March 2022 to March 2023 only went up 4.98%.

 

[Koolau]

Government now reporting tax receipts for April 18 lower than expected.

Here we go.

Default risk now becoming top of mind.

It's my fault. I got a big refund coming.

 

[explanade]

I believe some of the provisions of the tax cuts from 2018 are going to sunset in 2024, if not 2023 as well

 

[FLSUnFIRE]

I just got billed for auto insurance. It went up 7.3% compared to 6 months ago, and 10.75% compared to 1 year ago.

The CPI number for March 2022 to March 2023 only went up 4.98%.

Mine went up 10% over the prior 6 months.



Been a long time since I've noticed anything that seemed like a bargain but everytime I shop I notice something that seems excessively high. My consumer behavior has definitely been impacted so my expenses have stayed about the same but it would be hard to argue that my QOL has not gone down. I've always been a cost conscience shopper and certain things I'm just like "Nope, not at that price, I don't need soda anyway." I do miss eggs as cheap protein. For now it's rotisserie chicken but that's only because it's a loss leader and that will stop eventually.