Client Newsletter Example: PPI Comes In Lower Than Expected - Long-Term Look at When the Best Buying Opportunities Occur - Major Indexes Keep Trying for Now
Published on August 13, 2024 @ 6:42am
Producer Price Index (PPI) comes in lower than expected. Tomorrow, we get more inflation data via the Consumer Price Index (CPI). Although the markets like the lower inflation levels right now, it's actually more of a concern based on the markets' recent activity. Here's why, along with a historical look at both PPI and CPI, as well as when those data points tend to produce the very best buying opportunities on a very long-term basis. It's why patience is so important to buy and hold investing at the right times. Here are the details on all of it:
PPI Comes In Lower Than Expected - Long-Term Look at When the Best Buying Opportunities Occur - Major Indexes Keep Trying for Now
The challenge for today's newsletter isn't how valuable it's going to be, but how to keep it short enough to make some very important points, especially for those long-term buy and hold investors who continue to wait for life-changing buying opportunities.
First, this morning before the markets opened, the Producer Price Index (PPI) came in slightly lower than expected. Including food and energy, year over year PPI for July came in at 2.2% - analysts were expecting 2.3%. Ex food and energy, year over year PPI for July came in at 2.4% - analysts were expecting 2.7%.
So all good for now - further suggesting that the Fed can now lower interest rates? Sure, but despite rates coming down for weeks now, the markets have struggled, and that's typically not a good sign. But before I share the rest of today's newsletter with you, we need to keep everything within the context of time, meaning we do believe these markets will end up moving net higher at some point soon enough.
So what's our big rub with the longer-term market landscape?
First, the idea of the Fed lowering interest rates is already being priced into the markets. Provided here is a daily chart of the 30-Year Treasury Yield, and as you can see, the Fed doesn't need to be all that aggressive lowering interest rates because the markets are already doing it for them.
Second, provided here is a daily chart of the NASDAQ 100 and S&P 500, the two most important indexes to these markets anymore. As you can see, they've been moving lower along with Treasury yields as well. That's actually starting to suggest that earnings on a go-forward basis could be in trouble if companies can't continue to price gouge the consumer with their products.
As a matter of fact, when you go back and look at all of it since the turn of the new century, this has happened on a number of occasions before.
Provided here are long-term charts of PPI and CPI dating all the way back to 2000. Also provided below is a monthly chart of the S&P 500 spanning the same time period. As you can see, although CPI data did suggest on two prior occasions that it was almost time for investors to be the most aggressive, it was PPI that did it on four separate occasions, once in 2003, once in 2008, once in 2020, and then again in 2022.
However, it's very important to note a few more things here that I hope everyone ends up remembering.
First, we can all make money in every market environment. We just don't want to be marrying too much the higher and higher these markets go.
Second, the above is referring to the four most attractive buying opportunities over the last 24 years, which means they don't come along all too often. However, this is why patience is so important for very long-term buy and hold investors. In other words, investors often get caught up with greed and FOMO (fear of missing out) when markets continue to run and run like they have since October of 2022.
Instead, they should be taking what the markets give them - knowing full well that, given enough time, they'll eventually be able to get their favorite companies much cheaper.
Third, despite those four major collapses in PPI data suggesting it was an excellent time to get very aggressive with one's long-term investing, the markets did end up going lower for at least another month or two after those PPI data points had hit their lows.
And finally, even though all of the above suggest when's the best time to become an aggressive long-term buyer, none of it has ever suggested when the markets were finally done going higher. That always came from the charts of the major indexes first, meaning the charts have usually been the most reliable indicators for telling us when the markets were on the verge of a major long-term top. And right now, it's very possible that we're in the very late innings of that finally happening again.
The bottom line is just because rates and inflation are moving lower now does not mean that stocks are just going to start screaming again. Is it possible? Sure, but again, I'm a very firm believer that we continue to take what these markets are willing to give us until a point in time these markets end up imploding again.
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John Monroe - Senior Editor and Analyst
