Swift Inflation?
“Darwin paid particular attention to disconfirming evidence."
The Portfolio Performance
The portfolio is UP +20.72% YTD
The S&P 500 is UP +17.58% YTD
*** CORRECTION ***
The portfolio's YTD return is +20.72%. An error in the portfolio was discovered that double counted our cash position.
Personal Consumption Expenditures (PCE)
Yesterday, we received the PCE report. I was expecting a slight decline. Instead, we got an inline, as expected report. I thought the market’s reaction to the news was interesting. The initial market reaction reflected the data. The indexes bounced higher, then quickly gave up those gains and returned to a lower level than before the report release. Bonds reacted similarly. The U.S. 10-year yield dropped slightly below 4.1%, then returned to a neutral level.
While the PCE report looked like a non-event, that isn’t the case; the market was simply waiting on additional data that came out today in the August jobs report.
August Jobs Report
Today’s jobs report and yesterday’s PCE report gave the market an early boost that has since disappeared. The August jobs report also indicates that the U.S. labor market is slowing. The Bureau of Labor Statistics said that 187,000 jobs were added in August, and the unemployment rate increased to 3.8%. We can see several one-off declines in the report. Adding these one-off groups back should keep monthly jobs in the low 200,000s going forward.
Swift Inflation
Real spending increased in the third quarter, helped by stadium tours from superstars Taylor Swift and Beyoncé, and blockbuster movies “Barbie” and “Oppenheimer.”
Taken together, Morgan Stanley economist Sarah Wolfe said, “The unprecedented revenues tied to these events should add a seventh of one percentage point to consumption growth in the quarter. They fall under the movie consumption and non-sports live entertainment portions of the personal consumption expenditures price index, known as the PCE. These categories alone would have to see massive swings in order to impact overall economic activity,” Wolfe said in a note to clients. “And they have.”
As these tours and the summer movie season end, we can also expect the economic impact to end. But wait, there’s more. Student loan interest has started to accrue again, and payments will begin again soon. Economists expect that the end of the mega tours and a decline in theater attendance will cause a 0.6% decline in GDP, and the return of student loan payments will have an additional 0.8% decline in spending. These two areas of spending on “experiences” vs. goods will have a meaningful impact on real GDP.
My Thinking
Will the Fed raise rates again? Let’s connect some dots. Long-term Nominal GDP since 1900 has been 6.1%, and Real GDP has been 3.2%. If the Real GDP is 3.2%, the Fed will continue to be desperate to get the inflation rate down to its target of 2.0%. Rate hikes and aftereffects lag in the real economy, so the Fed needs to be patient and let the current rates flow through, allowing businesses and consumers time to adjust and digest the current rates.
The low job numbers, an inline PCE report, indicate that higher rates are working to destroy demand. Remember that demand destruction is a short-term panacea for the economy; only an increase in supply (labor, energy, goods, and services) will keep inflation down at the Fed’s 2% target.
I think Jay Powell will hold rates steady and skip in September and take that opportunity to collect more data. Should the data continue to come in on or below target, we have likely seen the last of rate hikes, and businesses will feel more confident to make longer-term decisions.
The Portfolio
I have updated the dividends received. Year-to-date, we’ve generated $8,972.71 in dividends. I’ll remind everyone that in practice, I would have every stock that pays a dividend set to reinvest dividends. For clarity, I track the total cash received from dividends in this portfolio and leave the share count unchanged.
I have also updated the 12-month price targets for all positions. Note that these price targets are the consensus estimates (average from all analysts covering the stock). Most of the stocks have had their price targets increase. I may have a higher or lower price target based on my research.
There are several positions where I would like to add shares; one position, ChargePoint, I would like to sell, and I have home builder D.R. Horton in the bullpen as a new addition. The stock is fairly valued right now; I’m just looking for a pullback to make a buy. Let's get through the long weekend and see what values show up next week.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
Stay Invested,
Clay Baker
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Clay's Rules
Rule #1: Don't lose money
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
RULE #10: Being early and being late is the same as being wrong...move on.
Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
AMD, AMZN, AAPL, ARKK, ARKG, CNRG, ENPH, FB, GNRC, GBTC, GLD, HRTX, HD, MSFT, NVDA
I am invested short in these securities mentioned in this post:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
