Newton's first law states that “An object in motion will remain in motion at a constant speed and in a straight line until acted upon.”.

 

On Thursday, the October Consumer Price Index rose just 0.4% for the month and 7.7% from a year ago. This is the lowest increase since January and a slowdown from the 8.2% pace the prior month. We commented a couple of months ago in our note that it appeared that inflation had peaked, however, it had not started to accelerate down. With the news that came out Thursday, it appears that inflation has not only peaked but is beginning to decelerate. Hopefully Newton's first law applies, and we continue to see inflation come down. This is important because it would allow the Federal Reserve to slow down its rate hikes to tame inflation.

 

One of the other tools at the Federal Reserve has been using to bring down inflation was restricting the growth of money supply. As you can see from the chart below, during the peak of the pandemic in 2021, the Federal Reserve grew its M2 money supply by 30%. Increasing money supply is inflationary. In 2022 so far, the Federal Reserve has decreased money supply by 6%. As you can see from the chart below major drops in money supply tend to be correlated to large drops in price-to-earnings multiples. With the M2 money supply decreasing by as much as any other time in history you can see what usually follows is an increasing price-to-earnings multiples. Any increase in price turning multiples will be good for the market!

 

Source: Liquidity & Valuation, Timmer, Jurien (@TimmerFidelity), “Since late 2020, valuations and money supply have taken a round trip to excess and back. It's hard to get too bearish at these levels even though the S&P 500 continues to trade several P/E points above its fair value.”, November 10, 2022, 10:57AM, Tweet.

 

I have also included a piece from our CIBC Economics team entitled "A break in the other Great Wall"

 

As always if you have any questions please feel free to give us a call at any time.

 

I hope everyone has a great weekend and don't forget to take a moment to remember all those who served for us this Remembrance Day.

 

Milan