By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
Sticky inflation...what sticky inflation? That is the question of the week as both inflation metrics - CPI & PPI - released this week were below expectations for the month of October and lower year-over-year. We've also seen a resurgence of asset classes all but forgotten this year. It reminds me of the inspiration for this week's musings, the 1992 film "My Cousin Vinny." The movie was a surprise hit. Like last week, this movie doesn't need much setup, so let's get to the trivia:
- Like last week's musings, this film was a success at the box office. The budget of only $10 million was more than overshadowed by the $64,088,552 it earned.
- While Joe Pesci (Vinny) had been acting for nearly two decades before this film, this was Marisa Tomei's (Ms. Vito) first major role. Tomei had a few minor roles in film, but did have a fairly recurring spot on the TV show "A Different World." Despite her youth, she actually won an Oscar for "Best Supporting Actress" by staring in this film. It would turn out to be her only Oscar. Coincidentally, Pesci won an Oscar 2 years earlier for "Goodfellas." In 2022, Tomei temporarily lost the Oscar she won when she moved into a new house.
- The infamous scene where Judge Haller misunderstands Vinny's accent regarding the "two youts" was born from an actual conversation between Pesci and the director, Jonathan Lynn. Lynn was British and had a hard time understanding Pesci, so he put the bit in the movie.
- Vinny has Judge Haller chasing court records for his previous appearances in court up in New York. The disagreement centers around a fictitious name "Jerry Callo/Gallo." Jerry Callo was an actual practicing attorney from whom the name was borrowed in the film.
- A little bit of irony among the cast is that while Fred Gwynne's character (Judge Haller) gives Joe Pesci's character (Vinny) grief for his New York accent, it is actually Gwynne who is a native New Yorker while Pesci is not.
Here's what we've seen so far this week...
How Many Fingers Am I Holding Up? It's not hard to see trends in the market and the economy if you just take a moment to look at all of the data. For months we've heard nothing from the financial media and the Fed about "sticky" inflation. It reminds me of the film when Vinny starts to look deeper at the facts of the case and realizes there are holes in the prosecution's case. During cross examination of one of the so-called "eye witnesses," Vinny walks across the courtroom to the approximate half the distance the witness stated she saw the defendants enter the store with her thick prescription glasses and asks the witness, "How many fingers am I holding up now?" To which the witness gives the incorrect number. Vinny asks, "What do you think now, dear?" The witness responds, "Thinkin' of gettin' thicker glasses." Sometimes we all need to take a second look or improve our prescription when examining economic data. We've made note of the considerable decline in gas, used cars, and some commodities. But now, we're on the cusp of consumers spending for the holidays. For example, those who will be travelling for the holidays will see lower airfares - down 0.9% in October and down 13.2% year-over-year. Those who chose to drive to their holiday destination will feel a break in costs. Gas was down -5% in October and is down 5.3% (YoY). Meats, poultry, fish, & eggs were up slightly in October (+0.4%), but are flat year-over-year. When we look at other key commodities that will no doubt be used for holiday dinners and get togethers, we see good trends. You will see a lot of press lately about the price of Orange Juice, which has moved higher. However, that one commodity alone is being affected by crops were damaged earlier this year and extreme weather in Florida has forced the U.S. to import more oranges. But, when we look at some of the more common commodities that are likely to be used over the coming weeks for Thanksgiving dinner and holiday meals, most are down. Corn and Wheat are down more than 29% year-over-year. Soybeans and Rice are lower, while Milk has also receded from highs made last year. All-in-all, consumers are likely to get some breaks in holiday spending, which may aid in spending on discretionary items. In fact, according to Deloitte, holiday sales are expected to increase between 3.5% and 4.6% in 2023. A consumer survey conducted by the International Council of Shopping Centers shows that 80% of consumers expect to spend the same ore slightly more than during the 2022 holiday season. That's an uptick from the 73% revealed in the 2022 survey. Before we fret about "sticky" inflation and how it will affect the consumer, maybe we need Vinny to quiz us on how many fingers he's holding up?
Return Of The Forgotten Asset Classes? With the impressive out-performance of the Magnificent 7 (Apple, Microsoft, Amazon, Meta, Google, Tesla, & NVIDIA), investors have largely forgotten about other historically strong performers - Mid Caps, Small Caps, & International Equity. Are these asset classes starting to emerge? It reminds me of the scene early in the film where Vinny and Mona Lisa arrive in Alabama to help Vinny's young cousin and his friend. The following exchange occurs after emerging from their convertible and encounter a local and have an unusual conversation with him:
Mona Lisa Vito: [Vinny looks at her funny] What?
Vinny Gambini: Nothing. You stick out like a sore thumb around here.
Mona Lisa Vito: Me? What about you?
Vinny Gambini: I fit in better than you. At least I'm wearing cowboy boots.
Mona Lisa Vito: Oh yeah, you blend.
That has been the case with the forgotten asset classes in 2023. In the first 6 months of the year, Mid Caps, Small Caps, & International Equities all under-performed the S&P 500 Index by at least 750 basis points. Yet, since the market reached a 6-month bottom on October 27th, Small Caps have out-performed the S&P 500 Index with Mid Caps almost even with the broad index and International Equities just barely behind the S&P. This bodes well for a market that might be on the verge of broadening and seeing somewhat of a rotation away from the Magnificent 7. There is likely more solid performance in broad equities to come. Hedge Fund and CTA positioning in U.S. Equities just reached the highest amount of purchases ($70 billion) in a 10-day period since the data started being tracked (2014). In previous posts, we've shown how the seasonality favors equities in the last two months of the year. So far, we're not seeing anything to derail that historical trend. If retail sales comes in strong due to holiday spending, it's reasonable to expect a nice end to a strange and difficult year for investors. Portfolio diversification, a time-tested strategy, may be due to come back into vogue in 2024.
Not two Youts, but two Youths....
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