The Dow Jones Industrial Average closed above 40,000 for the first time on Friday, May 17, 2024. Daniel Wiener laid out some of the index’s past closing milestones, going back to crossing 1,000 in 1972.
As Mr. Wiener points out, it took only 85 days for the Dow to move from 39,000 to 40,000. That was roughly a 2.5 percent increase.
The law of large numbers makes it easier for the index to add another 1,000 points today than in the past. Still, 85 days stands out in stark contrast to the period from 1999 to 2006 when the Dow took 2,726 days to move 1,000 points, or from 2007 to 2013 when the same climb took 2,119 days. Thanks to those two long, slow stretches, it took 13 years for the Dow to climb from 11,000 to 15,000, a 2.2 percent annualized gain.
Harmonized inflation
There are two widely tracked measurements of inflation in the United States and a third you may need to be made aware of.
The first inflation metric is the Personal Consumption Expenditures (PCE), which the Federal Reserve watches the most closely. In particular, they target the “Core” PCE, which excludes items that are considered to have more volatile prices, like food and energy. The Fed’s target for year-over-year core PCE is two percent. The most recent year-over-year measurement for the core PCE is 2.82 percent.
The second inflation measure is the Consumer Price Index, or CPI. This metric is the one everyone seems to dial into, despite the Fed’s preference for tracking the PCE. The Bureau of Labor Statistics released the CPI data for April 2024 on Wednesday, May 15. The headline year-over-year core CPI was 3.6 percent.
CPI has been cut in half since its peak in June 2022 and is down about one-third from a year ago. That sounds like good news, and it is. But keep in mind that an improving inflation rate is the second derivate calculus; the growth rate is decelerating. This means things are still getting more expensive, just at a slower rate. But not everything has been getting more expensive. Since last year, many things have actually dropped in price. Several items in the “food at home” and “energy” categories have experienced outright deflation from last year, as have the prices of many other goods.
The CPI has remained above PCE for some time, partly because shelter is weighted higher in the CPI, and home prices have been rising. Additionally, the method of calculating shelter prices in each metric is an issue. An estimate of owners’ equivalent rent (OER) is used to track housing prices. Owners’ equivalent rent is a hypothetical price homeowners would pay themselves to live in their own homes. It is survey data, not actual data.
Suppose the BLS called you and asked you how much you would rent your house for—quick! What would you say? OER is not science. It is barely an art. It is imperfect, and economists agree it is a lousy way to measure housing costs.
That brings us to the third and most unloved and undiscussed inflation metric: harmonized inflation. Harmonized inflation does a few things, including replacing those OER with actual data.
Most other developed nations measure inflation this way because it makes sense. The BLS has begun tracking its version of harmonized CPI, and Moody’s has done the same for harmonized PCE. Mark Zandi of Moody’s notes that harmonized Core CPI has been below or equal to the Fed’s year-over-year two percent target for nine straight months, and harmonized Core PCE has been below two percent for five months straight.
Nonetheless, the Federal Reserve should not cut interest rates this year. The Atlanta Fed GDPNow tool tracks the current quarter’s Gross Domestic Product (GDP) rate at 3.6 percent. Although that will prove to be overstated, it is still good. And the unemployment rate remains below four percent, which is very healthy. The risk of reignited inflation is too high to warrant cutting interest rates.
But there is what the Fed should do and what they will do. They will probably make a one quarter-percentage-point cut this year at their December meeting.
That is a strong but loosely held opinion.
There is a good chance that my guess will be wrong. The Fed’s Summary of Economic Projections expects three quarter-percentage-point cuts in 2024. I expect that the Fed won’t do what it says it will do. If the Fed does cut rates three times this year, expect them to cite harmonized inflation data to maintain their credibility despite veering from their stated target inflation rate. In addition to many other good reasons, I remain invested in equities (mostly U.S. large capitalization stocks) because the stock market should react positively to any number of rate cuts so long as at least one occurs in 2024.
Allen Harris is an owner of Berkshire Money Management in Great Barrington, Mass., and Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com. Adviser is not licensed to provide and does not provide legal, tax, or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
