Resources/Weekly Insights

Volume 13, Edition 20 | August 10 - August 16, 2024

Avoiding the Media’s Favorite Scare Tactic

Doug Walters, CFA

Stocks continued their rally this week, buoyed by more positive inflation progress. We take this moment to reflect on one of the media’s favorite scare tactics… the Dow.

Contributed by Doug Walters, David Lemire, Max Berkovich

Stocks continued their march higher this week after last week’s rebound. It’s amazing how a week can change sentiment so quickly. Fear was everywhere two weeks ago, and now we’re celebrating moderating inflation and a strong consumer. We’ve talked at length about how the media can exasperate these moments. Today, we’ll reveal one of their favorite tools… the “Dow.”

In the throes of the pullback earlier this month, someone asked, “Did you see what the Dow did today?” I knew what stocks were doing broadly, but I had given no thought to what the Dow specifically had done. No self-respecting investment professional would care for anything other than sentimental reasons. The human brain has a finite number of brain cells, and personally, I’d rather burn a few cells watching The Bachelorette than waste them keeping tabs on a relic like the Dow.

What do I have against the Dow? It is less about the Dow and more about how the media perpetuates an obsession with an index whose day has passed. It does not pass muster as a good benchmark by today’s standards.

Let’s start with the fact that the index is a hand-picked list of 30 companies that a committee believes best represents the breadth of the US economy. It may have served investors well back in 1896 when the index was established, but we have far superior indexes to gauge broad market performance these days. The S&P 500, which includes most of the 500 largest companies in the US, would be a good place to start. The Russell 3000, which better represents the many small-cap companies, would also be a better measure. Yet, as I look to my left, at the top of our Bloomberg TV screen, in prime position, I see the current level of the Dow.

Is the difference from the other indexes material? You bet it is! Looking back over the past 20 years, the S&P 500 is up 415%, the Russell 3000 is up 420%, while the Dow is up just 307%. That is not a difference I’d want to be on the wrong end of in my retirement account.
Yet the media loves it. And two weeks ago, we saw their favorite use: referring to the “number of points” that the index fell. “The Dow falls 1,000 points!” could be seen on every TV screen. To those who have been following the Dow for decades, 1,000 points sure seems like a lot! In some ways, it is. It represents a 2.5% decline (the Dow is around 40,000). That’s a fairly big number, but also one we’ll see a few times in a normal year. Now, had we seen a 1,000-point decline ten years ago when the Dow was 17,000, that would be a bigger deal… a 5.9% decline! I guess the media has a lot of faith in the average viewer’s ability to do that math on the fly.

What’s the takeaway? It is another reminder not to get caught up in the media sensationalism, whether it is quoting Dow “points” or some other scare tactic of the day. Media exaggerations can lead to fear, and fear can lead to bad decisions. Evidence-based investors can see through this charade and remain focused on sticking to the long-term plan.

2.9%

CPI inflation now below 3%

CPI inflation came in lower than expected, with the headline number falling below 3% for the first time since March of 2021. Items like Food at Home, which have been a source angst for many, grew just 1.1% which is well below current average wage increases.

Headline of the Week

Partly Sunny with a Chance of a Rate Cut…

This week’s inflation report dissipated some economic clouds around the next Fed meeting. The uptick in the unemployment rate and consumer angst in earnings reports had all the markings of an economic hurricane, hinting at a recession. However, this week’s inflation report, coupled with earnings reports now hinting at consumer resilience, has this storm weakening and tracking off the coast.

Planning an outdoor weekend activity based on a 5-day forecast is risky, much like predicting Fed intentions and their economic impact. While we dodged one recessionary cloud formation, there are still two key inflation reports and one employment report before the next Fed meeting. For now, a 0.25% rate cut seems likely according to most market meteorologists, but they remain cautious with their “partly sunny” hedge.

The Week Ahead

Between the Jackson Hole Symposium and the Democratic National Convention in Chicago next week, the markets will have plenty to keep attention levels high.

Hole’d On!

With inflation reports in the rearview, the central bankers will descend on Wyoming to “reassess the effectiveness and transmission of monetary policy.”

It is highly unlikely that anyone can steal the spotlight from Chairman Powell, but a speech from Andrew Bailey of the Bank of England may also be a hot ticket.
Japan’s Ueda is one central banker who may not make the event and would get a lot of attention. However, he faces a Friday grilling from the Parliament about the rate hike that created a financial storm a few weeks ago.
Chairman Powell will speak on Friday, and the entire world will watch for clues about the September cut and its depth.
With both economic data and the markets moving past the ugly jobs report, an emergency cut and even a deeper than ¼ of a percent trim in September are extremely unlikely.
Confirmation that a September cut is on the table and hints for future moves is what everyone will be watching.
The minutes of the last Federal Reserve meeting will also be released early in the week, which should only add more fuel to anxious markets.

Which Way the Wind Blows

With support behind Vice President Harris surging coming into the Democratic National Convention in Chicago, both sides are focusing on the Economy.

Policy vision and subsequent attacks from both sides could impact stock sentiment.
From inflation and tax policy to Federal Reserve independence, investors will surely find points to ponder from one candidate or the other.
Over 100 events in Chicago next week coincide with the convention.

Shopkeepers Delight

While Walmart’s and Home Depot’s earnings this past week may have stolen the wind from the sails of other major retailers, we do have Lowes Corp. (LOW), DollarTree (DLTR), TJX Companies (TJX), and Target (TGT) on the calendar.

Investors will key in on Lowe’s commentary on the do-it-yourself (DIY) consumer as the professional customer has been solid, and the DIY segment makes up 75% of Lowe’s sales.
Target is expected to see similar tailwinds as Walmart did and is expected to show improvement in profitability.

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