Friday File: Social Inflation Winner?
The response of the market to the slightly-better-than-expected CPI number on Wednesday and PPI on Thursday really tells us all we need to know: When it comes to investor sentiment, it’s still all about interest rates.
Slightly improve the probability that the Fed will cut rates at least once or twice this year, with a tepid endorsement of that by Jerome Powell in this week’s FOMC announcement, and everyone feels good again and stock prices go up.
That can flip quickly if the Fed say something less optimistic next time, or if the next number turns out to be slightly off in the wrong direction, but none of us will be able to predict where the Fed Funds Rate will be in six months or two years, nor where “regular” interest rates will be over the coming years (bank savings rates, mortgage rates, T-bills, etc.). If even the teams of professional economists at the Fed can’t routinely come close with their forecasts, there seems little point in us amateurs hazarding a guess.
I’d like to be able to tell you that I bought back into Dream Finders Homes (DFH) last week because I knew inflation expectations would drop a little, and interest rates would trend down a bit this week, driving expectations for the homebuilding and home sales markets up, and therefore pushing the DFH share price back up… but that, of course, would be a lie — and this is my money we’re talking about, so I don’t feel like lying to myself. Well, not on purpose, at least. I bought because I love the strategy and have a lot of respect for the CEO, who owns 2/3 of the company, and because it was reasonably valued… and that’s all still true. It will be more sensitive than many stocks to interest rates — but as most of us probably noticed with our portfolios this week, just about everything is sensitive to interest rates.
And yes, I’m happy to see inflation come down closer to “normal” range. A little deflation would be nice, to offset the huge jumps in prices we saw over the past 18 months or so, but that would probably only come with a deep recession. So I’ll stick with hoping for “back to moderate inflation” in the 2-3% range, which is where the powers-that-be want it, and where most folks don’t notice it …
