August 2023: Inflation Eases – The Stock Market Responds

The stock market rose a modest 3% in June after inflation showed signs of continued easing.

The Consumer Price Index “CPI” and the Producer Price Index “PPI” were 3.0% and 2.6%, respectively, for June.  As a result, markets “priced-in” a ¼ point increase in interest rates for the FED’s July meeting which happened and a “no change-or pause” for the September 2023 meeting. The next news cycle may come August 24-25 when the annual Jackson Hole, WY symposium will be held.  This year’s symposium’s title is- “Structural Shifts in the Global Economy”.  Federal Reserve Chairman Powell will take the stage as always and surely will deliver nuggets of information to which markets will respond.   I expect/hope Chairman Powell will address the US structural fiscal and debt crisis.  Fitch, a well-respected bond rating service, downgraded US Government securities from AAA to AA+ due to the US increasing deficit and resulting debt.

The US economy continues to expand greater than many economists expected in the beginning of 2023.

Gross Domestic Product “GDP” for 2023 may approach 2%, up from a mere 0.5-1.0% previously expected.  While the overall US economy is relatively strong, manufacturing and housing activity are declining. Employment slowed in July with 187,00 new jobs added to payrolls, down from the 312,000 average monthly gain during the past 12 months.

The stock market is expecting the US economy to avert a recession and muddle through a soft landing (GDP= 1-2%).

The forward P/E for the S&P 500 Index (large cap concentrated) is 19.2x while mid-sized stocks are trading at 14.2x.  In our opinion, the largest 10 stocks of the S&P 500 may underperform smaller stocks during the next 12 months and is why we are not recommending the purchase of the S&P 500 Index in a ‘passive’ strategy.

Rich Lawrence August 8, 2023

As always – We recommend only investing in the stock market with a long-term view (3+ years) and having cash available for emergencies and spending needs for the short term 2-4 years.


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