October 14, 2023 | CPI, Stock Market Volatility and Treasury Yields

CPI
I was somewhat disappointed by the Consumer Price Index (CPI) as I believed there would be a slower growth in the inflation rate. With that being said, I don’t believe the report is problematic. The headline number for September of 3.7% matched August’s rate and was only slightly ahead of the expectation of 3.6%. The core rate which excludes food and energy came in at 4.1% which
was right in line with expectations and was below August’s reading of 4.3%. This was also the lowest reading on core CPI since September 2021 when the report showed inflation of 4%. Regarding the miss on the headline number, it is important to remember that with the recent increase in energy prices we have lost a major benefit that was pushing the headline number lower for most of this year. In fact, energy prices only fell 0.5% compared to last year and gasoline prices were actually up 3%. This compares to just a few months ago in the month of June when energy prices were down 16.7% and gasoline prices were down 26.5% compared to the prior year. These declines were extremely helpful for the headline number CPI number. One area that remains surprisingly high is the shelter index as it climbed 7.2% compared to last year. I have pointed at many times that this is a lagging indicator, but I am surprised to see how much it is still weighing on the overall inflation front as housing/rent prices have cooled tremendously on a real time basis. With that said, the shelter index accounted for over 70% of the total increase the core CPI. I still believe the shelter index is likely to cool as we end the year which would be very beneficial to both headline and core CPI.

Stock Market Volatility
You may be wondering why there is so much volatility in the markets lately and I will tell you it’s because of too much information. I’ve been managing money for over 40 years and remember back when Alan Greenspan was the Federal Reserve chairman and he was the only member of the Fed who would speak. He also did not speak very often. He spoke so little that financial commentators on TV would make decisions based on the size of his briefcase on what decisions he may make. The FOMC consists of seven members of the Board of Governors and then there are 12 Regional Federal Reserve Bank Presidents. It seems to me that many more of these Governors and Federal Reserve Bank Presidents are
speaking publicly on their thoughts. I do agree that we need information but not the opinions of so many different people who can change their mind when they meet and make decisions on interest rates and policies. I know it will not change, but I think too many people giving their views on what they think will happen is doing nothing more than causing volatility and confusing the investor. In the end it doesn’t matter what they say it is only important what they decide when they meet eight times a year. Everything else is just a bunch of confusing noise.

Treasury Yields
Many investors have been concerned by the move higher in treasury yields, but I believe it has been more a move towards normalization. Sure, rates have climbed rapidly, but if you go all the way back to 1790 the average yield for U.S. government debt is 4.5%. We are slightly above there now and may drift a little higher considering history shows that the fed-funds rate and the 10-year Treasury have tended to peak around the same level. This means we may breach the 5% threshold, but I do believe we would not see rates climb much from there and would mean we are near the top. Over the next few years, I believe we could see rates around the 4% level. Investors need to be realistic and understand the days of one or even two percent rates are in the past and extremely unlikely to occur anytime soon. Higher rates don’t always necessarily mean stocks can’t perform well and in fact from the mid-1980s to 2008, real rates were more than a point higher than now, and stocks returned 15% a year.