Stock prices and the mean NGDP growth rate were up again last week, extending the rally to 8 straight weeks, as inflation continued to moderate. However, the VIX closed higher for the first time during this streak, as tensions rose in the Middle East. These tensions also resulted in higher oil prices. This was the only note of alarm in the midst of the bells of holiday cheer. Obviously, the conflict in the region warrants close attention, for further potential supply-side impacts. Nonetheless, this was yet another week with a net positive real shock.
This rally still has room to run, with the usual caveat about possible further increasing instability in politics and geopolitics. Not only do inflation expectations remain low with respect to the Fed’s mean target in core PCE terms, but the Q3 gap between year-over-year NGDP growth and the S&P 500 earnings yield, while still positive, continued a trend of moderation.
More importantly, as I pointed out earlier this month, NGDI seems a more reasonable measure of economic output in recent quarters, as the gap between what are supposed to be equivalent measures has grown.
The gap between year-over-year NGDI growth and the S&P 500 earnings yield in Q3 was -1.76%. This is probably a low estimate for a reasonable gap, but closer to reality than that using NGDP.
So, there’s not much to ruin the holiday cheer at the moment. Happy holidays to you and yours.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
Links to Data: