BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
Stocks rebounded from mid-August but remain in a trading range seen since mid-June. Still, as of this writing, the S&P 500 is less than 5% from all-time highs on a total return basis. Bond yields have increased this year, which has been a headwind to stock prices lately. Treasury yields reached new highs in mid-August and the recent increase in the price of oil to $90 per barrel has affected inflation readings; it might also influence Fed interest rate policy.
The employment picture remains strong, as weekly unemployment claims remain low. National unemployment increased to 3.8% in the most recent monthly report, but this is still historically low. Recent core inflation readings, which excluded food and energy prices, improved from the prior month at both the consumer level (CPI 4.3%) and producer level (PPI 2.2%). Headline inflation is being impacted by something the Fed cannot control: both Brent crude and WTI oil are over $90 per barrel for the first time in nearly a year due to extended production caps by Saudi Arabia and Russia. Luckily, natural gas prices have remained low, which should help with utility bills compared to a year ago. Gasoline prices at the pump could moderate as refiners soon switch to a “winter blend”, but diesel prices are expected to increase due to supply constraints.
The Federal Reserve is not expected to raise rates on September 20th and may not change rates for the foreseeable future. After this week’s updates on CPI and PPI, the odds of a Fed hike on November 1st actually declined. Short-term interest rates could stay elevated well into 2024. The Fed is expected to keep rates higher for longer, or at least while oil prices are elevated, jobs remain strong, and other economic reports are decent.
Yields have been fairly stable over the past month and short-term rates have stayed higher than long-term rates (also known as an inverted yield curve) for over 10 months. This is now the longest stretch of time that the 3-month Treasury yield has stayed higher than the 10-year Treasury yield in at least 60 years. The spread between the two peaked at a historically high level, around 1.8% in early May, but the spread has narrowed to around 1% recently.
The current price of the S&P 500 divided by the expected earnings (this is also known as the forward P/E) is about 18.5, which is in-line with the average level seen over the past 5 years, though above the 10-year average of 17.5. Volatility remains very low, with the VIX index recently closing below 13. A VIX above 20 is usually thought of as elevated, while 11 is the lowest it has been in the past 5 years. Recently, more companies have announced IPOs (Initial Public Offerings) of stock, which we view as positive for the stock market in the near-term. Too many IPOs would be a warning sign that stocks are overvalued, but that is not the environment we are seeing today.
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Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.