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inflation tapering

Inflation is Tapering

Inflation is tapering. The United States mid-term election is over, and we can focus on the end-of-the-year holidays now. In the U.S. Thanksgiving is this week, and Christmas is in a month. But while your attention was focused on the election, two interesting reports were announced suggesting high inflation was tapering. 

The U.S. Federal Reserve is determined to lower inflation to around 2%. Many on Wall Street feel that they may not succeed. But that data shows the trends are in the right direction. In the meantime, the stock market has seemingly bottomed on better inflation and growth numbers. Moreover, unemployment is still low and jobs plentiful, although the tech industry is accelerating layoffs. Companies like Twitter and Facebook are laying off workers in droves.

The October Consumer Price Index (CPI) came in at 7.7%, below expectations. Inflation seemingly peaked in June 2022 and has been on a downward trend since then. Food prices are growing slower, and used car prices have dropped sharply. Other categories are showing slower price increases too.

CPI 12-month-percentage-chan
Source: U.S. Bureau of Labor Statistics

Furthermore, as measured by the Producer Price Index (PPI), wholesale prices rose 0.2% in October, less than expected. Importantly, services showed a decline, the first in almost two years.

The two reports are a positive sign for stock markets, but that said, we are still far from low inflation.

inflation tapering
Inflation is Tapering

Stock Market Performance Overview

11/19/22

The stock market had a negative week, but some sectors performed well. The Dow Jones Industrial Average (DJIA) outperformed other indices continuing the trends for the year. As shown by data from Stock Rover*, the Russell 2000 and Nasdaq were down the most this week. Tech investors continue to suffer the brunt of the bear market.

Only the Consumer Defensive, Utilities, and Healthcare sectors had positive weeks. Energy, which was a leader for much of 2022, declined because oil prices have plunged, dimming the prospects of oil and energy companies for Q4 2022 and 2023.

Weekly Stock Market Performance
Source: Stock Rover*

For the year, the Dow 30 is doing the best, and the S&P 500 Index is again in a correction, while the Nasdaq is still in a bear market.

YTD Stock Market Performance
Source: Stock Rover*

The dividend growth investing strategy has performed relatively well, outperforming the S&P 500 Index and Nasdaq in all instances. The table below shows their performance by category. Significantly, the Dividend Champions are almost even for the year.

CategoryYTD Return (%)
Dividend Kings(-3.8%)
Dividend Aristocrats(-3.9%)
Dividend Champions(-0.2%)
Dividend Contenders(-13.8%)
Dividend Challengers(-8.0%)
Source: Stock Rover*

The Bottom Line on Inflation is Tapering

For now, inflation is undoubtedly tapering. Demand is down, and supply is recovering. A simple trip to the grocery store illustrates that shelves are again full. It is likely inflation numbers will be lower in November and December too. West Texas Intermediate (WTI) crude oil prices are below $80 per barrel on much higher supply and China cutting purchases. The bottom line is that inflation is tapering. Moreover, I will make a contrarian call and state it will go lower, which is good for stock markets.


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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 October 2022. As a result, the number of companies on the list has risen to 576. 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 October.

The new additions were Presidio Property Trust (SQFT), The Marketing Alliance (MAAL), and Chimera Investment (CIM).

Market Valuation

The S&P 500 Index is trading at a price-to-earnings ratio of 20.62X, and the Schiller P/E Ratio is about 29.06X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. However, we are nearing the long-term averages. Earnings multiples of 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 1.5 points at 23.12. 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.

CBOE VIX
Source: Google

Yield Curve

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

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

Economic News

The Labor Department reported that the producer price index for final demand increased by a seasonally adjusted 0.2% in October. September was revised lower, showing the PPI rising 0.2% instead of 0.4%, and unchanged from August. On an unadjusted basis, the PPI, a measure of prices that U.S. businesses get for the goods and services they produce, is up 8.0% yearly, down from September’s 8.4% reading. The PPI shows some signs of moderation after peaking at (+11.7%) in March 2022. The index for final demand goods rose (+0.6%), reflecting increases in food (+0.5%) and energy (+2.7%). The index for final demand services declined for the first time since November 2020. It decreased (-0.1%), and contributing factors were decreases in trade (-0.5%) and transportation and warehousing costs (-0.2%). Another contributing factor to the decline was a drop in the fuel and lubricant retailing index (-0.7).

The Commerce Department reported that advance U.S. retail and food services sales were up 1.3% to $694.5B in October, up from a flat reading in September to a 0.4% increase in August. Retail sales are up 8.3% year over year. Increases in sales were reported at gas stations (+4.1%), grocery stores (+1.4%), auto dealers (+1.3%), internet retail (+1.2%), furniture (+1.1%), home and garden (+1.1%), and personal care (+0.5%). Restaurants, the only services category, increased (+1.6%). Offsetting the increases were decreases in electronics and appliances (-0.3%), sporting goods (-0.3%), and general merchandise (-0.2%).

The U.S. Energy Information Administration reported U.S. commercial crude oil stockpiles decreased by 5.4M barrelsto 435.4M (4% below the five-year average) on November 11th. Crude oil refinery inputs averaged 16.2M barrels per day, an increase of 63K per day compared to the previous week’s average. Gasoline inventories increased by 2.2M barrels (5% below the five-year average), and distillate inventories increased by 1.1M barrels (15% below the five-year average). Refineries operated at 92.9% of their operable capacity. Gasoline production increased, averaging 9.8M barrels per day.

Thanks for reading Is Inflation Tapering – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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