December 23, 2024
Inflation is far from dead. And that should give people – especially frothy stock investors – some motivation to back away from their exuberance.
The October consumer price index’s 2.6% monthly increase is up from the prior month’s rate. Also, core inflation, which excludes volatile energy and food prices, was up 3.3%.
Are we facing the sequel to the 1970s inflation battle where the Federal Reserve cut interest rates too soon? It seems possible.
Back then, President Nixon pressured the Fed to cut rates prematurely. It did and inflation came roaring back.
And yet, as of this writing, the market is pricing in an 82% chance of another 25-basis-point-rate cut at the Fed’s meeting this week. We’ve got inflation going up and we’re cutting rates?
A second concerning sign is the price-to-earnings ratio for S&P 500 stocks is near its all-time high. The CAPE ratio, which is a valuation measure using EPS over a decade and averages about 16, crossed above 38 for only the third time since 1880.
In other words, U.S. stocks haven’t been this expensive in nearly 150 years.
Meanwhile, the CAPE ratio for the Brazilian stock market is 11. In Hong Kong, it’s 12. In Japan, it’s 22.
Another warning signal is the U.S. share of global stock market value hit another high. A few decades ago, the market capitalization of Japan was greater than the U.S., and Europe was close.
That’s completely changed.
Today, the U.S. stock market accounts for 74% of the MSCI World Index (an all-time high). This reflects decades of outperformance by U.S. markets relative to the rest of the world:
How much longer will this last? Remember, markets fluctuate over time.