NEWS
What Happened Last Week
Jobless claims hit a 14-month high at 258,000, despite high job growth.
Inflation, as measured by the Consumer Price Index (CPI), came in at 0.2% in September (2.4% annualized). This was higher than the estimated 2.3% annualized inflation rate.
The Producer Price Index (PPI), which measures inflation before it reaches consumers, also caused estimates for inflation numbers to be slightly hotter than previously estimated.
The number of individual stocks outperforming the S&P 500 has risen from around 20% to 70% in the last three months. This indicates breadth in the stock market. It’s no longer just a few companies driving the overall return.
The S&P 500 dividend yield is the lowest that it’s been since late 2000. This is measured by taking the annual dividend payment and dividing by the stock price.
Investor optimism remains elevated according to the AAII Investor Sentiment Survey and Fear and Greed Index.
How I See It
The economy has a lot going for it.
The worries over inflation remain focused on tiny details which have no predictive power for where markets go over the next twelve months.
The stock market is showing breadth, meaning it’s not just being driven by a few big companies. There is a fundamental strength to suggest strong economic growth ahead. And that is normal to see as bull markets mature.
But there are some headwinds. This good news is widespread information, and it has built excitement among investors.
Suddenly it’s cool to be an investor. Not so much back in mid-2022.
That’s why we’re teetering on “extreme greed” in the Fear and Greed Index.
And it’s also why prices have been driven up high enough to create a very low dividend yield environment.
Here’s an important thing to remember.
Unless there is undeniably careless oversight of underlying weaknesses in the economy, the odds are against us to bet on falling markets. Assuming you’re invested at your proper long-term risk levels, when in doubt, stay invested. Even if that means riding through large market swings.
Uncertainty will be falling as a winner emerges from the Presidential elections next month. This alone is likely to create some strength for stocks in the short-term.
Though prices are high, along with optimism, remember that this can go on for years before a bear market comes around. In other words, there is no immediate predictive power in P/E ratios and dividend yields.
And remember that the Fed has a good deal of monetary policy power at its disposal.
Some of the most powerful stock returns tend to come at the beginning and the end of bull markets. And it’s far more important to capture all of that upside than it is to miss out on the downside.