Investment Read Time: 4 min

Five for Friday - May 17, 2024

Inflation, Housing Costs, Consumer Staples, Trade Wars, and Losing a Legend

1. Inflation

Inflation data out this week showed a deceleration in April CPI, a welcome piece of news for investors. Markets liked the data for a few reasons. First, a big contributor to the headline jump (+3.4% year-over-year) was from gasoline prices, which the Fed tends to assign lower importance to in their decision-making (too volatile and out of their control) and gas futures have already come down quite a bit in recent weeks. Second, Core CPI, which excludes food and energy, hit 3.6%, its lowest since April 2021. And then finally, critically, markets avoided the tail risk that a hotter-than-feared report would bring. This data may not change the Fed’s calculus over the next year, but it did—at least for the moment—alleviate fears that a meaningful acceleration in inflation would put rate hikes back on the table. In the short-term, markets move on beating or missing expectations, so avoiding a big miss was as important to the market as the actual data—for now.

2. Shelter

While the recent bout of inflation has many roots, a lingering issue is shelter costs. Those costs have come down (April saw shelter CPI at its lowest in two years) but there is a limit to how far prices can fall with so little housing supply on the market. Research from Moody’s shows a tight correlation between home prices and the “month’s supply inventory,” or, how many months it would take for the current inventory of homes on the market to sell at the current sales pace. As of March, there was still less than 4 months’ inventory, which historically implies that housing prices will rise over the coming year. So, on the inflation side, we have a supply problem that can’t be alleviated easily in a high interest rate environment. On the other hand, this reduces the odds that markets and consumer finances will be seized up by a crash in home prices. Plus, home equity is a massive (and largely untapped) asset for the U.S. consumer.

3. Staples

A stunner of a stat from our partners at Strategas: 10 years ago, every company in the Consumer Staples sector yielded more income than a 3-month Treasury bill. Today, just 8% of those companies do. The rapid rise in interest rates is a headwind to sectors like Consumer Staples that are lower growth and rely on dividend yield to attract investors. Staples has been the worst-performing sector over the last year as sticky inflation caused the Fed to hold off on rate cuts. Yield-proxy sectors still have defensive properties that make them attractive as recession protection, but they remain structurally challenged in an environment of higher inflation, higher rates, and solid economic growth.

4. Trade

This week, President Biden announced a plan to increase tariffs on Chinese goods over the coming years. The move to implement a 100% tariff on Chinese electric vehicles grabbed headlines, but large increases in section 301 tariffs on semiconductors, solar cells, and metals are just as—if not more—meaningful. The EV tariff seems largely preemptive, as Chinese penetration into the U.S. is very low today. But the administration believes that heavily subsidized Chinese manufacturers will soon be able to cripple Western manufacturers by dumping excess vehicles into U.S. markets on the cheap. Chinese EV penetration in Europe has gone from 2% in 2021 to ~10% in 2023, according to Evercore ISI. This move underscores a few things: 1) getting tough on China via trade policy is bipartisan…deglobalization is afoot; and 2) tariffs will likely put upward pressure on prices (whether directly or by requiring manufacturers to source from a more expensive market). This is likely just the beginning, as the U.S. is also looking at deeper sanctions based on Chinese “connected car” data security worries and the implications of China building out capacity in places like Mexico to circumvent U.S. tariffs and reap the benefits of the U.S.-Mexico-Canada trade pact.

5. Legend

The world lost an investing titan last week when Renaissance Technologies founder, mathematician, and quantitative investing pioneer Jim Simons passed away at 86. As The Economist noted this week, Simons led his firm to an annualized return of 66% from 1988 to 2018—an unheard of run. Simons also gave away ~$6 billion across his life. Though he is considered to be one of the greatest investors ever, he remained largely unknown to the general public. This eulogy (by an author who wrote an excellent book on him) is worth the time.


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