Friday Still-Good Charts

Newton's first law of motion states that an object at rest stays at rest and an object in motion stays in motion (with the same speed, in the same direction) unless acted upon by “some external cause.” 

That rule extends beyond physics — things tend to stay the same unless something disrupts them — but in markets, we’re always looking for that external cause that’s going to disrupt things (for the worse) because that’s what gets clicks on websites and generates trading commissions on trading floors.

Most of it is noise — the constant “multiplicity and confusion” of financial markets.

We cannot, of course, tune it out entirely — as newsletter readers, we have to be good Bayesians by 1) adjusting our beliefs for new information and 2) thinking in probabilities.

But we do not have to adjust our beliefs for every piece of new information and we do have to assign some probability that nothing much will change.

The market may be doing too much of the former and not enough of the latter: Bob Elliott interprets the market in Fed funds futures as putting just a 10% chance that things will stay about the same in markets and the US economy. 

10% is probably not enough!

Per this week’s data, the US economy continues to chug along, unemployment is both low and stable, wage growth is good, stocks are very good, credit spreads are tight, inflation is falling and interest rates are poised to follow.

This is all great news, and there’s no particular reason to think that the news should change.

In fact, it might get even better.

The market is pricing in Fed rate cuts as early as March, with bigger cuts possible in May or June.

But rate cuts are looking likely: Not because things are bad, as is normally the case, but because things (like deflation) are still looking good.

That’s admittedly an unusual situation, so it’s understandable that markets would find it disorienting — and therein, perhaps, lies opportunity.

The biggest opportunity in markets is when things go from bad to less bad.

That is not where we are now.

But because we’re always being told that things are about to get worse, going from good to still good can be an opportunity too.

That might be where we are now and, if so, to make money, we’d only need Newton’s first law of motion to hold.

Let’s check the charts to see if we’re still on course.

The last mile:

As measured by headline CPI (“all items,” above), deflation has stalled, with prices rising faster in December than they did in June. This has raised fears that we may be stuck in the “last mile” with the Fed’s 2% target forever out of reach. Core CPI, however, is not stuck, falling below 4% for the first time in nearly three years.

Better yet:

Excluding its lagging shelter component, CPI (at 1.8% in December) has been below the Fed’s totemic 2% target since May.

The news that’s not fit to print:

Initial jobless claims continue to be rock bottom. Headlines highlighting layoffs, like those at Alphabet this week, seem to tell a different story, but we should be reminded that, even in the best of times, there are always layoffs. @EconBerger notes that there are currently about 1.6 million layoffs in the US every month — plenty of fodder for headline writers. But what doesn’t make headlines is that 1.6 million per month is also one of the lowest levels of layoffs on record.

Make your own job:

USA residents filed a record 5.4 million applications for the formation of new businesses in 2023, 1.8 million of which are expected to hire employees. The post-pandemic startup surge shows no signs of slowing down (which should probably be headline news).

Not likely to change:

One thing we can all agree on is that the US government is unlikely to suddenly stop spending like a drunken sailor — and that, per 3Fourteen Research, might mean we should all agree that recession is similarly unlikely.

Still magnificent:

Perhaps the one thing that finance people have even more agreed on is that the outperformance of mega-cap tech stocks could not possibly keep going on. And yet, it’s still going on: The Magnificent Seven is back to all-time highs.

The noise is getting louder:

The FT’s John Burn-Murdoch writes that the West is talking itself into decline: “Over recent decades western culture has been moving away from values of progress and betterment. In their place, a culture of caution, worry and risk-aversion is on the rise.”

That, to me, sounds a lot like what we keep doing to ourselves in markets.

Let’s not — let’s stay in motion, instead.

Have an optimistic weekend, Newtonian readers.

― Byron Gilliam

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