Professor Siegel's Weekly Commentary Archive
“The Beat Goes On.”
September 18, 2023
My current read of the economic data last week would be encapsulated as “the beat goes on.” Real economic activity remains quite strong.
Retail sales data came in a little ahead of expectations. The PMI reports are still strong. And the weekly jobless claims that come in every Thursday also remained subdued, reflecting healthy economic activity and no increase in layoffs.
Pressuring inflation higher is the big increase in oil over the last few weeks to over $90 a barrel. That increase comes despite the almost 5% increase in the dollar over the last few months—oil priced in euros is even higher.
One anecdote on gas prices. I drove to the New Jersey shore last weekend, and I have never seen a longer line to fill up for gas at Sam’s Club—which offers the cheapest gas on the island. Consumers are trying to save money everywhere they can. These higher gas prices will clearly hit consumption elsewhere. Yet, the U.S. is now a big producer of oil, virtually energy independent, so there are beneficiaries to offset the hit.
But economic bears are looking at these price gains and see higher oil prices driving headline inflation to +0.6% for August, while core inflation came in only at +0.2%.
Despite all my commentary on the Fed and inflation, the market direction and narrative are more attuned to how strong the economy (and therefore corporate profits) will be over the next six months. The recent resilience outweighs whether the Fed hikes another 25 basis points or even 50 basis points. You see this last, even though the higher inflation print could have been a risk-off day for the markets if inflation was the top concern, strong economic data influenced stocks more.
Let’s preview this week’s FOMC readout. There will be no hike from the Fed, but I believe you will get headlines of a hawkish readout on the Dot Plot. I can see more FOMC members thinking we need another one or two increases this year and a level of rates which is higher than what is currently priced into the Fed Funds Futures market. Powell likes to reflect all the discussion in the Dots in his commentary, so I can see some hawkish words from Powell. But Powell will maintain the Fed is totally data dependent. Unfortunately, the inflation data is likely to stay strong and official core inflation figures remain stubbornly high—particularly the ex-rent figures.
My view remains the Fed should not risk an unemployment rise and millions of unemployed workers with the path to lower inflation well established and on track. But we’ll hear the tough talk from Powell.
The union strike from the United Auto Workers may last longer than people currently think. The car companies put 20-21% pay hikes on the table, but the union leader is demanding much higher at 40% but may be just posturing to get something above 30%, although I hear the settlement will be in the upper 20s. Can they both settle a little above or below 30%? We have talked in these commentaries about how workers were falling behind inflation and that wage growth lags inflation but ultimately it catches up through this type of contract re-negotiation process. The workers are trying to get this catch up with this new agreement. Hopefully a resolution is had that keeps companies competitive.
We also have a government shutdown pending for October. The Republicans seem to like playing this shutdown game—which I think is a losing gambit. Eventually the GOP caves in and re-opens the government, but the market is looking past the disruption and silly gamesmanship coming out of Washington and thinks the slowdown from the union strike and this government shutdown will be just a moderate hit to the economy.
The market still has positive momentum and can tilt upward towards the end of the year. I don’t see a strong boom but an upward tilt. I also don’t see a major crack in tech stock’s performance until we see their earnings disappoint. The Arm Holdings (ARM) IPO last week was positive and shows a good re-opening of the IPO markets. I think that is a healthy reopening and shows there's still appetite for risk. Tech stocks had a few tougher days as real yields rose and I expect real yields to remain firm. I like the valuations of dividend stocks more than the valuations of tech heavy Nasdaq, particularly on a more robust economy, but you can still see the money flowing into tech stocks with the artificial intelligence (AI) narrative dominating enthusiasm.
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