Is Inflation Slowing

The combination of high inflation and the US Federal Reserve’s response with higher interest rates has puzzled investors and consumers alike. Inflation impacts the stock market and makes consumers less likely to spend. However, the recent Personal Consumption Expenditure (PCE) report suggests that inflation is slowing. Moreover, the Gross Domestic Product (GDP) returned to positive territory after 6-months of mildly negative readings. The stock market responded positively.

Stock Market Overview

The stock market had a positive weak, with the Dow Jones Industrial Average (DJIA) outperforming other indices except the Russell 2000. However, as shown by data from Stock Rover*, the Nasdaq performed poorly on a relative basis because of either poor results or guidance from several tech stocks. For example, Microsoft (MSFT) and Amazon (AMZN) were down meaningfully for the week contributing to the Nasdaq’s poor performance.

All sectors rebounded except Communication Services. The Industrials sector had two excellent weeks on the promise of lower future inflation and slower rate increases.

For the year, the Dow 30 is no longer in a correction, and the S&P 500 Index is no longer in a bear market. However, the Nasdaq is still in a bear market.

Dividend growth stocks have performed relatively well, outperforming the S&P 500 Index and Nasdaq in all instances. The table below shows their performance by category including the Dividend Kings, Dividend Aristocrats, Dividend Champions, Dividend Contenders, and Dividend Challengers.

Is Inflation Slowing or Is It a Head Fake?

Inflation is slowing, according to the PCE report. The September reading was 6.2, the same as August and lower than May to July. However, the core PCE index was up to 5.1, indicating prices of items besides energy and food are increasing.

That said, inflation is down significantly on a quarterly basis. For example, the PCE index increased by 4.2% in the third quarter versus 7.3% in the second quarter; a sign inflation is slowing. Moreover, excluding the food and energy prices, the PCE index rose 4.5% in Q3 20222 compared to 4.7% in Q2 2022.

Some economists will argue inflation will surge again. But slowing business spending and way consumers and an aggressive Fed, inflation may be tempered in the future.

Gross Domestic Product Is Positive Again

After two-quarters of lower real GDP, it grew 2.6% in the third quarter meaning the economy is back to growth and probably performing well. So not only was it positive, but the results also beat estimates. So far, at least the constant drumbeat of those expecting a severe has been put off for a bit.

More for those investors asking themselves, are we in a recession? The answer is likely no because of low unemployment despite two consecutive quarters of negative GDP growth. The unemployment rate typically leaps higher in recessions. But it is 3.7%, and the United States had 21 straight months of job gains. Additionally, the National Bureau of Economic Research has not formally indicated the United States is in a recession.

Final Thoughts on Is inflation Slowing

Slowing inflation is a positive sign for the global and US economies. Furthermore, investors should benefit significantly if the Federal Reserve slows its pace of interest rate increases because they will view it favorably.

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of September 2022. As a result, the number of companies on the list has risen to 573. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Six new additions indicate companies are experiencing solid profits and cash flow in August.

The new additions were Invesco Mortgage Capital (IVR), Steelcase (SCS), Sturm, Ruger & Company (RGR), and TPG (TPG).

Market Indices

10/29/22

Dow Jones Industrial Averages (DJIA): 32,861 (+5.72%)

NASDAQ: 11,103 (+2.24%)

S&P 500: 3,901 (+3.95%)

Market Valuation

The S&P 500 Index is trading at a price-to-earnings ratio of 20.29X, and the Schiller P/E Ratio is about 28.75X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. However, we are nearing the long-term averages. Earnings multiples of more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

Shiller PE Ratio History

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down about 4.0 points at 25.75. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the New York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Economic News

The Conference Board’s Consumer Confidence Index® decreased in October to 102.5 (1985=100), down from September’s downwardly revised 107.8 reading. This followed two consecutive monthly gains. In addition, based on consumers’ sentiment toward current business conditions and the labor market, the Present Situation Index tumbled to 138.9 from 150.2 the previous month. Finally, based on consumers’ six-month outlook for income, business, and labor market conditions, the expectations index also declined, down to 78.1 from 79.5 the previous month. A reading below 80 is considered recessionary.

The US Census Bureau reported new home sales decreased by 10.9% in September to a seasonally adjusted annualized rate of 603,000. August’s recent home sales were revised to 677,000 from an initially reported 685,000. Sales are down 17.6% from a year ago when 732,000 new homes were sold. Sales decreased in the South (-20.2%) and West (-0.7%), while the Northeast reported a significant increase (+56.0%) and the Midwest a modest jump (+4.6%). The regional year-over-year home sales figures were mixed – the West (-30.4%) and South (-19.3%) showed declining sales, while the Northeast (+25.8%) and Midwest (+10.6%) both reported in positive territory. The median price for a new home rose to $470,600, up 13.9% from a year ago.

The first estimate of GDP for 2022 Q3 reported that the economy grew at an annual rate of 2.6%, followed by 1.6% Q1 and 0.6% Q2 contractions. A narrowing of the trade deficit fueled economic growth. GDP gains also came from consumer spending, nonresidential fixed investment, and government spending. Offsetting the gains were declines in housing construction and business investment. Exports rose 14.4%, and imports shrank 6.9%. The shrinking trade gap added 2.8 percentage points to the headline number. Consumer spending – which makes up over two-thirds of GDP decelerated, increasing 1.4%, down from the 2% pace set in Q2. Business fixed investment fell by 4.9%. Nonresidential fixed investment expanded by 3.7%, with increases in equipment (+10.8%) and intellectual property products (+6.9%) partially offset by a decrease in structures (-15.3%).

Thanks for reading Is Inflation Slowing – Week in Review!

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