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The Weekly Update 3/22/2024

| March 22, 2024

The Weekly Update 3/22/2024

 

Inflation versus Valuations


In last month’s update of The Seven Signs of a Changing Economy™, (read it here), under Sign #7, (inflation, deflation and GDP), we discussed the significant drop in our U.S. inflation rate.

The key input that has kept inflation high, in my opinion, artificially high, is shelter.  The Consumer Price Index (CPI) calls it “owners equivalent/rent” (OER).  The Bureau of Labor Statistics (BLS) has a long lag time to measure the OER.  However, if they used the available live data flow provided below from Truflation.com, they might see that our inflation rate is closer to 1.66%.  This is well below the Federal Reserves target inflation rate of 2%!

                                                  

Also, in last month’s update of The Seven Signs of a Changing Economy™, under Sign #6, earnings per share for Corporate America, I summarized the current price to earning ratio as the following.

“The current 3/9/2024 price of the S&P 500 at 5,137.08 divided by the earnings per share estimate of $247.91 equals a Price to Earnings (P/E) ratio, a measure of risk, of 20.72x.  Per J.P. Morgan Guide to the Markets (12/31/2023) the 20-year average P/E ratio for the S&P 500 is 18.9x.  So, close!  But, back out those big six tech stocks and the P/E drops to a historically reasonable 13x”.

This is very important!  If we are close to 13x earnings, and we are, according to the research piece below from FactSet, 3/12/2024, the S&P 500 average price to earnings should be 18.5x when inflation is less than 2%, as it is in the Trueflation chart above!

As you observe the chart below think about the significance of this.  No one knows the future, yet arguably the S&P 500 (or 494 without the six big tech stocks) could be +42.31% higher and potentially not overvalued.

If so, that puts the S&P 500 closer to 7,310.45 than our current 5,157.08 as of 3/9/2024.  Something we at The Wealth Strategies Group are taking very seriously.  

                                

Source: LPL Research, FactSet, Bloomberg 03/12/24 (Trailing 12-month price-to-earnings data, annual CPI changes, 1962-Current)
Past performance is no guarantee of future results. 
All indexes are unmanaged and can’t be invested in directly.


 I’m interested in your thoughts, comments, and observations.  Feel welcome to call, email, or stop by the office and say Hi.

Respectfully,

James O. Lunney, CFP®

CERTIFIED FINANCIAL PLANNER™ Professional  

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.