Two Views

     Today the markets received data on the Producer Price Index (PPI) and without going into detail the result was, to say the least, open to interpretation. Expectations were for the month over month data to increase .2%, but came in up .4%. The year over year number was expected to be 5.9%, but came in at 6.2%. Well, the markets took the data to show that inflation has increased, and I disagree. First, last month’s year over year inflation data was 6.8%, this month came in lower at 6.2%. In my opinion, this shows that inflation, although still high, may have peaked and is experiencing bounces along the way down. As far as the monthly data goes, the increase in energy prices last month and the continuing challenge of inflated prices to seasonal shoppers, fills in the blank as to why the month over moth data increased. But the increase was higher than the consensus (prediction) and once again the economic analysts got it wrong, and that’s what the markets like to ignore these days.

     Unfortunately, this is also what is taking place in the equity markets. Over the last 30 days a number of companies such as retailer of lifestyle athletic apparel Lululemon (LULU), CRM software provider Salesforce (CRM) and a number of other technology and consumer discretionary companies, each reported earnings that beat top down expectations, but the stocks went down. The reason has been simple, the analysts, pundits and our favorite algochums are all focused on the guidance provided by the companies. That guidance has unsurprisingly inferred caution going into the first quarter of next year. Why not? There are many indications that there will be some economic slowdown, and I’m not just referring to the economic expectations resulting from a yield curve inversion, a phenomenon that has been going on since April. The outcome of the ISM Manufacturing Index and the ISM Services Index are both trading under 50, which is a direct sign of economic contraction. For now, the only uncertainty is Unemployment, and that’s where the Fed comes in. Recent comments by the Federal Reserve members show frustration with the continuing strong employment data, even in the light of well advertised layoffs, and hiring freezes. In the meantime, they still expect to increase interest rates, and continue with aggressive Quantitative Tightening (QT) into year end. QT could have an especially sobering effect on the economy.

     Next week, the Fed is expected to increases interest rates by .50% at their December meeting, and data for the Consumer Price Index (CPI) will be released. There is reason to be constructive in today’s environment. Not because the markets are going to rally into year end, that may happen once the Fed decision and the economic data are out of the way. But, because if there is any sign that the economic environment is showing signs of weakness, that is the time when the markets will find a true reason to rally. When that happens, first or second quarter, remains to seen. In the meantime, we’ll continue to watch the data, taking opportunity when markets decline, stay invested, and remain patient until we get this year out of the way.