December CPI report, plus active management, a golden cross, and long-term results
The Sandbox Daily (1.12.2023)
Welcome, Sandbox friends.
Today’s Daily discusses the Consumer Price Index (CPI) report from December, bear markets create opportunities, a golden cross from the equal-weighted S&P 500, and the price of long-term returns.
Let’s dig in.
Markets in review
EQUITIES: Russell 2000 +1.74% | Dow +0.64% | Nasdaq 100 +0.50% | S&P 500 +0.34%
FIXED INCOME: Barclays Agg Bond +0.72% | High Yield +0.56% | 2yr UST 4.136% | 10yr UST 3.442%
COMMODITIES: Brent Crude +1.50% to $83.91/barrel. Gold +1.23% to $1,902.0/oz.
BITCOIN: +7.09% to $18,813
US DOLLAR INDEX: -0.93% to 102.225
CBOE EQUITY PUT/CALL RATIO: 0.70
VIX: -10.72% to 18.83
CPI inflation cooling
We received our final reading on Consumer Price Index (CPI) inflation for 2022 today. Inflation took another important downward step in December – affirming the market’s assessment that it has peaked for the cycle – and putting the Federal Reserve on track to again slow the pace of interest-rate hikes.
The Consumer Price Index (CPI) edged down -0.1% MoM in December – the first negative print since July 2022 – and matched the consensus expectation of -0.1%. Core CPI, which excludes the more volatile food and energy components, rose +0.3% MoM and also matched the consensus expectation of +0.3%.
On a YoY basis, the headline CPI print eased to +6.5% from +7.1% in the prior month; this is the 6th consecutive monthly decline, the lowest headline level since October 2021, and a reading firmly off the peak rate of +9.1% back in June. Meanwhile, Core CPI inflation came down to +5.7% from a cycle peak of +6.7% in September.
Here is the sequential year-over-year headline data reported each month that clearly shows a reversal in the trend off the peak +9.06% in June. As a reminder, inflation pressures first brought the headline CPI number above 2%, the Fed’s mandate and desired long-term trend target, back in March 2021.
Shelter CPI, the largest component of the basket (33%), moved up to +7.5%, the highest rate of housing inflation since 1982. This category continues to be a hot-button topic and subject to intense debate as to how it influences, and perhaps distorts, the inflation data being reported.
Why is Shelter CPI still moving higher while actual rents (aka spot prices in the market today) are moving lower? Shelter CPI is a lagging indicator – due to how the survey data is collected – that had significantly understated actual housing inflation over the last 2 years. Here is Joey Politano to explain:
The Fed is expected to raise interest rates further before pausing to assess how the most aggressive tightening cycle in decades is impacting the economy. Policymakers have emphasized the need to hold rates at an elevated level for quite some time and cautioned against underestimating their will to do so. Investors are still betting the central bank will cut rates by year end, despite officials saying otherwise. Resilient consumer demand, particularly for services, paired with a tight labor market threaten to keep upward pressure on prices.
Source: U.S. Bureau of Labor Statistics, LPL Research, Calculated Risk, Ned Davis Research, Charlie Bilello, Apricitas Economics, YCharts
Bear markets create more active management opportunities
We know market timing is incredibly challenging. The empirical data supports this narrative. As the saying goes: “time in the market is more important than timing the market.” This refers to the simple investment philosophy that focuses on long-term goals and staying invested, rather than trying to pick short-term bottoms and tops that inevitably weigh on investment results over the long run.
But, choppy price action and bear markets present greater dispersion of returns and more opportunity. Early data shows 2022 could be a banner year for active management, which has come under pressure for years for underperforming their benchmarks and ETF-equivalent passive strategies.
Source: Strategas
A golden cross promises more upside
A golden cross occurs when a shorter moving average crosses above a longer moving average. Conversely, a death cross occurs when a shorter moving average falls below a longer moving average. The graph below shows the equal-weighted S&P 500 just experienced a golden cross with the key 50 and 200-day moving averages crossing. The equal-weighted index is not a primary, well-followed index. However, its recent golden cross is a positive sign that the broader market's breadth is improving. In contrast, the 200- day moving average on the S&P 500 is still 100 points above its 50-day moving average. The S&P 500 must continue to rally for a while to see a golden cross.
Since 1970, the S&P 500 has been returning about +15% gains on average in less than a year after a golden cross’ occurrence. However, golden crosses can result in a false breakout and quickly turn into a death cross. Therefore, one should consider the golden cross pattern but use it alongside other technical indicators for the best results. Additionally, the golden cross may indeed portend a good rally in the coming month or two, but as we saw on three occasions in 2022, double-digit rallies were followed by lower lows.
Source: Lance Roberts
One simple graphic
Long-term returns are only achieved after overcoming these high hurdles of short-term friction.
Source: Brian Feroldi
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.