Stock Market This Week – 04/20/24

Why Are We Obsessed with 2% Inflation?

The business media is obsessed with 2% inflation, especially if the value is above it. A week does not go by without commentary about why inflation is not at that percentage or lower. Examining the Personal Consumption Expenditure (PCE) Price Index chart, the value has usually ranged between 0% and 2% since early 1998. Similarly, the United States CPI Core has been between that value since then.

That said, the Fed did not always have this target. The Federal Open Market Committee (FOMC) formally adopted the target in January 2012. However, the Fed resisted making the change for many years. New Zealand was the first country to create a 2% target in 1988, followed by many others. In 2012, The Fed under Ben Bernanke pivoted, and the inflation target was set at 2%. This change was done under political pressure from legislation forcing the Fed to abandon its dual mandate.

Bernanke’s argument later in his memoir was that a 2% target increases business and consumer confidence and provides the bank greater flexibility to address both parts of its dual mandate. The Federal Reserve still makes that argument. The website states, “inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”

However, the approach has a significant flaw. People argue that an employment rate target is needed, too, because the Fed has a dual mandate. A single target for inflation implies the Fed is overly focused on one part of its mission at the expense of employment.

Where does that put the United States today? The economy is performing exceptionally well, with an unemployment rate of 3.9% and a 2.5% inflation rate. Furthermore, the Gross Domestic Product (GDP) is rising, the dollar is strong, and the stock market is bullish. Consequently, do not expect changes to interest rates. They will likely be held constant for a while, again proving most economic and political forecasters wrong, like their predictions about a recession in 2023.

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Stock Market This Week

Stock Market This Week – 04/20/24

Data from Stock Rover* showed a mediocre week for the stock market. All the main indexes were negative except the Dow Jones Industrial Average (DJIA), which eked out a tiny positive return. It was followed by the Russell 2000, the S&P 500 Index, and the Nasdaq Composite.

Three of the 11 sectors had positive returns this week. The Utilities, Consumer Defensive, and Financial Services sectors were top performers. However, the Real Estate, Consumer Cyclical, and Technology sectors were the worst performers. Poor expectations for Apple, Tesla, and semiconductor stocks are hampering technology stocks.

Oil prices fell to ~$82 after a few weeks of gains. The VIX climbed 8%+ to 18.8 on geopolitical risks, which is above its long-term average. Gold ended the week at ~$2,404 per ounce. People gravitate to the metal because of higher energy costs and geopolitical risks.

Despite the recent turmoil, the markets continue to move upward because of the strength of the American economy and the continuation of the bull market. The S&P 500 leads the way, followed by the Nasdaq and the DJIA. The Russell 2000 has a negative return year-to-date. Eight of the 11 sectors have positive returns. The top performers in 2024 have been Energy, Communication Services, and Financials, while the Technology, Consumer Cyclical, and Real Estate sectors are trailing.

The dividend growth investing strategy started the year down. Larger market capitalization stocks are performing better than smaller ones. The table below shows their performance by category. However, dividends and passive income streams continue to grow.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 26.96X, and the Schiller P/E Ratio is about 32.98X. These multiples are based on trailing twelve months (TTM) earnings.

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

Despite the recent correction, bear market, and rebound, the market is still overvalued. Based on historical data, earnings multiples of more than 30X are overvalued.

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