Professor Siegel's Weekly Commentary Archive
Fed Meeting Was Exactly as Expected
June 20, 2023
It was a big week for the markets and economic data with multiple inflation-related releases, the Fed meeting, jobless claims and retail sales.
The Fed meeting read out exactly as I expected—no hike but a hawkish Dot Plot. I always emphasize to not overly read into the Dot Plot as implying any future actions. While the median projection of the Federal Open Market Committee (FOMC) participants upgraded estimates for economic growth, core Personal Consumption Expenditure (PCE) inflation and lowered projections for unemployment—with two more hikes viewed as appropriate policy—reality is the Fed has no idea what it will do at future meetings. The Fed is entirely data dependent.
I maintain the Fed is likely done hiking rates—or at least it should be done. I thought weekly jobless claims were the most important indicator last week—given the rise in claims the prior week. And the prior week’s claims were revised higher and last week claims came in again at exactly the same elevated level—so the moving average of jobless claims is trending higher. I want to see three weeks in a row to confirm the recent tick up, but we are at risk of a negative jobs print with the latest data. The political pressure that comes with negative jobs reports should weigh on Fed thinking.
The market is ignoring the Fed’s aggressive stance for more hikes. There was a little bump higher in Fed fund futures for July but nothing significant. The market does not expect the Fed to go two hikes—and just a reminder that one has to be careful from interpreting the probabilities directly from Fed funds futures due to the hedging nature of futures. The estimates that come from Fed funds futures probabilities understates what the market really expects to happen—since investors buy the Fed fund futures as a hedge in case something bad happens and the Fed has to cut rates.
Retails sales came in very much on target. Some read out the retail sales report as the consumer being resilient but largely it was right on track.
The Producer Price Index (PPI) inflation data confirms my view that inflation pressures are declining and even more so when you read into the details of the report.
And the alternative inflation metric our team puts out—that substitutes real time housing metrics for shelter inflation—read out as 1.4% for year-over-year headline inflation instead of the 4.1% official Bureau of Labor Statistics (BLS) headline inflation, with core inflation using real time metrics running at 2.1%—almost exactly the Fed’s target inflation. The difference in our alternative inflation series compared to the official BLS reports is shelter inflation—which is running at 8% over the last 12 months in official statistics but only 0.5% in our real time housing series. This single variable change would dramatically alter the Fed’s inflation narrative and shows the Fed should be done hiking.
Another piece of good news for official reports is inflation expectations from the University of Michigan Consumer Sentiment survey. There was an 0.8% drop in inflationary expectations—a welcome relief—and one of biggest drops since the 1980s.
Coming back to the Fed Dot Plot—estimates for 2023 Gross Domestic Product (GDP) now show 1% real GDP growth. Based on the first half estimated growth of approximately 1.4%, this implies a very weak second half of the year for the economy—around 0.6% real GDP growth. Unemployment is expected to pick up to 4.1% from 3.7%—showing the Fed economists are projecting job losses. If we have any productivity growth, the job losses will mount further bringing more pressure on the Fed to consider employment trends in their dual mandate.
The equity markets as a whole are fairly valued. I have argued 20x price-to-earnings was a reasonable multiple for the S&P 500—and that is close to what we have for the broad market now. But tech stocks are selling around Nasdaq multiples of 30x earnings, while the non-tech stocks in the S&P 500 are at 16.5x earnings—or right at median multiples for the group for the last 30 years.
I think tech is moderately overvalued and value stocks moderately undervalued. Of course, momentum players can take tech higher in the short run regardless of valuation. However, in the long run, earnings growth must be realized to justify these high multiples—which is a high bar.
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