Investing: Why the January Inflation Numbers Don't Matter

• Passive investing has been an item of discussion lately, putting the spotlight on long-term strategies versus constant buying and selling. 
• Since the close of October 2022, the S&P 500 Index is up roughly 45%, performing well for those following a passive investment strategy. 
• That being said, the constant flow of official (government) imaginary numbers isn't likely to change a long-term strategy. 

Last week I had the opportunity to speak at a customer meeting for a large commercial grain company. It was an evening meeting, meaning adult beverages were plentiful and the conversation sparkling. I turned my part of the program into a nearly hourlong question and answer session filled with a number of hot topics[i]. The one I want to focus on this morning has connections beyond the grain industry. A young gentleman asked, “What are your rules for evaluating an advisor or advisory service?” It didn’t take much consideration for me to come up with four:

• No. 4: If the service only tells customers what they want to hear rather than what they need to hear, look elsewhere (e.g. A service that paints a bullish picture for every scenario. Markets aren’t always bullidh). 
• No. 3: If getting your advice from a grain merchandiser (in the grain industry), then you may want to expand your search. I’ve been a merchandiser (and a broker, and a number of other things), and it comes down to who is signing the paycheck.
• No. 2: If getting your investment/hedge advice from a broker, run away quickly. I have nothing against brokers, as I said, I was one for a number of years. But the reality is their job is to create trades. An example: A brokerage company disguised as a consulting group posted on social media after last week’s USDA reports a boast about how report days are some of the busiest in their office. That is exactly what you don’t want an advisor doing. 
• No. 1: Along with Rule 2, if your advisor promotes government reports of any flavor, there is likely a reason. Usually because it’s a brokerage house looking to find folks to trade the latest imaginary numbers. 

This came to mind again late in the week as I had a conversation with Kitco News about this week’s gold market. Ernest Hoffman asked what I thought all the economic data coming out this week, starting with Tuesday’s January Consumer Price Index, meant for the market. I take the same stance with these government reports as I do with USDA, or EIA, or any other official combination of letters. All I’m concerned about is what the various markets are telling us. Those who have been following along with my writings will recall I’ve written a great deal about how to understand real market fundamentals when it comes to commodities. Also, since November 2022 I’ve posted almost monthly updates of my view US stock indexes are in long-term uptrends. 

Some of you might’ve seen the conversation I had on the X-site formerly known as Twitter Monday evening. A gentleman and I were talking about passive investing, defined as “an investment strategy to maximize returns by minimizing buying and selling”. In other words, it’s the difference between long-term investing, a strategy one might get from ad actual financial advisor, and trading each and every headline and government number that comes down the pipe. Again, something brokers can help you do.

This idea moved into the spotlight Tuesday morning with the release of the aforementioned January CPI number of 0.3%. An immediate headline from CNBC read, “Dow drops 300 points as hot inflation report sends Wall Street reeling”. There are so many problems with this, it’s hard to know where to begin. 

• Let’s start with the end: The only price that matters is the close. Let’s see where US stock indexes finish today, this week, this month, and so on. 
• We knew inflation was still with us, it didn’t magically go away. As Heather Long of the Washington Post correctly reported, “US inflation was 3.1% (y/y) in January, down significantly from 6.4% a year ago. Falling prices for energy and many goods are really helping inflation cool off”. 

Of course the underlying theme has to do with what this does for the US Federal Open Market Committee stance on interest rates. Fed Chairman Jerome Powell said earlier this month that the FOMC will “proceed carefully with interest rate cuts this year”. Chairman Powell also clearly stated “it’s unlikely the FOMC will make that first move (cut) in March”. Yet here we are, Tuesday morning, with talking heads on one side of the aisle feigning surprise that a March rate cut now looks to be off the table. 

Does anything that has happened of late, or is expected to be announced over the coming weeks and months, change a good long-term investment strategy built on limiting buying and selling activity? No. Another passive investing strategy is “investors purchase a representative benchmark, such as the S&P index ($INX), and hold it over a long time”. If we go back to the bullish long-term reversal pattern completed during October 2022, including the monthly close of 3,491.58, has gained roughly 45% through the February high of 5,048.39. 

Do you think a single set of already priced in inflation data is going to change the long-term strategy? If you get your investment advice from a broker, maybe. Otherwise, the answer is obviously no. 

[i] A few of them had to do with the US presidential election this coming November. I’ll talk about this at a later date. 

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