So far this year, the S&P 500 index has climbed an impressive 12.5%.
In spite of all the hand-wringing and worrying, in spite of the constant the turmoil and drama you’re hearing about in financial headlines every day. The stock market is charging forward.
But we’re still a few points short of my prediction of 15%+ gains in 2026 from December of last year.
Not to worry though, the latest data is pointing towards even more strength in the economy, with room to run higher through the end of the year.
Click below for the full story:
Video Transcript:
Welcome to Moneyball Economics. I’m your host, Andrew Zatlin.
All year long, I have been advising you to be long and strong the stock market. Every dip is a buy opportunity, and that’s because of the underlying economic fundamentals which have been improving.
And guess what?
For all you bears out there, I’ve got good news…
Those same economic fundamentals are telling me we should not see a rate hike this year. And that’s controversial. Right now, consensus expects not just one, but possibly two rate hikes. And if I’m right and consensus is wrong, then there’s going to be a mad scramble to change their kind of short positions into long positions, and that’s going to lead to a lot of buying pressure and the stock market’s going to jump even higher.
So today, I would like to lay out the case for what the economic data is telling me and why it’s telling me there’s going to be no rate hike.
And it starts off with the last week’s worth of economic data. We’ve got an insight into consumer spending with retail sales. We’ve gotten insight into recent inflation trends with the consumer and producer inflation. And of course we’ve had labor market snapshots.
Well, let’s start with retail. How are consumers doing? The way we measure retail is there’s the headline number, and then there’s something called the control group. That’s the core spending. That’s the stuff that’s discretionary because let’s face it, people have to eat, people have to buy gas.
And so whatever’s going on there is kind of irrelevant to whether their sentiment is leaning in and spending or not. So you strip those out and you come up with what’s called the control group. Coming into this latest release, consensus was expecting a pretty healthy number, some expansion. Not me. I think I was the only, or maybe one of the only forecasters on Bloomberg who saw a contraction.
And remember, a contraction and discretionary spending by consumers is not a good sign. It means there’s some belt tightening going on. And guess what? That’s exactly what we saw. We saw the control group contract for the first time in a long time. And folks, when you have consumer sentiment turning a little sour and reflected in actual spending by them kind of holding back the wallet a little bit, that is not the environment for raising interest rates. Let’s continue on.
Let’s talk about inflation because a lot of the motivation, a lot of the energy behind people expecting a rate hike kind of landed with inflation. I think it’s a false premise to say, ooh, inflation high, raise interest rates. That’s kind of a simple formula. It’s like the traditional way you do it. Economy overheating, it’s reflected in inflationary pressures. So we got to raise those interest rates and bring inflation down.
That’s not what’s going on right now. Inflation has been up for most of the year primarily, almost exclusively because of what’s going on with the warning ran that’s pushing up gas prices. You can raise interest rates all you want. It’s not going to affect gas prices. And so all you’re doing is just, again, hurting consumers. If you raise interest rates, you’re hurting the broader economy.
Well, needless to say, both CPI and PPI came in and they were soft. They came in lower on a month-to-month basis, lower on a year-to-year basis. That’s looking at both the headline and the core consensus again was surprised. So we’ve got two core pieces of data saying, “Hey man, this economy is not robust enough to justify a rate hike.” And then we’ve got what’s going on with payrolls. Now, this is where it gets a little bit funky, and I’m going to talk about that funkiness. That’s an economic term, by the way.
All right. We had three pieces of data that came out that talk about the labor market. If inflation is one of the dual mandates, they want to keep inflation tame, price predictability and all that other econ 101 stuff. The second part of the dual mandate is they want to keep jobs up. If you look at the payroll data that came out, we actually had fewer jobs in July. It was a negative 23, not good. Again, you do not raise interest rates when the job market is soft.
And that’s kind of where it’s been the past couple months, soft. So as a result, again, all this data so far is saying don’t raise interest rates. In fact, maybe you want to cut again. But there were two kinds of data that came out that kind of, again, go back to that funky term.
We’ve got jobless claims holding low around 200K. That’s a sign that the labor market’s tight. And then we’ve got the unemployment rate, which came down again, surprise to all the experts out there. Well, guess what?
This is not a testimony to a strong labor market. It’s talking about what happens when you kick three million people out in one year. So you might have heard from me on Capital Gains Trader, our sister channel, where I talk about jobless claims. Fundamentally, you kick out three million people. A huge chunk of them are workers. They’re not kids. They’re not housewives.
Well, you have a smaller pool of people who are claiming jobless benefits, and that’s a lot of what’s been going on, why jobless claims are down. There’s a similar effect happening with unemployment. The way they measure unemployment, again, in the survey, they ask you, “Are you looking for a job? Do you have a job?” That’s how you total up the number of unemployed. Now, what’s interesting is you got a numerator, the number of people who are unemployed, and you’ve got the denominator, the total possible pool of people out there who could be working, the civilian labor force. Well, the civilian labor force has shrunk by almost 1.3 million people last year to this year.
I wonder why we might have over a million fewer people out there in the labor force. Is it possible because we kicked out three million people? Well, as the denominator shrinks, because you’ve reduced it by almost a million and a half people, you would expect the unemployment rate to go up. The numerator’s here, the denominator has shrunk. That makes the rate increase. Except in addition to shrinking the civilian labor force, we also saw a massive drop in that numerator, the number of people who are unemployed.
It has fallen almost 400,000 in just the last six months. To put that in perspective, you kick out a million and a half people from the civilian labor force, that’s barely 1% of the total. You kick out 400,000 people from the number who say that they’re unemployed, that’s 5%. So the way the math is working is, yeah, the denominator’s shrinking, but the numerator’s shrinking even faster.
As a result, that rate’s coming down and it’s staying down. Surprise, surprise. They just did this a couple of months ago, so it’s only now showing up in the numbers. These numbers are fudged. They’re fake numbers. And to be honest, the Federal Reserve kind of sort of knows that they’re a little bit fudged and fake.
So when you see a strong unemployment number, which is running kind of counter to the other data points, well, there’s a way to explain why it’s not really pointing to a strong labor market.
It’s just pointing to the fact that we kicked out millions of people. Going forward, what should we expect?
Well, guess what?
The Fed can raise rates three times. They can do it in September at their next meeting. Excuse me, four times. September, October, November, and December. Except here’s the problem. In late October when the meeting’s going to be happening, that’s right before the midterm election.
So you got to take that one out. You’re not going to see them raise rates two weeks before there’s an election. So that leaves September, November, and December. Well, I just shared with you that all this economic data is kind of not strong. And so September’s out. There’ll be no rate hike in September. And again, nothing in October, which means any rate hike will be November or December. I believe that a lot of this data’s going to continue at today’s pace.
Retail’s going to pick up a little bit. You got some bonuses coming in, people a little bit happy. 401k is doing well. But overall, retail is not going to suddenly surge. You’re going to continue to have inflation come down because gas prices will probably come down. That’s the wild card though. Will they come down? Won’t they? If they continue to come down, inflation’s going to continue to come down.
And that leaves what’s happening with payrolls. Payrolls will continue to improve, but it’s not going to be at this blistering level. So I don’t think any of these data points are going to point us in the direction of an economy that’s strong, growing, and necessitating a rate hike. So what do you do? Well, if you’re not going to see a rate hike and the market expects there to be a rate hike, then you want to be long.
Maybe buy some leaps, some spy leaps or something like that. Certainly it’s going to be a blessing for tech stocks. They love it when rates go down or stay flat.
But here’s the key … there are some wild cards here.
I’m expecting unemployment not to go down any further. It could go up. But what if it does go down? Again, that puts the rate hike question back on the table, which is there for a couple of weeks. In any case, you should consider that we will see the stock market surging in the last few months of this year and take action today because we’re early enough for us to get the full advantage.
We’re in it to win it, folks. Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics