Perception is reality in many ways (in investing, we think data is reality). Just ask the famous fried chicken chain KFC. When it started opening stores in China in the 1980s, the company tried to translate its slogan, “finger-lickin’ good,” to Mandarin. However, the literal translation was, “eat your fingers off.”
The point is different perspectives can perceive the same data and come to different conclusions. For investors, this can be seen with the media telling people to eat their fingers off while data says to enjoy a tasty meal.
Of course, the media does this because negativity sells. We humans are attracted to negative stories because it boosts our own self-worth. Germans have a word for it – “schadenfreude” – which loosely translates to joy at others’ misfortune.
Negative stories, including those from the business media, attract eyeballs to advertisements looking to sell us anything and everything. Current headlines include news about hurricanes, auto strikes, political scandals, inflation, war and even the Mexican government holding hearings on “1000-year-old aliens.”
Notice a pattern? This news is a drag.
To counter such bias, we use objective data.
In September, the stock market also dragged. But because we follow the data, we know stocks are doing what they normally do. So, we have to wait it out. The good news is October is near, and October-December is historically the strongest time of the year for stocks.
Today, the major story for investors seems to be inflation. More specifically, investors think the Federal Reserve isn’t helping matters by continuing to reference a long-term goal of “2% inflation,” which Chair Jerome Powell mentioned at his press conference last week:
Let’s dig some more on this. Powell is saying, “Eat your fingers off,” while the data says something else:
Inflation has fallen more than 6% from its peak and currently sits at 3.7% (the latest reading of the consumer price index (CPI)). That seems persistently high, but the clear culprit is energy. So we think the headline CPI number is misleading. As this table shows, energy commodities, gasoline, and fuel oil all experienced big spikes in August (yellow highlights), though all energy categories are among the big decliners on a 12-month basis (amber highlights):
The decreases are even clearer in monthly household credit card spending data:
Gas was the only increasing category. And after removing energy and food costs, which leaves “core CPI,” all items rose just 0.3%.
Let’s move to shelter costs. As we know, owners’ equivalent rent (OER) is the Fed's favorite metric for housing costs. It is the hypothetical rent a homeowner would pay themselves if they were a landlord renting their own house. A Wall Street Journal reader and retired university professor agrees it’s a deeply flawed and fictitious measure:
This implies that inflation has actually fallen a lot more than the CPI says.
We’re even beginning to realize the Fed’s recently invented “supercore” measure of inflation is also turning out to be flawed:
The so-called “dog’s breakfast” is clearly unappetizing:
If the July CPI is arguably lower than the published number due to shelter and volatile energy costs, then we're potentially already below the Fed’s “2% target” right now. This is why we argue this target rate is like eating your fingers off.
Per government data, the average CPI reading since 1960 is 3.77%. That’s far greater than the imaginary “2% target” eyed by the Fed.
Furthermore, the average CPI since interest rates fell to 0% in December 2008 is 2.32%. Thus, even when rates were at their lowest point ever historically, the CPI average was greater than the Fed’s “2% target.”
Additionally, even with the uptick in energy costs, the federal funds target rate is still substantially greater than the latest CPI reading:
That energy spike is showing up in “big money” investor stock buying activity too:
This is a direct result of Saudi Arabia cutting oil production. It caused the WTI crude oil price to rise 17% since Aug. 8, an increase that should flow to the sector’s bottom line:
From an investment standpoint, this is why we continue to hold an equal weight energy position in our client model portfolios, even as they were dragged down by headwinds earlier in the year. We expected a third-quarter rise in oil and needed those energy positions to hedge against commodity risk.
It’s clear September volatility is here. The news headlines have taken every opportunity to leverage attention, which has driven the instability. But what’s really happening may depend on perception. Because while it’s doom and gloom in the headlines, the CBOE Volatility Index or VIX (often dubbed the market’s “fear gauge”), is at its lowest levels since before the pandemic:
With such a low VIX and an S&P 500* that’s dropped less than 2% in September as of this writing, things seem a bit odd. You’d think the VIX would be higher. So, perhaps the market isn’t too worried about all that’s happening in the news because the choppiness is seasonal in nature?
This disconnect is shown more clearly in MAPsignals’ trusty (and decreasing) Big Money Index (BMI), which is a 25-day moving average of outsized buys and sells from “big money” investors:
We’re waiting for the BMI to bottom out, paving the way for a big lift to end the year. That is what typically happens with stocks since 1990:
So, is it a “finger-lickin’ good” or “eat your fingers off” situation? That depends on your perception of the data itself (is it quality or “garbage in, garbage out”?) and what it says.
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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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