More New Highs for 2024
We might sound like a broken record, but stocks made more new highs last week. The S&P 500 is now up five weeks in a row, something it has done only two other times so far this year, falling during the sixth week each time. In fact, it hasn’t been up six weeks in a row since late 2023. Nonetheless, the S&P 500 is now up to 45 all-time highs in 2024, which already ranks as the ninth most ever.
As we’ve noted the past few weeks, October in election years can produce volatility and with the S&P 500 up five months in a row (and 10 of 11) let’s not get too complacent here. The good news is this bull market is alive and well, and as we will discuss below, it might be two years old, but there still could be a good deal more time left.
Happy Birthday to the Bull!
Last Saturday marks the official two-year birthday of the bull market that started on October 12, 2022. That was a vicious 25% bear market made worse by also having some of worst bond market performance ever. As long-time readers know, Carson Investment Research has been on record since November of 2022 that the lows were indeed in and prices were going higher, and that the economy would surprise to the upside and avoid a recession. Two years later, we are still saying it.
To be bullish two years ago (and most of 2023) was quite an experience, since any optimism was widely greeted with scorn. As British philosopher Bertrand Russell said, “The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” This quote perfectly fits the permabears, who were so certain of a recession and a bear market in early 2023, only to see the complete opposite occur.
We’ll never quite understand why so many people were bearish, and almost seemed to take joy in rooting for bad things to happen. But fortunately, instead we have stocks up more than 60% from those lows and an economy that appears to be warming up, not slowing down.
Want some more good news? This bull market is actually quite young. That’s right, a two-year bull market historically has plenty of life left, with the average bull market since 1950 lasting more than five years and gaining more than 180%. How long this bull will last is anyone’s guess, but we remain in the camp that looking out the next six to nine months we simply don’t see any reason to expect a recession or end of the bull market. Will it last another three years? All we will say there is the odds are better than many expect.
A year ago at this time we noted that previous bull markets that made it to one year made it to year two every single time except the post-pandemic bull, and even that one saw a gain of over 100%. Remember, a year ago right now we were told by many that a weak first year to a bull market suggested the end was near, as stocks were barely up more than 20%. We noted this was probably the wrong way to look at it and suggested being open to the possibility of huge gains in year two. Well, after more than 30% gains during the second year of the bull market we would say that indeed was the way to look at things.
Will this bull market make it to three? We think so, but history would say we should temper our expectations for another 30% gain. We found that out of 16 previous bull markets (after bear or near bear markets), 12 of them made it to their third birthday, with an average gain of about 8% and a median return of nearly 10% in year three, pretty much what your average year does. All in all, we expect stocks to be up at least low double digits over the next year and this study does little to change that view.
Inflation Has Normalized
The Consumer Price Index (CPI) showed a little more heat than expected in September. Headline CPI rose 0.2% month over month while core CPI (excluding food and energy) rose 0.3%. Cue the worries about resurgent inflation. But the big picture takeaway remains fundamentally positive, and there’s even good news in some of the details, which we’ll get to below.
Here’s the headline: CPI is up 2.4% year over year, which is the slowest pace since March 2021. A year ago, it was 3.7%. Even better, we’ve been seeing inflation running even lower lately — over the last three months, inflation has run at an annualized pace of just 2.1%.
Core CPI is up 3.3% over the past year and is running at a 3.1% annualized pace over the last three months. The elevated core numbers are due to lagging shelter inflation within official data (shelter makes up 44% of core CPI).
Shelter inflation that happened in 2021 – early 2022 is still showing up in the data (though there’s good news here, which I’ll discuss below). If you exclude shelter, here’s how CPI looks (this includes energy and food):
- Last 3 months: +0.7% (annualized)
- Lats 6 months: +0.1% (annualized)
- Last 12 months: +1.1%
I don’t know how you can look at these numbers and still say inflation is a problem. Keep in mind that the Federal Reserve actually targets overall inflation (they just use core inflation to tell them what direction headline is going).
September “Heat” Is Not Abnormal
Even during normal or low inflation periods, it’s common to get readings similar to what we saw in September. Between January 2017 and February 2020 (pre-pandemic), headline CPI inflation average 2.1%, and core averaged 2.2% (annualized). The chart below shows monthly inflation numbers (headline and core) over this period. Headline readings above 0.2% were fairly common, and we got several core readings near 0.3%. In short, this is what “normal” looks like. Keep in mind that lagging shelter inflation data is keeping current numbers elevated, with a bigger impact on core inflation.
Good News on the Shelter Front
Official shelter inflation data is showing signs of normalization. We’ve written about this several times over the last two years, explaining why official data runs with significant lags to what we see in actual rental markets on a more real-time basis.
Rents of primary residences (10% of the core CPI basket) rose at an annualized pace of 4.1% in September, well below the 6.2% pace in August and not far above the pre-pandemic pace of 3.2%. Owners’ Equivalent Rent (OER) makes up a whopping 34% of the core CPI basket — it is the “implied” rent homeowners pay and is based on market rents as opposed to home prices. OER rose at an annualized pace of just 3.4% in September, which is slightly below the pre-pandemic pace of 3.6%.
Looking back over the last 12 months, shelter remains very elevated relative to what we saw before the pandemic — rents are up 5.2% year over year and OER is up 4.8%. This is essentially why the headline and core CPI numbers quoted widely in the press are reflecting a hotter inflation story than is actually the case. September is just one month, but this is extremely encouraging data.
Looking ahead, there may actually be more shelter disinflation to come in the official numbers. Markets rents are still declining. The Apartment List rental index is down 0.7% since last year, the 16th straight month with a negative year-over-year reading. Official shelter data is declining slowly but surely. And we may get to a point where the readings are lower than what we saw pre-pandemic, potentially pulling inflation numbers lower over the next year.
Profit Margins Are Also Telling Us Inflation Has Normalized
There was some heat in certain categories that offset the positive data on the shelter side. Airfares rose 3.2%, while apparel and vehicle prices also rose. This probably reflects how the data is seasonally adjusted more than anything else. Motor vehicle insurance premiums also rose, but this is likely a lagged impact of higher vehicle prices. With vehicle prices pulling back (at least in the private market data), insurance premium increases should start to ease.
But even during “normal” inflationary periods, you always get idiosyncratic areas that see hotter inflation. That doesn’t mean broad-based inflation is going to surge.
Case in point: profit margins. The producer price index (PPI) measures input price inflation for businesses. However close to a quarter of the PPI basket that excludes food and energy is made up of “trade services,” which actually measures profit margins for retailers and wholesalers. Margins are up 29% since before the pandemic (February 2020), but as you can see in the chart below (top panel), they’ve flatlined over the last two years.
Back in 2022, when inflation was hitting its peak, profit margins were up a massive 19% year over year (March 2022). The good news is that as of September, profit margins for retailers/wholesalers were up 1.6% over the past year (bottom panel of the chart), which is in line with what we saw before the pandemic in 2019. This is more evidence that inflation has normalized.
There is some concern that inflation is surging even as economic activity remains strong, the “no-landing” scenario. Real GDP is up 3% year over year as of the second quarter of 2024 and is expected to rise at a similar pace in the third quarter, based on “NowCast” estimates from the Federal Reserve Bank of Atalanta. However, as I discussed above, inflation is normalizing. But the way to reconcile this with stronger growth is via stronger productivity growth, which we’ve seen evidence of. In fact, we wrote about this in our 2024 Outlook, released all the way back in January.
All of this means the Federal Reserve can continue to normalize interest rates. They may not have to go with a big cut at every meeting, like the 0.5%-point cut they made in September, especially with the labor market looking a little better than what the summer data showed. But they can cut gradually, and we expect they will. That’s going to be a big tailwind for the economy, and markets, as we go into 2025.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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