Author Archives: Michael Murphy

Dear New World Investor: After the explosive Monday-Tuesday upturn, stocks retraced the whole gain. There wasn’t much news this week, but next week brings earnings from the major tech companies, plus the first estimate of September quarter real Gross Domestic Product growth Thursday morning and the latest Personal Consumption Expenditures Index Friday morning. Both of those reports precede the next Fed meeting on November 2, when they are sure to raise the funds rate by another 75 basis points (0.75 percentage points) just before the midterm elections. Focus on this: We are entering a multiyear bull market for forgotten growth+value...

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Dear New World Investor: The headline September Consumer Price Index continued to cool, but was hotter than expected this morning, as was the Producer Price Index yesterday and the nonfarm payrolls report last Friday. Another 75 basis point increase is a sure thing at the Fed’s November 2 meeting and probably at the December 14 meeting. Prices rose 8.2% year-over-year, down from August’s 8.3% and June’s 40-year high of 9.1%. Economists expected the headline inflation rate to drift down to 8.1%. The month-over-month increase was 0.4% versus the consensus expectation for 0.2%. Core consumer prices, which exclude food and energy,...

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Dear New World Investor: What a week! Inflation vs. the Fed, labor markets vs. the Fed, OPEC+ vs. the Fed…no wonder everyone feels like the collateral damage of a drive-by shooting, even after the best two days in the market since April 2020. Let’s dive in. First, last Friday we learned that the personal consumption expenditures price index rose 0.3% in August after dipping 0.1% in July. In the 12 months through August, the PCE price index increased 6.2%, down from 6.4% the previous month. But excluding volatile food and energy, the Fed’s favorite way to measure inflation, the core...

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Dear New World Investor: One year ago, the Fed said interest rates would remain lower for longer, they were unlikely to raise rates until 2024, they believed a recession was unlikely, inflation was transitory and not a problem, and inflation should fall to 2% in 2022. Wrong on every count. Yesterday, they raised the Fed funds rate by 75 basis points (3/4 of a percent) for the third consecutive time, bringing the funds rate to a new range of 3.0% to 3.25%, its highest level since 2008. Three 75-basis-point rate hikes in a row are unprecedented since the Fed explicitly...

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Dear New World Investor: The Consumer Price Index report was worse than I or, apparently, most everyone else expected, resulting in a whopping 4.3% drop in the S&P 500 and 1,276 point on the Dow Jones Industrials. About 30% of the CPI is related to real estate, where the data lags reality by 9 to 12 months. So last year’s jump in house prices and monthly rentals is showing up now. Click for larger graphic The Fed’s other important metric, employment, also is a lagging indicator. So with their eyes firmly fixed on the rear-view mirror, they are sure to...

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Dear New World Investor: Stocks broke their downtrend yesterday after the Fed’s Beige Book cited softening demand and moderating price growth. Economic activity was downgraded to “stagnating” or “unchanged” after July’s “modest expansion,” with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening, as “residential real estate conditions weakened noticeably as home sales fell in all twelve Districts,” “residential loan demand was weak amid elevated mortgage interest rates,” and “residential construction remained constrained.” While the slowdown in the economy was good, the outright “moderation in price levels” in nine of 12 districts...

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Dear New World Investor: The S&P 500 decisively snapped a four-day losing streak today by gaining 330 points from its intraday low. The Index still lost 5.5% since last Thursday and fell 4.2% in August. It is down 16.8% year-to-date. And here comes September! When the S&P has been down year-to-date through the end of August, it has averaged a decline of 3.4% in September, whereas September has been flat when the index was up year-to-date heading into the month. For the remainder of the year, the Index has averaged a loss of 1.2% when coming into September with year-to-date...

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Dear New World Investor: Friday at 10:00am EDT Federal Reserve Chairman Jerome Powell will address the Kansas City Fed’s annual Jackson Hole conference. Last year he said inflation was transitory to justify not responding to already-rising prices with higher interest rates. He was wrong. This year, he is expected to take a hawkish stance, saying it’s way too early for the Fed to consider a pivot because the economy is not in a recession, the labor market is strong, and interest rates must go much higher to stop inflation. So he will be wrong on three factors instead of just...

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Dear New World Investor: The Fed minutes indicate they are full speed ahead on interest rate increases until either inflation cracks or unemployment shoots up. The Goldman Sachs Credit Impulse Index shows a hard landing coming for the economy with a stock market decline likely. Fed tightening takes seven to nine months for impact, so the likely hit is mid-2023. Click for larger graphic The New York Empire State Manufacturing Index cratered, down -31.3 vs +0.5 estimate. It was the lowest reading since May 2020 and the second largest monthly decline on record. Click for larger graphic It was led...

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