In today’s Steady Investor, we break down the top factors shaping the current market and what may lie ahead, including:
Latest Inflation Print is Not Bad, But Not Great Either – With all the post-election noise and a flurry of cabinet picks hogging the headlines, it was easy to miss a crucial economic data point: the consumer price index (CPI) measure of inflation. On Wednesday, the Labor Department reported that CPI rose 2.6% year-over-year in October, a slight pickup from September’s 2.4% print. Every month, prices increased at a seasonally adjusted rate of 0.2%, in line with expectations. Core prices, which strip out volatile food and energy prices, rose 3.3% year-over-year and 0.3% from October.1
CPI (blue line) and Core CPI (green line) Year-Over-Year % Change
We would classify these inflation data points as not great, but certainly not bad either. It seems to confirm the existing trend of inflation moving steadily lower over the past couple of years, but on a bumpy and uneven path. In the words of Fed Chairman Jerome Powell, “we’re not declaring victory, obviously, but we feel like the story is very consistent with inflation continuing to come down on a bumpy path.” As for monetary policy, this latest inflation data is not likely to deter the Fed from cutting rates at their December meeting, a move that is widely expected. Futures markets imply an 80% chance of a rate cut at the next meeting, which we expect to be 25-basis points.
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The S&P 500’s Equity Risk Premium Sinks to Near Zero – One way to gauge the relative attractiveness of stocks to bonds is to look at the equity risk premium, which for U.S. large-cap stocks means comparing the S&P 500 earnings yield with the 10-year U.S. Treasury bond yield. In the decade following the 2008 Global Financial Crisis, the equity risk premium often hovered above 4%, as the economy was growing and Treasury bond yields remained anchored at low levels. Fast forward to 2024, however, and the equity risk premium is closing in on 0%. Stocks are trading near all-time highs, with elevated valuations, while yields on 10-year U.S. Treasury bonds have jumped in recent weeks and now hover close to 4.5%. We would not read too much into rising bond yields in the short term, even as many prognosticators signal that markets are anticipating higher inflation and higher deficits in coming years. It is worth noting, however, that the S&P 500 is trading at 23 times projected 2025 earnings, which is 40% higher than the average since 2000. With Treasury bond yields climbing, we could see some rotation as investors consider choices on where to park their cash.4
U.S. Household Debt Reaches New Highs – According to the Federal Reserve Bank of New York, total household debt reached a new high last quarter, rising to $17.9 trillion. While that number may sound staggering, it’s important to see it relative to total household net worth, which stood at $163.8 trillion as of Q2 2024. What matters most to the economy, in our view, is not the level of household debt but rather households’ ability to use disposable income to make debt service payments. And on that metric, U.S. households appear to be in fine shape. As seen on the chart below (green line, right axis), household debt service payments as a percent of disposable income are roughly 11.5%, which is roughly in line with its long-run average (over the last 50 years). Delinquency rates on all consumer loans also remain at a very low historical level, signaling that households are not anywhere near crisis levels at this point.5
In aggregate, households saw incomes rise faster than debt levels, but younger and lower-income cohorts continue to face pressures.
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