Disinflation: The Early Christmas Gift

This week, we had a nice rally in the markets with the news of inflation cooling.

In this week’s edition, we look at:

1. The market’s strong week, especially the RUT

2. Year-end reminders

3. The Consumer Price Index cools

4. Producer Price Index cools

5. The consumer story, spending, and habits moving forward dictating profits for equities and inflation.

Important Disclosures:

The opinions voiced in this material are for general information only and are 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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing involves risk, including loss of principal.

Jason Jacobi & Mark Boyer are registered principals with and securities and advisory services offered through LPL Financial. A Registered Investment Advisor. Member FINRA/SIPC.


Jason Jacobi, CFP® (00:00.674)
Good morning everyone. Happy Friday. Jason Jacobi here with your closing bell for the week. I don’t know about you, I’m getting excited. I know Thanksgiving’s next week and have some good turkeys, some time with friends and family, good football on TV. And then obviously that means Christmas is approaching, which is my and my family’s favorite time of year. I know you all probably enjoy it as well. Not only for

my faith, but also just for what Christmas brings and what it means giving and spending time with friends and family around a fire or if it’s cold enough where you live. It’s not cold enough currently in Newport Beach, but hopefully we get there. Just the lights and the tree and the smells. It’s just, it’s amazing. So I’m looking forward to it. We’re going to set up Christmas this weekend. So always really excited just to see the look on my kids’ faces as well.

But let’s dive into it. So a great week in the markets, major industries hovering around 2% gain for the last five days or so at the time of recording at around 11 a.m. on Friday, November 17th. Now, the Russell 2000 is doing exponentially better this week. Those are the small cap stocks, obviously with inflation and kind of tapering off, which we’ll get into the CPI and PPI readings for the week.

consumers and producers price indexes, both showing signs of cooling price pressures, which is wonderful for all of us. So the Russell 2000, obviously, which is kind of more sensitive to interest rates, more volatile than your traditional S&P 500 or the major stock or major large cap company indices. So that’s up about 4% for the week. Now, a few things I wanna talk about.

Uh, you know, as we kind of get into the closing bell here, first would be some reminders. Okay. I want to do this at the beginning of the podcast for everyone that’s listening. Uh, sometimes people skip around, but this is important. So as we go into the waning months of 2023, a few things I want you to remember. Okay. So tax harvesting, which we perform for our clients. But if you have any outside investment accounts that are held elsewhere, uh, tax harvesting needs to be done by December 31st. Okay. So, or the last major market day of the year.

Jason Jacobi, CFP® (02:23.658)
Again, if you want to write off losses, you can run up to $3,000 in capital losses per year. The rest of it, if you have more than 3,000, you can basically have that carry forward indefinitely. So just a reminder, tax harvest, get that right off the statements while you can reposition, rebalance, especially going into election year. So tax harvesting, get that done. Also require minimum distributions, need to take those by your end as well.

So if you’re age 72 for some people, if you take it, you know, back when the requirement of age was 72, currently 73, you know, you do need to take those distributions by year end to satisfy your RMD. Complete your charitable gifts or your year end giving gifts to your charities or, you know, 501 C3s that you’re passionate about. So get that done.

It’s also usually tax deductible in the year of which you give. Uh, also last minute maxing out of retirement plans, very important or, and or five 29 plans, get those done by the year end. Uh, again, could be a some great strategy there to lower taxable income, but try to max those out for the year, especially if you’re not getting the employer match, it’s free money for you. Get it done. Roth conversions. Again, if you’re in a lower tax bracket or you’re expecting lower income for the year,

Roth conversion may be appropriate to you. Consult with your tax advisor, give us a call. We can talk through it. Also flexible spending accounts, FSAs, use it or lose it. That’s all I’ll say about that. Use it or lose it. It won’t roll over to the next year. Any questions on that? Give me a holler. Be happy to talk about it. But let’s give a brief synopsis of S&P earnings. Where now we’re kind of waning from that season, earning season, Q3 earning season, to…

Going back to macro, excuse me, a little word soup here, macro economic season. Okay. Basically meaning going back to data dependent data from the economy. So let’s do an S&P earnings update. So we have 62% of the S&P 500 that’s reported so far. 461 companies have reported 62% of those companies have beat revenue estimates. 80% of those have beat earnings estimates. So

Jason Jacobi, CFP® (04:46.026)
Really solid. We’ve got 2% revenue growth. We’ve got 5.3% earnings per share growth. So we’re kind of out of the earnings recession that we saw last few quarters, which is great news. Okay. So companies making money, corporate America, making money. That that’s always a good thing, especially in the environment with increased prices, which obviously most of the times pass along to the consumer, which means higher earnings. We should start to see that taper off, which we’ll talk about in a second as well. So,

Big news for the week was the CPI numbers, which stands for consumer price index. The year over year number, which is what we look at is basically the inflation rate, we call it. So that’s showing a positive trend. It would decrease by a half of a percentage point compared to both August and September. So it remains slightly higher than what we saw in June, which was the 3% handle there. It’s 3.2%.

So again, still above the Fed’s target rate. Personally, you know, Mark and I have said, you know, historically you look at inflation over the last 100 years or so, it averages about 4%, 3.9% or 4% depending on how you look at it in the timeframe. But we’ve been in basically a deflationary environment in terms of inflation. Inflation has been lower. I guess you can call it disinflation.

Basically it’s been going up at a lower rate over the past 50 years or so since the early eighties. So core CPI, looking at that, excluding food and energy, the latest data is as close to a three handle as we’ve seen it in more than two years. It’s at 4%. So getting higher than the Fed likes anything between 3% to 4%, the economy can function very well at. Okay.

We need to remember that. I know the Fed wants 2%. We were at 2% prior to COVID, even slightly below that. But again, that was a free money era. I don’t think we’re gonna get down to exactly 2%. And again, I could be wrong, which is fine, but anything closer to between 3% to 4%, like where we’re at right now is a very functioning, strong, we can have strong economic numbers with where our inflation’s at right now. Now, obviously you say Jason,

Jason Jacobi, CFP® (07:08.69)
I’m paying, it was at the gas pump a few months ago, gas was up about rushing towards $100 a barrel. And with that being said, people were like, oh, we’re not up 3%. Gas is up way more than that or food was up way more than that. That’s true. Very true. So when you average out the numbers, and again, that core CPI number excludes food and energy, which are more the volatile prices like we just talked about, because you look at gas today, gas is now at a new four month low.

So again, there’s ebb and flow in the economy, right? Supply and demand plays a major factor in that money supply. We had a ton of money, trillions of dollars injected into the system, stimulus. It was just insane. And then all of a sudden it gets sucked out like a vacuum. And this is kind of what happens in that environment. So we’re trying to return to normal here. The Fed again.

I do not think that they will raise rates anymore. I think we’re in the pause period, which just means we’re going to pause for now. We’re going to have higher rates for longer, barring any major economic downturn that might come in the future. Then they would cut rates pretty quickly, but I still think by mid 2024 is when we’ll see the first rate cut. Now the UK, their inflation came in around 4.6% for their CPI numbers.

They’re more interest rate sensitive over there. So more than likely, you’re going to see the UK cut rates before us. And you’re like, Jason, I really don’t care about that. Just putting it in perspective here. Uh, we are still going to see higher rates for longer. We would like to see the, the shorter end of the duration, uh, curve for the treasury yields, we, uh, we definitely want to see the, the shorter term treasury yields kind of correct and come down from where they’re at two year and below.

because the rates have stabilized a little bit on the upper end of the duration scale. So CPI moving in the right way. And also we look at producer prices. So if you’re looking at producer prices as well, which is basically a kind of a foreshadow for what’s to come in consumer prices, hopefully, prices have declined to 1.3%. So it’s a reversal from the upward trajectory that we observed the last few months.

Jason Jacobi, CFP® (09:34.998)
but it’s come down, it’s declined, which again, should be foreshadowing to hopefully cooling numbers moving forward. Now, might be a little bit sticky in the near term. Again, we got holiday season. People are starting to spend less. Retail spending was down for the month, which we expected to see, you know, post summer fund inflation kind of hangover services were booming. We’re starting to see unemployment go up 3.9%, personal spending.

has basically started to decrease in the services sector as well. You look at the last year, it’s basically flat. It’s come down from upwards of 10%, obviously inflation adjusted. But again, moving in the right direction. So people are starting to be a little bit more wary of where they’re spending their money and how they’re spending their money because personal savings is down 63% since January 2021, which is insane. So people have gone through spending. We’re seeing cracks in terms of…

of defaults on loans and car loans, home loans somewhat, but commercial real estate especially. There’s a specific type of like mezzanine loan. We’re seeing a larger number of defaults. So that’s what we’re seeing. But again, we’ll keep you updated on that. But again, the reason the markets have rallied so much this last week or two is because inflation numbers have come down, which basically insinuates that the Fed is done. So like I said before,

Fed most likely done raising rates. Then the decrease in inflation here that we saw this month has basically stated that the markets have done the Fed’s job already. So good news on that front. Now last thing we want to talk about here is going to be moving forward, heading into winter months. Are we going to have a recession? Are we not going to have a recession?

Again, I don’t want to play that game again different. I do think that different sectors have felt kind of contractionary Periods, which would basically signal recession obviously manufacturing still sub 50 on the manufacturing index that we look at so I Do think that the economic slowdown the economic slowdown that we’re seeing that we’re starting to see and should continue Which isn’t a bad thing? Okay

Jason Jacobi, CFP® (12:00.29)
Just with where we’ve been and where we need to go in terms of curbing inflation, we just need some normalization, getting back to kind of pre-COVID policy and normalization and money supply. Interest rates, again, interest rates are still high for mortgages, still upwards of seven. But again, if we can get that number back down as the economy cools, the Fed, again, Fed starts cutting rates. You should see those mortgage rates come back down.

which again, we’ll see price normalization in the markets. That’ll be a good thing. So, uh, that’s kind of basically what I wanted to talk about today. The, the reason again for market, uh, a great kind of rally in the markets was, Hey, the economy is slowing down, you know, inflation’s coming down. Uh, the bad news of the economy slowing down, which obviously nobody wants to see a slower economy, but it’s good news in terms of, Hey, more than likely the fed’s going to be done.

So there’s a light at the end of the tunnel. The only way we could see markets react poorly is if something breaks in the economic system, which could spurn kind of more volatility or uncertainty. But again, I think the worst of it, we’ve weathered a lot last year and a half, and we’ll keep you updated moving forward. But reach out again, just want to touch on inflation this week. Thanks so much for listening to us. We’ll be back next week with your closing bell. Have a good one.

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