IT COULDN’T KEEP GOING UP FOREVER:  Of late, we could all see gas prices moderating, and so it came as no surprise that lower energy prices helped lower the annual inflation number.  In July, the Consumer Price Index did not rise, after rising 1.3% in June. This was the first month in over two years in which the CPI has not increased. This lowered the 12-month inflation number to 8.5% from 9.1%.  Gas prices fell by 7.7% and energy prices in general fell by 4.6%.  This offset price increases in food and shelter costs.  Another inflation index is called the Producer Price Index (PPI).  It tracks what producers of goods and services are paying.  If that goes up, it is often a leading indicator that consumers will be paying more as well.  The PPI for the prior twelve months was also down in July to 8.9%.  It had been 11.3% in June.

INFLATION DOWN, MARKETS UP:  The U.S. markets rose for the fourth week in a row, this week buoyed by the inflation data.  Inflation data released on Wednesday, while still near the highest rate in decades, showed a slight easing.  That combined with decelerating consumer spending gives investors greater hope that the Fed’s interest rate activity won’t put us into a deeper recession.  A continued strong labor market, good corporate earnings reports, along with the inflation data have been enough to keep this rally going.

LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  

THINK LONG TERM:  If you look at this S&P 500 growth chart as a straight line from beginning to end, it is a healthy looking line.  If you look at a couple of points of short term performance, it looks ugly.  Focus on the long term.

HOT HOUSING MARKET SLOWING UP:  Refinance activity has dried up in the U.S. for obvious reasons. According to the National Association of Realtors, housing affordability is currently at its lowest point since 1989.  Mortgage rates hit their recent peak in June, and have eased since then. Loan Depot has reduced staff by 35% this year.  Inventory of available homes is still historically low, but growing.  There are a record number of new housing units under construction (over 1.6 million).  The rate of price rises has begun to ease, but it is still growing.  Housing data lags a bit, so we are not yet seeing the full impact of the rapid rise in interest rates in the reported data.  This trend of slowing sales and growing inventory is likely to increase in the months to come.

BOND YIELD CURVE IS A NEGATIVE INDICATOR:  When you go out on the open market and buy bonds, you can choose to buy longer term bonds or shorter term bonds.  You will look at the interest rate on the bond, and make an offer either at par, at a discount, or at a premium.  The purchase price will determine your yield.  If you purchase it at a discount, your yield will be higher.  When yields on bonds of shorter duration are higher than yields on bonds of longer duration, that indicates investors have a poor outlook on the economy.  When there is a rush in demand for bonds of longer maturities, it causes yields of bonds of shorter maturities to increase.  If they increase higher than the yields for long-term maturities, that is called an “inverted yield curve.”  An inverted yield curve is considered a credible indicator of short term economic pain, generally recession.  Yields are currently higher on U.S. government bonds that mature in a year or two than they are for longer-dated bonds, like the 10-year Treasury note. The yield on the benchmark 10-year U.S. Treasury note edged down to 2.848% on Friday from 2.886% on Thursday. The two-year Treasury note edged up to 3.257%.

MY TRAVEL BUG HAS PASSED TO THE NEXT GENERATION:  For their first anniversary, my daughter Molly and my son-in-law Guido traveled to Portugal and Scotland.  I am very happy that got to explore these two beautiful countries.

Have a great week!

“There isn’t time, so brief is life, for bickerings, apologies, heartburnings, callings to account.  There is only time for loving, and but an instant, so to speak, for that.”  Mark Twain

“Let no debt remain outstanding, except the continuing debt to love one another.”  Romans 13:8

SOURCES: 
IT COULDN’T KEEP GOING UP FOREVER: bls.gov/news.release/cpi.nr0.htm AND wsj.com/articles/u-s-producer-prices-eased-in-july-as-energy-costs-fell
HOT HOUSING MARKET SLOWING UP: calculatedrisk.substack.com/p/current-state-of-the-housing-market-c8e
BOND YIELD CURVE IS A NEGATIVE INDICATOR: wsj.com/articles/global-stocks-markets-dow-update-08-12-2022-11660299658?mod=markets_lead_pos1

(c) 2022 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets. 
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States. 
*Bloomberg Barclays U.S. Aggregate: This is a measure of the U.S. bond markets.