“The Year over Year (YoY) Phenomenon”
In the investment industry it is quite common to make comparisons between any given date versus twelve months prior, meaning a year over year measurement.
It has now been over two years since you started reading and hearing me suggest that the inflation we were seeing was far from “transitory”.
Well, two years later we are seeing many of the inflation inputs slowly starting to “normalize”. Over the last nine to ten months, depending on your data source, we have seen the key inputs like energy and wages peak and ever so slowly pause and are now starting down toward a more normal level.
In the last month we have seen slowing job growth, downward revisions in job gains, a slightly higher unemployment rate and moderating wage gains. When combined with a 20% drop in crude oil prices since March of 2022, inflation is now in reduce mode (Source: Bureau of Labor Statistics (BLS) Consumer Price Index Summary dated 8/10/2022).
Now, back to the opening paragraph. As economists start to make Year over Year (YoY) comparisons we will start to see the inflation rate begin to drop rather quickly. Each new month of reduced inflation replaces a very high number from twelve months ago.
Just like magic, when we get to the end of 2022 and make our inflation rate comparisons on a YoY basis, the inflation rate will drop significantly. This is the year over year phenomenon.
The valuations of Corporate America have been reduced between 20% and 45% depending on which index you are measuring. The technology sector is especially impacted by increasing interest rates. So, as interest rates trended up to fight inflation, technology company valuations were decimated.
Let’s pause for a moment and consider what might happen if the interest rate increases were mostly completed in the inflation battle because, as noted, the inflation rate YoY mathematically must start to drop just as the inputs have.
Hmmm! If interest rate increases, both now and the one planned for late September 2022, are the catalyst for price reduction the pause that comes next, not planned, could be the catalyst that backstops current valuations in Corporate America and then becomes the catalyst that starts the next trek to higher valuations.
No one knows the future, including me, but I am the same person who told you (timestamped) that inflation was far from transitory two years ago. I am now suggesting the peak inflation is in. Inflation mathematically must drop and that is likely the story you will here from no one else from anywhere for at least a few months, maybe a year.
We will slowly, thoughtfully, and intentionally invest ahead of what we believe will be the next surprise, i.e., higher valuations.
I’m interested in your thoughts, comments and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.