By: Jeff Anderson, CFA
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.161%||7.54%||108.85%|
Source: Wall St. Journal
The bear market in equities continued this week, with the major indexes falling 4.3% to 5.6%. Bond yields rose. As with last week, economic data continues to point to further tightening from the Federal Reserve. Inflation spiked again (more on that below) which weighed on stocks. Bonds, which had been returning to its normal role of providing a ballast to equities sold off as well, as prices dropped to reflect the increase in interest rates that are coming. There is no crystal ball out there that can tell us when this will end. The good news is that it will end at some point. As a reminder, bonds are yielding more (that’s good news), equities are cheaper (also good news). The consumer is still spending. Company earnings are still growing. Unfortunately, the multiple on those growing earnings is declining faster than the rate of earnings growth. The sooner we all wean ourselves of the notion that companies should trade for multiples well above their historical averages, the better we’ll all be.
If you look at the attached bar chart, you’ll see data for the S&P 500 over various time frames. Since 1927, over a 5-year rolling return period, the S&P 500 was positive 89% of the time. Over a 20-year period, it was positive 100% of the time. Given today’s market environment, it is important to keep things in context. “Time-in” the market is extremely important when saving for retirement. “Timing” the market is almost impossible.
Talking Inflation; Again:
The consensus estimate for US inflation for May was 8.1% (the monthly figure is annualized to reach this number) which would have signaled that inflation had peaked in March of this year. Unfortunately, it was not to be. May clocked in at 8.6%. As an aside, it is a good lesson for all of us. Nobody has a crystal ball. Consensus estimates were off. Way off.
The May number was the largest 12-month increase since December 1981.
Food increased 10.1%. Energy was up a whopping 34.6% (gasoline alone was up 48.7%). New vehicles were up 12% while used vehicles cost 16.1% more than last year. Shelter (i.e., “rents”) were only up 5%. Rents tend to lag home prices, so it is fair to say that rents will rise faster than 5% given last year’s run up in house prices.
So, how is the Consumer Price Index Calculated? The Bureau of Labor Statistics (“BLS”) creates a basket of goods and services based on consumption behavior. In the first 50 years of producing the CPI, the BLS updated the spending weights every 10 years. Back in January of 2002, the BLS started updating the CPI spending weights every 2 years to make the survey more relevant. Then came Covid-19. Spending habits were immeasurably altered. So, today’s calculations are not apples-to-apples with the historical data that is pasted all over the news. Nonetheless, costs are rising quickly. Below is a breakdown of the CPI basket:
Food 13.421% | Energy 8.255% | All items less Food & Energy 78.324%. In the last category, you have shelter making up 32.4% of the total CPI basket and autos at 6.5%. You can see from the table attached, that the largest component of CPI had the smallest increase. Shelter, being the largest overall weighting, will increase, but rents don’t go up like the price of food and gasoline, so the overall effect that it may have on CPI will likely be more than offset by the declines in energy prices (& food – fingers crossed) in the future.