It’s no secret that we don't value the news too much. It seems to only kick up a hornets’ nest. And often, it’s just flat-out wrong.
Even more eye-raising is how we’re not alone. A recent poll asking about useful news found that 70% of those surveyed said the weather is the most important news you can actually use, while 44% said crime reports, and 41% of respondents listed traffic.
Notice what's missing? National and global events.
We say this because when markets lose their mojo, they become especially susceptible to news headlines. The logical reason for that is trader conviction is down, liquidity drops, and sensitivity to volatility rises. Add in inflammatory headlines and you have a recipe for stock prices to whip around. We believe that’s what happened most from February to May of this year.
But when we step back, it’s important to note actual stock performance. As the chart below shows, stocks rose nearly nonstop over the last 15 months, despite headlines.
In the chart below, we zoomed out over a longer period of time and listed even more “scary” headlines on the right. But in the end, stocks just don't seem to care about the news:
Why are we harping on this? Well, as we've been discussing recently, the data has certainly changed, which is a common occurrence. But this time, it’s for the better. As we can see in MAPSignals’ sector rankings, “big money” institutional buying has returned in full force:
The first thing to notice is that buying was HUGE. Only four of the 11 S&P industry sectors failed to pierce the 25% threshold of “big money” buying signals. This will certainly continue to push up the Big Money Index, as we said would happen, and we're even seeing it ramp up quickly now:
Even more important, recently unloved growth stocks are being bought in a significant way. For example, 25% of the buy signals last week had solid or great three-year sales and earnings growth. In fact, the average three-year sales growth of those 141 growth stocks was 20%. And the average three-year earnings growth overall was an astonishing 531%:
Digging back even further in the technology sector, software stocks have seemed to come back. We believe it’s because the average three-year earnings growth is 259% and the average three-year sales growth is 44%. Fundamentals matter! The return of buying to growth areas is cause for cheer. Remember, it wasn't that long ago that news stories spoke about how growth was dead, and value was the new growth.
While those stories get a ton of clicks, the fact remains they came at the expense of nervous investors. Never forget the news media is a for-profit business. The data say the market is going up, especially in growth. But the news is trying to scare you into thinking the market will fall. Trust the data.
Prices Rising, Pockets Loaded
And now to the boring – but potentially important – part of this blog! As readers and clients know, we have frequently discussed the risk of runaway inflation. Two common measures of inflation – the Consumer Price Index (CPI) and the Producer Price Index (PPI) – were updated recently. The CPI measures changes in prices paid by consumers for common goods and services. The PPI measures changes in selling prices for domestic goods and services.
A couple weeks ago, the Labor Department reported the CPI rose 0.6% in May, bringing the 12-month total to 5%, which is the fastest pace of growth since August 2008. And core CPI, which excludes food and energy, rose 0.7% in May and 3.8% in 12 months, which is the highest rate since 1992. While this isn't a surprise, we are paying close attention to what the Federal Reserve will say about inflation and how they will react.
Moving to the PPI, it rose 0.8% in May, which is up 6.6% versus a year ago. Excluding food and energy, the core PPI increased 0.7% and is up 4.8% in the past year. Digging a little further, prices for goods are up 11.1% year-over-year, while prices for services are up 4.5%.
Much of this can be attributed to extensive supply chain issues that continue to put significant pressure on prices, to which there’s no end in sight. Still, demand is being supported by an M2 money supply that stands 37% above pre-COVID levels:
In other words, consumer and corporate pockets are flush with cash.
Still, despite inflation running well above the 2% target, no matter how you cut it, last week the Fed did not signal any change in the plan to keep short-term interest rates near 0%. But it could be a different story in a couple years. In the meantime, we’ll keep monitoring data to help determine what, if any, effect all this will have on equity and fixed income markets next year and beyond.
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