Don't Stop Believin'

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Inflation was all the talk this week and so far, the markets seem to have embraced the news well. While PPI was higher than expected, while CPI was lower than expected. So far, the Fed has been neutral to dovish on the inflation data. The 1981 song, "Don't Stop Believin" serves as this week's inspiration. This song is one of the most enduring hits of the band Journey, and that's saying something as the band achieved 25 gold and platinum albums and 19 top-40 singles. Here's some trivia about the song:

Normally, the musings involves a song or movie pre-internet era, but today's inspiration is an exception. While the hit song sold more than 12 million copies worldwide in the '80s, it has also become the best selling digital track originally recorded in the twentieth century with more than 7 million downloads.
The idea for the song came from keyboardist Jonathan Cain. He was about to give up on his music career in the late 70s when his dad told him, "Don't stop believing" during a phone conversation. Lead vocalist Steve Perry and guitarist Neal Schon helped Cain finish out the lyrics and guitar elements.
The song is a homage to the Sunset Boulevard in Beverly Hills, CA. Cain was trying to capture the idea of dreamers trying to make their careers happen in music, moves, etc. in Hollywood, i.e., "Strangers waiting, up and down the boulevard."
The song re-emerged in the mid-2000s with the Broadway hit (and subsequent movie) "Rock of Ages." If you're a regular reader of this blog, you know the inner 80s child in me is a fan of that movie/play!

"Strangers waiting
Up and down the boulevard
Their shadows searching in the night
Streetlights, people
Living just to find emotion
Hiding somewhere in the night

Don't stop believin'
Hold on to that feelin'
Streetlights, people"

Here's what we've seen so far this week...

Don't Stop Believing. Earlier in the week, fears arose that inflation was heating up again as the Producer Price Index came in hotter than expected. However, later in the week, the Consumer Price Index was lower than what was expected, and markets have taken the news in stride. Several Fed speakers voiced concern over inflation this week. All of them stated that they would like to see more evidence that inflation is headed lower. There was good news and bad news in Tuesday's release of PPI. While the number was +0.5% for April, versus +0.3% expected, March's initial reading of +0.2% was revised lower to -0.1%. So, it was good that March was lower than originally thought, but that made April's increase all the more glaring. It put The Fed's Atlanta President Bostic's comments into light when he said, "There is still a lot of pricing pressure in the economy." The April reading on CPI helped settle markets a little, which showed that consumers were paying less overall (+0.3% vs +0.4) than originally expected. When we look at the year-over-year change in CPI, the glaring outlier is auto insurance, with a 22% increase versus this time last year. It would appear that COVID is still rearing its ugly head. According to some, the auto industry has suffered losses due to the cost of labor and the increase in costs of auto parts. The supply chain disruptions from COVID, vehicles are more expensive to repair and costlier to replace. On top of that, there is a shortage of qualified mechanics. The number of post-secondary programs being completed in the automotive sectors has plummeted 20% since 2020. Lastly, there was a sharp increase in 2021 in the number of fatal car accidents, causing insurance companies to try to recoup some of those losses. The good news is that the timeline for future rate cuts by the Fed looks to be back on schedule, in the eyes of investors. According to the Fed Futures, September has the highest odds (50%) of the first rate cut - up from 46% one month ago. In addition, 70 out of 108 economists agree that the first rate cut will happen in September. That would be good news for the rest of 2024 as even the Cleveland Fed's Mester stated, "I welcome the CPI data as a sign of cooling inflation."

Living Just To Find Emotion. There are some cracks in the economic backdrop, but that's not a reason to abandon equities just yet. As stand alone data points, they could be of concern, but when taken with the whole, we're not in worry mode just yet. Retail Sales for April disappointed this week, coming in flat versus a +0.4% increase. In addition, March's +0.7% reading was revised lower to +0.6%. This stands in stark contrast to the Redbook Sales data which has been steadily rising this year. Why the disconnect? Well, the government's data on Retail Sales differs from Redbook Sales in that the Retail Sales report incorporates more data on auto sales and gasoline sales, than does the Redbook data, which is general merchandize and apparel. Do, for example, in a city like New York, where there is fewer automobiles being purchased and fewer gas sales relative to the number of people living in the city who still purchase merchandise on a daily basis, the Redbook data would be more telling than the Retail Sales data. One note of anecdotal concern is the fact that McDonalds recently announced they are bringing back the $5 meal deal to help attract lower-income consumers who may be hampered by inflation and interest rates. In addition, on a recent earnings call, the CEO of Walmart indicated that consumers are "stretched" and are pulling back spending on "nonessentials." Another potential crack in the armor of the economy is the delinquency rate of consumer debt. While delinquency rates have risen, with the exception of credit cards, they are not yet at 2007 levels. What's more, if we compared current deposit demand levels to those of 2007, we see a different picture. Demand Deposits are near all-time highs. There was not a spike in demand deposits until late 2008, when the recession was already over. The reality is that while low-income consumers are stretched, it's not affecting middle to high income consumers yet. In fact, the delinquencies in credit cards may just be consumers selecting delinquencies. Time will tell. The reality is, just because we have been reaching all-time highs in multiple equity indices, that doesn't mean it's time to "sell in may and go away." According to recent work done by Seth Golden (@SethCL), investing in the S&P 500 Index at all-time highs may affect your returns in the short-term, but really ends up being a positive when holding periods are longer. So, for the time being, sit back and relax and let your financial plan do the work for you. If you have a good financial advisor, let them worry about what's going to happen in the months to come in the markets.

An iconic song for the ages...

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