Is Disinflation Bullish for the Stock Market?
By Jon Markman
Jon Markman is the founder of Markman Capital Insight LLC, an investment research and advisory service in Seattle. He is a highly accomplished financial writer and winner of the Gerald Loeb Award for Distinguished Financial Journalism.
One of the big reasons that the likes of United Parcel Service (UPS), Delta Airlines (DAL) and the railroads are surging now is the decline in the price of crude oil and gasoline. This trend of low and slowing inflation — you can call it “disinflation” if you like — is going to be a big story next year as it will be a tailwind for growth.
Cornerstone Macro analysts observed on Monday that prior to every recession, inflation has clearly re-accelerated. Today all measures of inflation, both at the producer and consumer levels, are low and in slowing trends. Slowing inflation tends to help boost growth and has a positive effect on equities by boosting price/earnings multiples.
Since late 2011, Cornerstone data shows that the overall producer price index, or PPI, has slowed from 7.3% year-over-year to just 0.3% y/y in September, with core inflation (ex-energy) slowing from 3.1% y/y in early 2012 to 1.2% now.
Since late 2011, the overall consumer price index, or CPI, has slowed from 3.9% y/y to just 1.2% in September. These slowdowns are an important reason growth is likely to re-accelerate in 2014, in the analysts’ opinion.
Low/slowing inflation is particularly important when nominal growth is low, as it is now, around 2.5%. Commodities as measured by the Goldman Sachs Commodity Index have fallen 8% in the past nine weeks alone. Commodities’ year-over-year growth rate has slowed from 38.4% in mid-2011 to -3.2% in October, which suggests that both the producer and consumer inflation will continue to slow.
Plus, newly abundant shale gas has pushed down natural gas prices, which have in turn pushed down electricity prices. It’s a virtuous cycle.
Cornerstone lists eight core reasons inflation is likely to remain low or slow further over the next year: 1) moderate to slow real growth; 2) high unemployment/underemployment rates; 3) declining total consumer debt; 4) low unit labor cost gains; 5) increased usage of low-cost natural gas; 6) slower emerging market growth; 7) potential for tuition price increases to moderate; 8) potential for healthcare inflation to remain low.
All of these trends are positive for the stock market overall, but particularly transportation companies for whom energy and labor are major inputs.
You’re not going to hear this in a lot of places, because it’s not that sexy, but it’s a good counterweight to all the negatives you hear about economic conditions. Falling inflation is like a hidden tax cut; you’ll pay increasingly less for essentials like gasoline and electricity, and that’s money in your pocket.
