Investing Update: Is Inflation Defeated?
What I'm buying, selling & watching
A start to the earnings season and the lower than expected inflation number on Wednesday, made for a lot for investors to weigh this week.
All three of the major indices finished positive on the week. Even the Russell 2000 (small caps) showed signs of life. They were up over 5% on the week, due to the possibility of upcoming rate cuts after the inflation read.
The S&P 500 has now set 37 all-time highs in 2024. That has now passed the number of record highs from both 2019 and 2020. Over the past 25 years, there have only been 4 years with more all-time highs. 2024 still has over 5 months to go.
Thursday saw 87% of S&P 500 companies outperform the index. That’s the highest number of S&P 500 stocks outperforming the index in over two decades.
This further signifies that this bull market participation is broadening out. More participation is very bullish and could give this bull market more legs.
You also have to keep in mind just how young this bull is. It’s 21 months old. The previous bull market ended at 21 months. But that’s not the norm. The average bull market is 61 months long.
The chart that most stuck out to me this week, was this from Grant Hawkridge. It shows that many parts of the market actually peaked months ago. I find this as very interesting.
Market Recap
Is Inflation Defeated?
This week inflation showed the first decrease since May 2020. Over 4 years ago.
Here is a look at every report going back to 2014. It has been a while since the number was negative.
The 3.3% number is the smallest YOY increase since April 2021.
It’s been a long road in the fight to get inflation down. So has it been defeated? I think it has been. Prices won’t go down but I believe we are past them going up. The worst is now over.
The reason I say that is what is finally happening to the lagging metric of shelter. It slowed to an increase of just 0.2%, the lowest level since 2021. This is important because the shelter component is roughly 40% of CPI.
Here is where inflation is and isn’t. Auto insurance still leads but it has decreased and I also believe has peaked. I’d expect the top 3 on here to continue to decrease.
This positive inflation data has the market expecting a rate cut. The chances of a rate cut in September are now up to 89.8%.
With interest rate cuts looming, some think this spells doom for the market. It doesn’t guarantee a recession. There really isn’t a clear historical pattern to show that this is a positive or negative for the overall stock market. This is a great chart from Callie Cox and the team at Ritholtz, which shows the S&P 500 performance 1 year after the first rate cut.
Last week I discussed the likelihood of rate cuts coming and shared two charts which showed historically what are the best performing factors and the weakest performing factors after the first rate cuts. You can read it here, Investing Update: 1st Half Recap & 2nd Half Outlook.
Rotation Out of Mag 7 For Small-Caps?
We knew small-caps would eventually get their day in the sun. The Russell 2000 hit a 52-week high Thursday. The best day in 23 years.
The jump in small-caps came at the expense of the Mag 7. They all saw a rather deep selloff on Thursday. Some had their worst days since March and April.
As this was happening, I wondered if this was an unwind due to hedge funds over exposure to the short side of small-caps. To cover/raise cash, you would sell the big winners. Like a short squeeze.
After lunch, Bob Elliott who has some great threads on X, said the following with the below charts.
As readers of Spilled Coffee know, I’ve been highlighting small-caps for a number of weeks and how they were overdue for a bounce. Eric Wallerstein points out in this chart that their forward p/e valuation is more than half that of the MegaCaps.
The Mag 7 stocks saw a rebound Friday along with another nice positive day from the Russell 2000. If small-caps participate along with the Mag 7 and the other S&P 493, watch out. This young bull could really roar.
Small Business Optimism Jumps
With all the news this week, I think something that went a little under the radar was the NFIB Small Business Optimism Index. It reached the highest number since December. It’s still below the historical average of 98, but it broke a trend of negative readings.
The results from the NFIB Small Business Survey: Outlook for General Business Conditions also saw a continued downward trend break. It reported the best condition since April 2021. Positive outlooks from small businesses.
1st Half Hedge Fund Returns
I found this 1st half performance chart of hedge funds to be rather interesting. With the S&P 500 being up 15.13% and the Nasdaq up 20.09% it showed how few were able to even beat those indexes. It made me even more proud of the 34.09% that my actively managed portfolio produced in the 1st half.
Moves I’ve Made
Lululemon My position in Lululemon hit my stop loss and was sold this week at $290. This name has been performing terribly, even after a decent last earnings report. It continues to make lower lows. I will continue to watch it and still like the company, but the stock is a mess right now.
Home Depot I added more shares to my Home Depot position at $360. It climbed over and held the $355 level. I expect it to take out its high of $396 and to cross over $400 in short order. This was a big winner this week as the odds of interest rate cuts became nore likely. It was up over 6% this week.
You can read about my last purchase of Home Depot where I provided more detail in Investing Update: A July Rest Or Rally? from June 29th. This was also one of my 3 stocks for 2024 which you can read here, Investing Update: 3 Stocks For 2024.
What I’m Watching
Tesla On April 20th in Investing Update: Buy The Dip?, I said the following about adding more to my position in Tesla.
Moves I’ve Made
Tesla On Thursday I made a significant addition to my position in Tesla at $150 a share. Yes, it’s in the midst of one of its worst drawdowns in history. YTD it’s down over 40%, at a 52-week low and the worst performer in the S&P 500. It fell below Walmart and Exxon in market cap. I may be trying to catch a falling knife and it could go even lower. Or maybe the news can’t get much worse and it offers significant upside from these levels.
Now at $238.32 and up over 65% from the $150 level, I may average up and even add more shares. My main thesis for continuing to increase my Tesla position was in regards to its AI and robotics outlook. Now we’re starting to see more regarding their energy business. I’m going to do some more work on this but the energy demand part of Tesla is adding another bullish layer to this company.
Upcoming Earnings & Data
Next week has 46 S&P 500 companies reporting earnings.
The Coffee Table ☕
Claudia Sahm who writes
wrote another great piece called Getting back to normal. She highlights why it’s time for the Fed to start cutting. I think Claudia who invented the Sahm Rule and is a former Fed economist, remains one of the best voices to explain monetary and fiscal policy.Ben Carlson wrote a post on a topic that I have been asked about many times. Why Don’t We Build More Housing? It sound easy, doesn’t it? Not quite. In Ben’s typical style, he has data and charts to shows answers to this question.
My friends Ryan Detrick and Sonu Varghese over at Carson just released their Midyear Outlook ’24: Eyes on the Prize. The entire report can be dowloaded here or Ryan and Sonu discuss it in their podcast here. Readers of Spilled Coffee know that there are a few professionals who’s opinions and data I follow very closely. Ryan and Sonu remain two of the best.
My friend and I went to a bourbon drawing this week. There were 100 tickets at $100 each. A ticket got you a chance to pick a brown bag with a bottle inside. It turned out I was the lucky winner of pulling the prized bottle. This is my first Van Winkle bottle. I’ve never had it and I’m not sure when I will open it. If you’ve had it, let me know your thoughts.
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