What we’re reading (7/6)
“Inflation Fears Drove Larger Fed Rate Increase In June” (Wall Street Journal). “Since last month’s meeting several Fed bank presidents and governors have endorsed a 0.75-point rate rise this month. ‘We’re not getting traction on inflation in a way that I had hoped,’ said San Francisco Fed President Mary Daly in comments to reporters on June 24 explaining her support for the larger rate rise.”
“After Tough Second Quarter, U.S. Stocks Look Cheap” (Morningstar). “Based on a composite of the intrinsic valuation of all the stocks we cover that trade on U.S. exchanges, we calculate that the broad U.S. stock market is trading at a price/fair value of 0.83 times. Growth stocks are the most undervalued, trading at a price/fair value of 0.78, followed by the value category trading at 0.83. Core stocks are trading closer to fair value at 0.91 times.”
“The Stock Market Is Gearing Up For A Strong Recovery In The 2nd Half As ‘Transitory’ Inflation Begins To Cool, Fundstrat Says” (Insider). “Concerns of elevated inflation will likely abate over the coming months as surging prices prove to be more transitory than structural, according to Fundstrat's Tom Lee. That means the stock market is poised for a strong second half recovery, as lower inflation will give the Federal Reserve breathing room in its current interest rate hike cycle, Lee argued in a Wednesday note.”
“The Virtue Of Complexity In Return Prediction” (Bryan Kelly, Semyon Malamud, and Kangying Zhou, NBER Working Paper). “The extant literature predicts market returns with “simple” models that use only a few parameters. Contrary to conventional wisdom, we theoretically prove that simple models severely understate return predictability compared to “complex” models in which the number of parameters exceeds the number of observations. We empirically document the virtue of complexity in US equity market return prediction. Our findings establish the rationale for modeling expected returns through machine learning.”
“The Shift To Remote Work Lessens Wage-Growth Pressures” (Jose Maria Barrero, Nicholas Bloom, Steven Davis, Brent Myers, and Emil Mihaylov). “The recent shift to remote work raised the amenity value of employment. As compensation adjusts to share the amenity-value gains with employers, wage-growth pressures moderate. We find empirical support for this mechanism in the wage-setting behavior of U.S. employers, and we develop novel survey data to quantify its force. Our data imply a cumulative wage-growth moderation of 2.0 percentage points over two years.”
