The latest BLS and Cleveland Fed release of their quarterly new tenant rent index was lower by 2.43% year over year and over 5% from the prior quarter. The sharp rate of decline was surprising. Moreover, the update gives us more confidence that inflation is heading toward the Fed’s 2% target.

Unlike CPI shelter prices, which measure rental prices of all rental contracts (those just signed and those that have been outstanding for months or even years), the new tenant rent index only measures recently signed rental agreements. Thus, the new tenant index is the best measure of current rental prices. The difference in data collection causes CPI shelter and the all-tenant rent index to lag significantly behind the new tenant rent index. Only approximately 5% of rents are renewed monthly.

Our graph below charts the new and all tenant rent indexes alongside CPI shelter prices. As shown, the all tenant rent and CPI indexes are closely aligned to each other. Moreover, they are well correlated to the new tenant index, albeit with a multi-quarter lag. The takeaway is that we should expect all tenant rent and CPI shelter prices to continue declining in the coming quarters. Accordingly, CPI shelter, accounting for 35% of CPI, should trend lower and push down the broader CPI index.  

What To Watch Today

Earnings

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Economy

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Market Trading Update

Yesterday, we discussed the market sentiment that has supported much of the recent rally from the 100-DMA. Notably, much of the market sentiment is based on hopes of continued economic expansion for the year. However, since we are in the middle of Q4 earnings season, it is interesting to note that estimates have slid sharply over the last year despite consistently higher market prices.

As noted by BofA yesterday:

“Q4 US earnings expectations have been cut meaningfully. The year-over-year growth rate is now down to 8% vs 18% at one point last year. The S&P 500 EPS level for Q4 is below what it was in Q3.”

“The global earnings revision ratio fell from 0.81 to 0.72 in January due to softer earnings expectations across most regions and global sectors. The lower ratio signals a less optimistic outlook for global earnings. Historically, when the global ratio was near current levels and declining, global equity markets averaged a +5.4% return over the following 12 months.”

Of course, this is why trailing valuations continue to push towards “dot.com” levels. Even forward operating earnings, the most optimistic outlook, are also not far off of “dot.com” levels. Such does not mean that the market is about to crash, but it suggests that forward returns are likely more challenging, particularly given the underlying earnings dynamics.

On a weekly basis, the market remains confined to a bullish trend. Despite the recent correction that reversed the previous overbought condition and bullish sentiment, the technical trend remains intact. A breakout to new highs will set the markets up for further gains, but after a very sharp rally, some consolidation is likely. Continue to manage risk and trade accordingly.

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They Came For Tyson And Stayed For Squid Games

Netflix (NFLX) shares rose 10% on much better-than-expected earnings. As the title eludes, Netflix saw a jump in subscribers due to the airing of the Mike Tyson – Jake Paul boxing match, but Netflix reports many of those subscribers stayed. While they claim the economics of providing live sports content doesn’t make sense, they have other ideas to help grow revenue. For instance, the CEO mentioned they are going after YouTube and TickTock by offering short videos. Again, the goal appears to be getting the younger generation to subscribe for the videos and hook them on their extensive content library. Similarly, they are adding gaming and have a license agreement with Grand Theft Auto. Market share gains appear to be Netflix’s growth strategy as we advance. Per Netflix:

Overall, we only have 6% of the content revenue in the markets we operate, so we have a lot of room to grow as we take market share. Then, we will snowball and continue to take that revenue to spend on new content so that the quality and quantity of our content continue to accelerate. We did a good job of balancing that in 2024, and we expect to continue to grow revenue faster than we spend on content, so we expect margins to improve in 2025.

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Yardeni Warns Of Foreign Inflows

The following graph and commentary below, courtesy of Ed Yardeni, help explain recent dollar strength. However they also provide a warning for stock prices. Per Ed:

“Over the past three months, foreigners purchased US equities at a record pace of $76.5 billion (chart). One note of caution: Their buying has a record of being a contrary indicator. They tend to be big buyers right before bear markets.”

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