Dollar, Crude Oil and Inflation Up
Investing Environment Review and Outlook – Volume 75
Dollar, Crude Oil and Inflation Up
Last month we discussed the positive implications of the high real Fed Funds rate and the strong first half of the year. Today our economic outlook and inflation outlook indicators are neutral, so we are keeping an open mind to the next move in the economy and inflation. This month we discuss the investment implications of recent moves higher in the dollar, crude oil and inflation. U.S. equities remain a neutral 3 rating. Foreign-developed and emerging markets equities remain bullish 5 ratings. Long-term bonds remain a neutral 3 rating. Gold and industrial commodities remain bullish 5 ratings.
Dollar Up 5% Since July: Risk for Foreign Equities and Commodities
Since July the Dollar Index is up 5%, adding risk to foreign equities and commodity positions. In June, crude was $68, with supportive commodity conditions including a stronger economic outlook and weak dollar. The same conditions also supported foreign equities like EAFE and Emerging Markets. If these trends continue, commodities and foreign equities will be at risk, and we will shift allocations accordingly.
CPI Inflation Reversal: Downtick for Equities
One of our core bullish indicators for equities since June 2022, when CPI inflation peaked at 9.1%, was falling inflation. While the media focused on how slow inflation was falling, we pointed out that high, but falling inflation by itself was quite bullish historically. That changed this month when headline CPI was released at 3.7% Y/Y for August, now up 0.7% from the June low of 3.0%. This move is mostly due to energy costs accelerating, so the core inflation rate was down. We have found the headline number is more predictive of equity returns. Expected equity returns are lower when CPI is rising as it is today, but historical returns remain positive. Our inflation outlook indicators are neutral for now, so we are not seeing strong pressure in either direction.
Crude Oil up 30% since June: Potential Manufacturing Turning Point
Crude oil is making headlines up 30% since June to $90 a barrel, with gasoline prices close to $4 a gallon again. While some are worried about an oil spike slowing the economy, the rebound from the 50% Y/Y decline in June may mark a turn in manufacturing to the upside like it did in 2020, 2015 and 2009. Prior oil spikes that slowed the economy were more significant, only after crude was up over 50% Y/Y, which in this case would be a lot higher at $120 a barrel. For now, economic outlook indicators remain neutral since other industrial commodities like base metals are flat year to date.
This month we discussed the recent dollar, crude oil and inflation moves to the upside. The dollar rally is a downside risk for commodities and emerging markets. For now, inflation outlook indicators are neutral. Finally, the crude oil rebound is similar to prior turns in manufacturing activity, despite the narrative that this move was caused by supply issues like OPEC. We will continue to watch our indicators on a daily basis and shift exposures as needed. Thank you for your support and please contact your advisor with any questions.
This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2023
Director of Market Research
Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…READ MORE