CAMS Weekly View from the Corner - Week ending 7/12/24
July 15, 2024
Editorial Note:
This weekly view was written prior to this past weekend's attempted assassination of former-President Donald Trump. As it is our job to inform you, our reader, about the economic and market landscape we felt it imperative that we remain steadfastly focused on that task while acknowledging the historical importance of such an event and the implications it can cause downstream in markets. We will continue to monitor the markets in the coming days for any such impact.
Post-CPI release late last week a seismic shift took place within the stock market.
On the surface, via the well recognized S&P 500 for example, it appeared little occurred by the close of the week as it moved upward less than 1%. For its part, up or down less than 1% on any given week is far from noteworthy.
What took place within the stock market certainly is noteworthy especially realizing the seismic activity unfolded in a couple of days.
The Consumer Price Index (CPI) was updated for the month of June which itself, on the surface, did not appear all that different. To be certain, the price inflation backdrop continues to offer a wealth of issues to point to but a trend is surfacing which we have not seen thus far in this price inflation era.
With this, for the first time in this price inflation era, post-CPI release we witnessed collective stock market participant behavior of which we had not seen in this era.
Price Inflation Data puts in a Trend Attempt
The above is a bar chart whereby each bar reflects the continual monthly updates of the CPI. Our chart dates back to the beginning of this price inflation era in order to isolate the time period as well as to visually emphasize the trend attempt that is unfolding.
Our red down arrow highlights the developing trend attempt as recent monthly CPI data continues to come in at a lower growth rate. Our red circle denotes the notable change in price inflation behavior which encompasses the two most recent months of data.
Within the circle, for the month of May we had 0% growth hence no bar is depicted. Then our stand-out bar reflects our current release for the month of June whereby it came in at a negative growth rate for the first time in this era.
The above is a month-over-month price inflation change. During this price inflation era we have challenged the general media’s focus on this type of timeframe.
Our issue with this in past editions was it made for great headlines when the price inflation backdrop was offering nothing new – just more price inflation growth – but when X month’s release compared to the previous month’s release offered a decline it could appear a notable change was unfolding. A one-off month does not offer a notable change hence our historical issue with this focus.
We are offering and drawing attention to the above type of timeframe chart (month-over-month change) now for three general reasons.
First, an identifiable trend change attempt is clearly surfacing for the first time in this era. Second, this is the first time we witnessed a solid negative read via the chart’s most recent bar to the far right. Third, the explosive response by collective market participants generally and stock market participants specifically.
The Third Reason is Worthy of Discussion
In this price inflation era and the ensuing endless line of narrative pushing (we labeled it “The Narrative”) that interest rate cuts numbered in the many were coming very soon (dating back two years if not more) based on the narrative assumption price inflation was done only to see zero rate cuts show up because price inflation proved to be anything but done.
Through that narrative pushing timeline we cannot recall such an immediate seismic shift inside the stock market by participants such as we observed post-CPI late last week.
With this observation it is important to preface that we use everything imaginable as tools in assessing the socioeconomic landscape.
Drilling this down to relevancy for today’s edition we monitor and analyze a plethora of collective stock market participant behaviors to get a read on their assessments of X economic issue/D.C. policy initiatives/geo-political issues – you name it.
Using the immediate and tremendous shift by said participants and what they left in the wake of their trading offers this time interest rate cuts are coming and will occur in 2024.
We offer this as an assessment of the collective trading behaviors, post-CPI, by these participants not as our own assuredness of such an outcome. For this edition, we are focused on their behaviors and their forward messaging rather than simultaneously offering our own drilled down view.
Importantly though, as offered, their behaviors play a role in our own forward expectations as we use a wealth of tools to include market participant messaging in developing our own downstream views.
Inside the Stock Market
To be accurate there are many ways in which we can speak to the stock market shift post-CPI late last week. As always we strive for succinctness to keep these editions manageable in reading time. With this, below is not comprehensive but it is representative of what unfolded late last week.
Offering a general backdrop of the importance of the visuals below we have shared them throughout various editions dating as far back as mid and even latter 2021 as we observed and asked why were broad swaths of the stock market disappearing in performance or unable to perform at all.
Reduced to the extreme basics the price inflation/interest rate levels were viewed by participants as particularly harmful to these areas and through this market participants showed little interest for them relative to bidding up their shares. That changed rapidly late last week.
Above are year-to-date return charts in 2024 for small size companies as depicted by a Russell 2000 Small Cap Index investment vehicle. Small companies are historically sensitive to interest rates.
For visual emphasis relative to the extreme response by participants late last week we are showing the returns for the same Russell 2000 vehicle before the CPI release and then after. In two trading sessions the charts look unrecognizable.
The above right depicts a monumental move for this mainstream index in an extremely compressed period of trading. Clearly, this time around, collective participants are confident rate cuts are coming by the most important measure of all – deployed capital rather than opinion.
Above is the same depiction as our previous charts but this time for a Microcap Investment vehicle identifying the behavior of micro sized companies.
These are even more interest rate sensitive as they are further down the size totem pole from the Russell 2000 companies. Similarly, in two short trading sessions these identical charts, with two days separation, are unrecognizable.
Over the previous couple of years we have consistently questioned the aforementioned “Narrative” that rate cuts were coming by the many. We had many analytical reasons for our skepticism one of which was the collective market participant disinterest in areas such as the above as well as others.
Last week their messaging changed seismically inside the stock market.
It is important to offer none of the above in totality assures we have a dependable shift unfolding let alone a new rock solid trend in both lower price inflation on a year-over-year basis (our traditional go-to for price inflation) and broader stock market participation.
Importantly though price inflation data is attempting a trend shift and for their part, post-CPI, collective participants behaved in an astounding manner to a degree not seen in this price inflation era. In their view, rate cuts are coming soon.
Will their view prove out in reality? Will said view disappear as quickly as it arose? It promises to be a very interesting 2nd half of 2024.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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