Inflation Is Low But Living Costs Are High

The Consumer Price Index is 22% higher than in January 2020, see chart below.

This means that the prices of all goods and services that consumers spend money on are up, on average, 22%.

For example, since January 2020, the price of cereal is 30% higher, household electricity is 32% higher, and car insurance is 52% higher.

The bottom line is that the Fed’s preferred measure of inflation, namely year-over-year inflation, may be back near 2%, but the living costs for households are still dramatically higher than four years ago.

Year-over-year inflation is close to 2%, but the price level today is 22% higher than in January 2020
Source: Bureau of Labor Statistics, Bloomberg, Apollo Chief Economist

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Retail Gas Prices Are Falling

Gas prices at the pump continue to decline, which is another tailwind to consumer spending, see chart below. The decline in oil prices is driven by significant supply and production in the US and lower growth in China.

Retail gas prices close to $3 a gallon
Source: AMA, Bloomberg, Apollo Chief Economist

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US Housing Outlook

Our latest housing outlook is available here. Higher mortgage rates are weighing on demand, but the inventory of homes for sale remains very low, and housing demand is supported by solid wage growth, high stock prices, and high cash flows to owners of fixed income, including private credit.

10 facts about the US housing market
Source: Apollo Chief Economist

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Another Tailwind to Consumer Spending

As home prices continue to rise, more and more households are taking out HELOCs to finance consumer spending, see chart below.

In other words, homeowners are liquifying their home price gains and using the proceeds for consumption.

Combined with low jobless claims, strong wage growth, high stock prices, and solid cash flows from fixed income, including private credit, the US consumer continues to do well.

Home equity lines of credit (HELOC) balances have increased
Source: New York Fed Consumer Credit Panel/Equifax, Apollo Chief Economist

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Stocks Are Expensive

When growth is strong, corporate earnings are high. When growth is weak, corporate earnings are low. This makes it difficult to find out if companies are cheap or expensive.

One way to analyze if stocks are cheap or expensive is to remove the business cycle by taking the 10-year average of earnings, and doing so shows that stocks are very expensive at the moment.

Specifically, the cyclically adjusted price earnings ratio at 38 is near all-time highs, significantly above its long-term average at 17, see chart below.

Cyclically adjusted price earnings ratio at near-record-high levels
Source: Robert J. Shiller, Apollo Chief Economist

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The Impact of Passive Investing

The rise of passive investing has had a significant impact on financial markets in the last three decades, especially on its contribution to higher asset-price volatility, reduced liquidity, and possible contribution to heightened market concentration. By analyzing the substantial shift of assets from active to passive strategies—particularly through the growth of ETFs and retirement-savings plans, such as a 401(k)—this paper illustrates how passive investors, who primarily track major indices, have contributed to reduced price elasticity and market responsiveness, which, in turn, have led to amplified price movements, decreased liquidity, potential macroeconomic inefficiencies, and a disproportionate concentration of market influence in a few dominant stocks, such as the Magnificent Seven.

Active funds have lagged respective benchmarks
Source: Morningstar, Apollo Chief Economist

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Fed Cuts Boosting M&A and IPOs

Fed cuts, tight credit spreads, and higher animal spirits will boost M&A and IPO activity over the coming quarters, see charts below.

Fed cuts will boost IPO activity
Note: IPO as of announced date. Source: Bloomberg, Apollo Chief Economist
Fed cuts will boost M&A transactions
Note: M&A announced transactions, US/Europe, is the daily sum of mergers, acquisitions, divestitures, self-tenders and spin-offs announced involving either a US/Europe target or acquirer. Source: Bloomberg, Apollo Chief Economist

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