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The Revisions in The CPI Were A Non-Event

The revisions to the CPI were uneventful.  Some had feared a repeat of last year when inflationary pressures were greater than previously reported, a concern perhaps based upon FRB Chair’s remarks that the CPI understates inflation. 

Inflation was about the same at end of last year as initially reported after incorporating annual revisions with the core CPI rising at a 3.3% annualized rate in the final months of 2023, matching the previous reading.

To the surprise of many, Treasuries however continued to sell off with some reaching year to date highs, perhaps fearing an ugly CPI print tomorrow or from rising inflationary pressures because of the issues in the Red Sea.

The NASDAQ—specifically the NASDAQ 100—however continued its unrelenting advance despite Friday’s Treasury selloff.  To remind all a major reason for the NASADQ’s 100 year end advance was the belief interest rates have peaked.

Last week several high-profile hedge fund managers stated the markets are “fundamentally broken” as passive investing comprises over 50% of market capitalization.   Most accept that passive investing has no opinion about value.

Passive investing dictates the big will get bigger as long as they are taking in new money.  The new money will accept the prices then available in the market, thus the more a company is valued, the more the funds will buy of that company, tending to push the price up further.

With tech performing very well, the argument is that the weight of money coming into passive funds each month will add to the sector’s momentum.

It is largely accepted that the Magnificent Seven is greatly over extended and the trade is very crowded, comprising over 29% of the S & P 500 capitalization.

It should be noted the US stock market now is now about 70% of the world’s stock market capitalization, even though the economy is only about 18% of global production, a metric that is greatly overextended.

Bloomberg writes “the markets are implying that over the next 20 years less than 20% of the world economy will earn three times more profits than the remaining 70%, believing US tech firms will be entrenched global monopolies stretching into perpetuity.”

The above is not a novel view. Bloomberg references a 2016 report written by Alliance Bernstein arguing “passive investing is worse for society than Marxism” given the lack of proper price discovery, thus capitalism will then cease to exist.  This report has since been resurrected given the extreme concentration of today’s markets.

History dictates that it will change, the question is as to when.  Unfortunately, the potential damage may be considerable given the massive funds invested in one strategy.  Indexing is the only market strategy versus a market strategy.

What will happen this week?

The economic calendar is comprised of various inflation statistics such as the CPI, the PPI, Import and Export prices, as well as retail sales, several manufacturing indices and a sentiment survey.

Last night the foreign markets were up.   London was down 0.15%, Paris up 0.34% and Frankfurt up 0.36%.  China was up 1.28%, Japan up 0.09% and Hang Seng down 0.83%.

Futures are flat ahead of the upcoming inflation data. The 10-year is up 5/32 to yield 4.16%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.