Bloomberg Forecasting Survery
Dr. Craig Callahan, ICON Advisers – Founder & President
For forty years, since the early 1980s, investors have worried about inflation coming back and they’ve been wrong with their fears unfounded the whole time. Now with the CPI up 7% over 12-months, their fears are once again ignited!
ICON has always made a distinction between inflation and a one-time price increase. Inflation is a compounding of price increases and I don’t believe the one-time price increases of 2021 have the ability to compound. That is, I don’t think those who raised prices in 2021 have the ability to raise them again. Here is a survey of economists on Bloomberg showing Y-O-Y Consumer Price Index (CPI) forecasts quarterly through the second quarter of 2023. Notice it is diminishing.
I agree with the survey and think it is sensible.
Unlike the economists, stock investors believe inflation is persistent and believe the Fed will have to tighten so much that the result would send the economy into recession – I don’t.
What if T-Bills were at 1.0% and the 10 year Treasury was at 2.0%? Would the economy come to a halt?
What if T-Bills were 1.50% and the 10 year was at 2.50%, and let’s say Money Supply (M1) is growing at its historic average of about 6% per year instead of the 16% we saw in 2021? By historic standards such a setting is not very scary. Businesses can do just fine in that setting.
Recall our ICON Value and Sentiment graphic. We don’t need the economic setting to be perfect for the market to move higher. We just need it to be better than is currently priced in. Currently, investors are pricing in strong inflation and severe Fed tightening.
If we get anything better than that scenario, stocks can move higher.
For more in depth discussions on Inflation and the Federal Reserve, you can read Dr. Callahan’s book titled “Unloved Bull Markets: Getting Rich the Easy Way by Riding Bull Markets.”
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ICON’s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates and bond yields, in an effort to determine whether securities are over- or underpriced relative to ICON’s estimates of their intrinsic value. ICON’s value approach involves forward-looking statements and assumptions based on judgments and projections that are neither predictive nor guarantees of future results. Value readings are contingent on several variables including, without limitation, earnings, growth estimates, interest rates and overall market conditions. Although valuation readings serve as guidelines for our investment decisions, we retain the discretion to buy and sell securities that fall beyond these guidelines as needed. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies.
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A Treasury bill (T-Bill) is a short-term debt obligation backed by the Treasury Dept. of the U.S. government with a maturity of less than one year.
The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The CPIs are based on prices of food, clothing, shelter, fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living.
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