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It’s a ‘Kind of Sort of Maybe’ Type of Progress

CAMS Weekly View from the Corner – Week ending 8/26/2022

August 29, 2022

It has been a month since we shared an indicator that we briefly touched on in a previous edition. In light of its importance to the Federal Reserve we thought we would make it the focal point for this edition. The Federal Reserve has had a long-standing preferred price inflation measure known as the Personal Consumption Expenditure Price Index which is simply referred to as the PCE Index for short. This past Friday we received the latest update on this closely watched price index. Making an assumption here we bet your own daily consumer price experiences have already informed you of the results. Think little has changed.

Click Chart For Larger View:

The above chart dates back to 1960 so we can get a big picture view of the overall storyline for the PCE Index.  Our red horizontal line ties back our updated reading to the early 1980’s so little has changed on the historical reference perspective as we have been experiencing 40-plus year high price inflation numbers for some time. The actual number came in at a 6.3% increase compared to a year ago.  For perspective we see recent months dating back to spring have posted year-over-year growth rates of 6.6%, 6.3%, 6.3%, 6.8%, and now 6.3% again.  It could be said that progress is occurring in that we are not continuing the escalation higher such as we have been experiencing for nearly a year and a half via our red uptrend line.  This progress could also be labeled the “kind of sort of maybe” type of progress in that we are not escalating higher and yet we are certainly miles away from the Fed’s multi-decade stated price inflation target of a 2% ceiling – emphasis on ceiling – being we are looking down on that ceiling as a floor and it is a long ways down below our current reading. A stated 2% price inflation level while we are seeing consistent 6% plus readings in the Fed’s preferred price inflation measure is a big ask in terms of how far this measure needs to improve from the most recently updated results this past Friday.  It gets worse. Dating back to 1960 – 62 years – the Federal Reserve has never been as behind a price inflation story as it is now.  Importantly, this includes both the most recent PCE Index update as well as including the Fed’s most recent increase in their Fed Funds Rate.

Click Chart For Larger View:

In the above chart we are zooming in on the 21st century alone.  The red line represents the PCE Index (price inflation) while the blue line represents the Federal Reserve’s Fed Funds Rate. Our red vertical line highlights the tremendous gap to this day between the two which underscores how far behind price inflation the Federal Reserve remains. In addition, focusing on the red line to the far upper right we get a visual of our above narration of the price inflation experience via this measure in recent months.  For now the escalation has stopped and yet there has been no decline in trend. Stock Market In recent days if not weeks there has been a build-up by collective market participants and general economic observers of the annual summer meeting in Wyoming whereby Chairman Powell of the Federal Reserve was scheduled to speak.  In a general sense there seemed to be a growing view, or frankly, a growing delusion that the Fed Chairman would offer interest rate pressure would be reducing in coming months. Per the Chairman’s shared view that was clearly not the case as their focus remains on fighting the price inflation issue.  We offer the previous build-up as a growing delusion in light of the above price inflation data as well as a plethora of other data points – much of which we have tried to share over the previous year-plus – offering the Fed is historically trailing price inflation.  Where in the data was there any concrete evidence offering the Fed was winning the price inflation fight?  We couldn’t understand the premise.  With the Chairman’s comments Friday’s stock market moved harshly to the downside. A stock market by-the-way that remains expensive on a valuation basis along with component companies of the market at large continuing to experience profit margin pressure.  This is naturally equating to declining profit growth.  Meanwhile the Fed will continue with interest rate increases as the Chairman offered this past Friday.  A quick summation offers declining profit margins with declining overall profit growth with stocks still highly valued with the Fed continuing to raise interest rates:  This is not a backdrop, through a historical lens, that leads to strong up trending stock markets. With this expect more interest rate increases by the Fed in coming months as they look to close the tremendous gap between their Funds Rate and you-name-it price inflation measure.    There is a lot of work to be done in order to fix the price inflation storyline. It’s an Official Wrap on the Unofficial End of Summer With Labor Day weekend looking at us via the calendar we are turning our heads toward the 4th season for 2022.  It has been an interesting ride thus far in 2022 with the final turn offering prospects for all types of challenges throughout various markets. As we say goodbye to the unofficial end of summer we wish you wonderful wrap up of the season.  We will pick back up a week after Labor Day with continued perspectives that we feel may be helpful.  Until then enjoy the final days of summer! I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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