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Better Inflation Report

Better Inflation Report – Week in Review

Better Inflation Report

After the awful CPI report for June, the much-awaited Personal Consumption Expenditures (PCE) Price Index was a better inflation report. The PCE was 6.3 in May, matching the rate for April and lower than March. Hence, inflation is not getting worse. However, after excluding food and energy, the core PCE was 4.7, down four months in a row. The point here is inflation is seemingly moderating, and the effects of June’s 0.75% interest rate hike are not yet in the data.

PCE 2022
Source: US Bureau of Economic Analysis
Better Inflation Report
Better Inflation Report

PCE is Important

The CPI is better known and gets more headline numbers. It is the PCE, though, that is probably more important since it is the US Federal Reserve’s preferred index. The differences between the two indices are technical. But importantly, the PCE is less volatile and weighs rents, vehicles, and airline tickets differently.

That said, the report is not sufficiently good enough that the Fed will stop raising interest rates. Inflation is still high, and Chairman Powell and the Fed will likely increase the Federal Funds rate by another 0.5% to 0.75%. The Fed is signaling that they will raise interest rates above 3%, double the current percentage.

The bottom line is that mortgages, credit card debt, auto loans, etc., will get more expensive. The fear is that the Fed will overshoot, and the US and global economies will have a hard landing.

Prices are Coming Down

Despite media and hedge fund managers claiming the Fed won’t be able to lower inflation, consumers and businesses are starting to get some relief on prices. First, the fear of recession, even if we are not technically in one yet, is influencing demand causing lower prices. Next, China seems to be reducing its lockdowns mitigating supply chain problems. Lastly, the war in Ukraine significantly affected energy, grain, and cooking oil prices, but prices are now declining there.

For example, the AAA reports that the national average for regular is now $4.822 per gallon compared to $5.016 on June 14th. Similarly, the prices of oil, natural gas, heating oil, coal, methanol, ethanol, and propane have declined in the past month. However, the lower costs are not limited to energy. The prices of many metals are down, with copper, iron ore, tin, zinc, nickel, and steel leading the way with 20% declines. In addition, wheat, canola, cotton, palm oil, and potatoes are down double-digits.

Prices are still up for many items since 2021, but if the trend continues, inflation will taper quickly. In addition, declining prices and a moderate PCE are causing US Treasury yields to fall after peaking in mid-June.

Market Still Down

The stock market is still down for the week, but the Utility, Energy, Consumer Defensive, and Healthcare sectors performed well. The Nasdaq and S&P 500 Index is still down.

Markets Overview
Source: Stock Rover*

On the other hand, dividend growth strategies have outperformed the S&P 500 Index and the Nasdaq by wide margins year-to-date (YTD) and in the past one and two years, although they are still down.

Dividend Growth YTD Performance
Source: Stock Rover*

Final Thoughts on Better Inflation Report

Inflation has been rising since 2021, and the highest inflation in four decades has been a reality since early-2022. Demand far outstripped supply, but inflation is seemingly moderating and the most recent PCE report is better. That said, we are still far from the Fed’s 2% target. The effect of the Fed’s recent increases is still filtering through the economy, but prices are trending lower.

In the meantime, down markets are an excellent time to be contrarian. Some quality stocks are at their lowest valuations and highest yields in the past decade. Some inflation resistant stocks also do well in a rising inflation environment. So buy-and-hold investors dividend growth investors can get some deals on quality stocks.


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The Stock of the Week

Today we highlight Intel (INTC), the largest chipmaker in the world by revenue. According to Stock Rover*, the stock price was down about 28% in 2022 and an even more significant decline of 33.4% in the past 1-year. Chip stocks have struggled as electronics demand has declined after a boom during the pandemic. Consumers are no longer buying electronics at the same pace, which is weighing on stock prices.

Intel’s stock price decline has pushed the dividend yield up 4%+, the highest since early 2013. Intel is not generally considered an income stock, but the current dividend yield is solid. In addition, Intel is a Dividend Challenger and, according to Dividend Radar, has eight years of dividend increases. The stock price is below the 50-day and 200-day exponential moving average (EMA). The forward P/E ratio is about 10.5X, below the range in the past ten years. The company is at the lower end of its range for multiple valuation metrics.

Intel Valuation
Source: Stock Rover*

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of June 2022. As a result, the number of companies on the list has risen to 557. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Three new additions indicate companies are experiencing solid profits and cash flow in June.

The new additions were National CineMedia (NCMI), Sissecam Resources LP (SIRE), and Sculptor Capital Management (SCU).

Market Indices


Dow Jones Industrial Averages (DJIA): 31,098 (-1.28%)

NASDAQ: 11,1287 (-4.13%)

S&P 500: 3,825 (-2.21%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 19.33X, and the Schiller P/E Ratio is about 29.55X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are 15.97X and 16.95X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. Earnings multiples more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down about 0.5 points to 26.70. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

10-Year Bond minus 3-Month Bill
Source: NY Fed
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

The US Census Bureau reported that new orders for durable goods increased 0.7% to a seasonally adjusted $267.2 billion in May. The increase follows a downwardly revised +0.4% in April, which was reported initially as a +0.5% reading. A primary contributor to the rise was transportation equipment, up two consecutive months, at +0.8% to $87.6B. In addition, new orders for manufactured durable goods grew 10.9% on a year-over-year basis.

The National Association of Realtors (NAR) Pending Home Sales Index, which tracks the number of homes under contract to be sold, reported up a slight 0.7% in May to 99.9, stemming six consecutive months of declines. Last month, pending home sales dropped by 3.9%. Month over month, pending home sales were mixed with the Northeast (+15.4%) and South (+0.2%) in the positive, and the Midwest (-1,7%) and West (-5.0%) in the negative. Year over year, pending home sales are down in all regions – Northeast (-11.9%), South (-13.8%), Midwest (-8.8%), and West (-19.8%).

Thanks for reading Better Inflation Report – Week in Review!

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