No surprise in CPI paves the way for a rate cut

CPI inflation comes in as expected…near record number of US households own stocks…reasons to own gold today…bitcoin price chart is worrying

The headlines keep coming fast and furious.

Today, let’s take another tour of the biggest stories in the world of investing.

This morning the consumer price index (CPI) brought no problems

The month-on-month figure rose 0.2%, as forecast. The annual figure was 2.9%, which is the lowest reading since March 2021.

Core CPI, which strips out volatile food and energy prices, posted a 0.2 percent monthly increase and a 3.2 percent annual rate, both meeting expectations.

While this morning’s data provided no softer surprises than expected, there were no roadblocks for the Fed as it considers a rate cut next month.

As I detailed here, in Digestthe market is 100% sure that a discount is coming; the only question is whether it will be 25 or 50 basis points.

While yesterday’s cooler-than-expected PPI report shifted the odds slightly in favor of 50 basis points, today’s “as-expected” CPI report shifted the odds back to just a quarter cut point.

Here’s CME Group’s latest FedWatch tool, which shows a 56.5% probability of a 25 basis point cut in September.

Regardless of the size of the cut ahead, the prospect of the start of a rate-cutting cycle has sent Wall Street back into party mode over the past week and a half…

And it seems that a near-record number of Americans are attending this party

Let’s go to Visual capital:

Today, the share of Americans’ financial assets invested in public stocks is approaching record levels, just off the peak seen in 2021.

Investor confidence, a strong U.S. economy and historical outperformance over the past few decades are driving equity allocations. In 2024, 41.6% of US household financial assets are tied to the stock market.\

For additional context, below, we look at data from The visual capitalist showing the stock holdings of US households at various times over the past few decades. All data below is from January 1 of the respective years.

2024 – 41.6%

2020 – 30.5%

2010 – 26.3%

2000 – 38.4%

1990 – 14.5%

1980 – 10.9%

1970 – 23.8%

1960 – 23.9%

Note the 2000 reading. The figure, taken as of January 1 of that year, came just two months before the bubble burst on March 10, 2000. And here we are today at an even higher percentage of household ownership.

That said, the valuations of many of the darlings of the Dot Com market were much higher than what we find today, even for our top AI stocks.

To illustrate, below is a blast from the past for you. We look at the P/E ratios of some of the top Dot Com people, taken as of March 22, 2000.

I remember getting burned by the JDS Uniphase crash when it crashed from that 668 P/E.

By comparison, Nvidia, the poster child for AI stocks today, is trading at a P/E ratio of 68.

Price? Sure. But clearly, nowhere near the levels seen in the stock bubble of 2000.

But the difference in valuation doesn’t mean we can dismiss the importance of this record allocation to the stock market.

To explain why, let’s go back to July 17th Digesthighlighting a quote from Stéphane Renevier from Finalize:

Lots of things can influence stock returns in the short term: interest rates, economic data, geopolitical stuff, investor sentiment — even the weather.

But for long-term returns, one factor rules them all: the proportion of assets investors park in stocks.

This ratio has proven to be the most reliable predictor of stock returns over a ten-year horizon, outperforming even hard factors such as valuations.

It is said that when investors go big on stocks, their long-term returns tend to be below average…

Investors’ overallocation to stocks was the most accurate warning sign of the lost decades.

Renevier went on to highlight the chart below, which shows how a surge in equity allocations (blue line, shaded red circles) preceded both the lost decade of the 1970s and the early 2000s.

We are at another “red circle” moment today. While we just looked at the allocation of US households to stocks, if we switch to Americans in general, the allocation rises to 62%. It is a maximum of 20 years.

By the way, this allocation principle also works the other way around.

When investors want nothing to do with the stock, that’s usually the best time to buy the surrender fist. On that note, guess…

1982 – at a value of only 9.4%.

And if you had gone all in on stocks in 1982, you would have made your money in an 18-year market.

Overall, bullish momentum is here, so keep riding it as long as your stop-losses allow. But don’t ignore the historical significance of what this level of stock ownership suggests for future market returns.

Meanwhile, stocks aren’t the only asset having a party today

Gold traded just below its all-time high set in mid-July, looking poised to set a new record high.

And while Wall Street licks its chops for gains from the Fed’s rate cuts, don’t forget what a cut could mean for gold.

Here’s Matt Weller, head of market research at City Index, with some background:

Over the past 40+ years of relaxation cycles, here are some conclusions we can draw from this analysis:

On average, gold has… increased by 11% in the following year.

Gold rose a year after the Fed’s first rate cut of a new cycle, six of the last seven times.

It is not just the prospect of rate cuts that will keep a firm supply under the price of gold. The potential for full-blown regional war in the Middle East is another (unfortunate) tailwind.

Behold Reuters from yesterday:

Only a ceasefire in Gaza resulting from talks hoped for this week would prevent Iran from retaliating directly against Israel for the assassination of Hamas leader Ismail Haniyeh on its soil, three senior Iranian officials said.

Iran has vowed a severe response to Haniyeh’s killing, which happened while he was visiting Tehran late last month and which it blamed on Israel. Israel has not confirmed or denied its involvement. The US Navy has deployed warships and a submarine to the Middle East to bolster Israeli defenses…

Iran’s Foreign Ministry and Revolutionary Guard Corps did not immediately respond to questions for this story. The Israeli Prime Minister’s Office and the US State Department did not respond to inquiries.

“Something could happen as soon as this week by Iran and its proxies … This is an assessment by the US as well as an assessment by Israel,” White House spokesman John Kirby told reporters on Monday .

Bottom line: There are simply too many tailwinds to ignore gold today. Make sure your portfolio has some exposure.

Have we finally reached a “this time is different” moment for bitcoin?

As I detailed in Digest Last Friday, hopes were high for a bitcoin rally after the spring halving. However, the opposite happened.

Due to several factors that I have detailed in various digestthe price of bitcoin is now trading nearly 20% below its March high. And this time, the price weakness has additional significance – bitcoin has fallen below the historical range of the post-halving growth trajectory.

Below is what this looks like. If you’re having trouble seeing the chart, the orange line (not the red line) shows bitcoin’s current trajectory. It is at the lowest level of all post-halving growth curves.

Now, while this isn’t the news that crypto investors prefer, it doesn’t mean it’s time to ditch bitcoin.

If the grandfathered crypto catches a bid and returns to its historical bullish trajectory range, we are likely looking at a price above $100,000 by the end of the year.

Our crypto expert Luke Lango believes the potential for this outcome comes down to one thing…

Consumer sentiment.

From Luke:

While a variety of factors drive crypto markets – interest rates, economic growth, forced liquidations, ETF approvals, halving events, etc. – we have found that the factor most closely correlated with crypto price action in this cycle is consumer sentiment.

When consumers feel good, they buy crypto and crypto prices rise. Conversely, when consumers feel bad, they sell crypto and crypto prices fall. Oddly enough, it was that simple.

Luke provides a chart showing how closely the price of bitcoin has been correlated with the University of Michigan Consumer Sentiment Index.

Here’s Luke’s comment, followed by that chart:

In the first half of 2022, consumer sentiment collapsed alongside BTC prices. Consumer sentiment fell in June 2022 – very close to when BTC bottomed.

Throughout 2023 and into early 2024, consumer sentiment rose sharply. And BTC prices spiked.

But as of March 2024, consumer sentiment is gone. So does the price of BTC (which, perhaps not coincidentally, also peaked in March).

But Luke anticipates a resurgence of bullish sentiment thanks to Fed rate cuts:

Given the number of similarities we see between today’s “early innings” AI economy and the “early innings” Internet economy of the late 1990s, we believe today’s rate cuts will have a similar impact as they did back then.

If so, that means consumer sentiment should rebound over the next 12 months – and that should lay a solid foundation for crypto prices to steadily rebound.

It’s hard to “HODL” when prices are languishing, but history shows that’s what it takes to enjoy crypto’s huge returns.

We’ll keep you posted on all these stories here in the Digest.

good evening

Jeff Remsburg