More Good Inflation News | Seeking Alpha

INFLATION word on calculator in idea for FED consider interest rate hike, world economics and inflation control, US dollar inflation

Khanchit Khirisutchalual

The major market averages rose for a third consecutive day in anticipation of election results, but there was a brief sell off around 1pm after another crisis of confidence in crytpocurrency land. Bitcoin traded down more than 10% when crypto exchange Binance announced intentions to acquire FTX in an effort to shore up its rival’s deteriorating balance sheet. Everything cryptocurrency has been a trainwreck this year, as monetary policy tightening has exercised all of the speculative excess from our financial markets. I also think most investors now recognize that digital currencies are solutions looking for a problem that doesn’t exist, but that may be more a reflection of my age than knowledge about the subject. Regardless, stocks took it in stride and resumed their ascent by the end of the day.

market averages

Finviz

The stock market’s run up in recent days has raised concerns that we may be stealing the post-election thunder that typically follows the midterms, but that is hardly the case, as can be seen in the chart below. To the contrary, we are right on track with the average price action we see for the S&P 500 in the third year of a presidential cycle that coincides with a midterm. This was not a focus when I first started discussing it in mid-October, as the S&P 500 was flirting with its bear market low, but today it is on everyone’s radar. That may be encouraging investors to increase their exposure to stocks for fear of missing out on the year-end rally we typically see. The next hurdle will be tomorrow’s CPI report, but regardless of the headline number, I see more signs every week that we are over the crest of the inflation wave.

midterm performance

Bloomberg

The latest datapoint to strengthen my resolve that we will realize a significantly lower rate of inflation next year comes from the rental market. “Loss to lease” measures the difference in rents between what the market is asking today for a new rental contract and the average that is already in place. The larger the difference, which peaked in the spring of 2021, the larger the renewal increase that drives up the rate of inflation. The good news here is that this metric has fallen to its long-term average, which means that new rental contracts are realizing much smaller price increases.

Loss to lease

CalculatedRisk

AvalonBay Communities, which is a multifamily apartment real estate investment trust (REIT) operating in 10 markets across the country, confirmed these findings in its earnings report last week. Falling short of revenue expectations, management indicated they were seeing weakness in new leases that were “mostly on the move-in side.”

It will be interesting to see if this shows up in the shelter component of the Consumer Price Index tomorrow, which accounts for approximately one-third of the index. The CPI looks at the average rent in place today, which means that it takes 6-12 months for new contract prices to meaningfully impact the average embedded one. Still, the deceleration in price increases for new rental contracts is already well established, and it means a big drop in the inflation rate is coming in 2023.

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