Ignore The “News”… The Facts Speak For Themselvesvalueplays
Household Survey employment rose by 293,000, Lt Weight Vehicle Sales est at 16.8 million SAAR (new reporting makes this number uncertain till they have been officially reported end of quarter). Watch the trends and ignore the news reports. The facts remain that employment continues the trend from 2009 on the avg monthly add. More employees will mean Retail Sales should rise with vehicle sales holding at current levels for at least 12mos.
The facts on inflation are very different than the headline fears. The past 6mos we have had many forecasters predicting runaway inflation, 3%-4% range, on oil price rises. In an earlier note, the facts laid out the case that oil price rises were not inflationary. The Dallas Fed 12mo Trimmed Mean PCE, the Fed’s preferred inflation measure, was adjusted slightly lower to 1.73%. Last month’s figure prior to adjustment had been 1.77%. The history since 2010 has inflation flat.
The 12mo Trimmed Mean PCE is used in the calculation of the SP500 Value Investor Index. The SP500 Value Index for June 2018 is $2,300 vs the SP500 currently at ~$2,730. This is only a ~17% premium compared to the 2000 SP500 peak of 100%+ and the 2007 peak 60%+. The SP500 has always shifted well above the Value Investor Index at prior peaks with a stalling employment trend, stalling retail sales trend and stalls in other key economic trends. All continue in decent uptrends today.
The Investment Thesis:
Economic momentum continues to expand. Equity prices should shift higher as good news flows out of the economy. Interest rates should rise as investors shift capital from Fixed Income to Equities seeking higher returns. Inflation remains calm and unconnected to the rise in oil prices. The SP500 is slightly over-priced but well under historical peak levels. With the new tax law, regulatory climate and other pro-business policy shifts having yet to take full effect, economic expansion is likely to continue for 3yr-5yr in my opinion. Equity prices can be much higher.