by Professor Jeremy J. Siegel Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
Last week the markets provided us with a mix of intriguing developments, from geopolitical shifts to vital economic data.
The M2 money supply growth rate in the U.S. accelerated, marking the first time the monthly change exceeded a 5% annualized rate after several months of more moderate increases. A 5% money supply growth is a desirable target, as it reflects 2-3% growth in the economy with 2% inflation. Thus, the uptick in money growth is reassuring and supports the possibility that we will avert a hard landing for the economy.
The housing market data also supports moderating inflation. The Case-Shiller Home Price Index indicates a deceleration in home price growth, a trend confirmed by additional data from the FHFA. This slowdown in housing prices suggests a return to more stable, long-term growth rates, aligning closer to historical averages.
On the inflation front, the PCE deflator data came in at an encouraging rate, either meeting or printing slightly below expectations. This moderation in inflation gives the Federal Reserve (Fed) the ability to keep adjusting interest rates downward, aligning with market expectations which predict significant cuts by mid-next year.
The Fed Funds Futures market is pricing in a rate of about 3.5% by the middle of next year. This rate is closer to the historical average and provides a more sustainable environment. I think the 10-year bond will actually trade with yields above 4% even while the short-term rate comes downāso this is not a bullish scenario for the long bond.
Internationally, the conversation around China remains top of mind. The recent fiscal and monetary stimulus news last week was surprisingly robust and gave a short-term boost for Chinese equities, despite ongoing concerns about regulatory crackdowns and geopolitical tensions. Investment opportunities in China could be attractive, especially considering the quite low P/E ratios and high earnings growth among many companies.
Japan volatility returned on Friday with the new prime minister appointment. But Japan is also very levered to growth in China and the global economy. Better spending in China should be positive for that market and economy. When David Tepper made his ābuy everything China-relatedā he noted China stimulus could send the yen higher. We shall see how the currency moves, but the short run is a favorable environment for those stocks; unhedged U.S. investors are getting a double boost from the currency and stock markets.
Tepper was less excited about the U.S. stocks due to valuation concerns and we have talked about a market priced at 21 times earnings as perfectly reasonable with a close to 5% earnings yield. This is not a 1999-2000 tech bubble environment by any measure, but the global markets offer good diversification and value opportunities.
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