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October’s CPI runs hot… a lesson from 1994… Louis Navellier’s Thursday event… Eric Fry, the cockroach consumer, and Deckers
Yesterday, we called this morning’s Consumer Price Index (CPI) report “the next shoe to drop.” That shoe is here…and it’s hot.
Consumer prices rose 0.4% in October from September, topping the 0.3% economists expected. Core CPI, which strips out volatile food and energy prices, rose 0.3% against a 0.2% forecast. That’s the third straight month core inflation has come in above estimates.
Zoom out and the picture isn’t any better. Over the past three months, prices have climbed at a 5.7% annualized pace, according to The Wall Street Journal. That’s nearly three times the Fed’s 2% target.
With the Federal Reserve meeting in early December, this is the last inflation reading it will see before its next move. So, today’s hotter-than-expected number hands the Fed’s hawks fresh ammunition. And combined with Friday’s blowout jobs report, the question is no longer whether the Fed hikes next month, but by how much.
The CME Group’s FedWatch tool shows traders have fully priced in a December hike, with rising odds that it’s a larger half-point move. Those odds jumped to nearly 11% this morning from 0% yesterday.
And what about paychecks?
As we noted in yesterday’s Digest, there’s a second number that matters a great deal to households: paychecks.
On Friday, we learned that average hourly earnings rose 0.4% in October. Today, the BLS told us how much of that raise survived higher prices. The answer: not much.
After adjusting for inflation, average hourly earnings were essentially flat in October, after falling 0.5% in September. And over the 12 months through September, inflation-adjusted hourly pay fell 0.7%. In other words, paychecks have stopped losing ground for now, but they haven’t started catching up.
We’ll come back to what that means for the American consumer shortly. But first, whatever the Fed decides next month, the bigger story for investors may be playing out in the bond market.
What 1994 can teach us about 2027
As I write, the 10-year Treasury yield has climbed to 5.0%.
That matters because the 10-year sets the cost of money across the economy, from mortgages to corporate loans. It also sets the bar that stocks must clear. The more investors can earn from a “risk-free” Treasury, the less they’re willing to pay for stocks.
Now, combine that with what look like more rate hikes in the pipeline, and stocks appear to face a real headwind. Perhaps, but that’s not the full story.
In yesterday’s Digest, we pointed out that in 1995, with Republicans newly in control of Congress and battling President Bill Clinton, the S&P 500 gained 34%.
What we didn’t mention is the year that came before it…
In February 1994, the Fed began raising rates for the first time in five years. A year later, it had doubled the fed funds rate from 3% to 6%. Bond investors were caught flat-footed. The 10-year Treasury yield climbed from about 5.6% in January to more than 8% by November, and global bond markets lost roughly $1.5 trillion in value in what Fortune called a “bond market massacre.”
Stocks didn’t crash, but they didn’t go anywhere either…
S&P 500 earnings grew about 20% in 1994, yet the index finished the year roughly flat. When a Treasury bond pays 8%, investors simply won’t pay as much for each dollar of corporate earnings.
Now, fast-forward to today
Today’s setup looks similar: a Fed that’s hiking, a 10-year yield near its highest level since 2007, and booming corporate earnings.
But look at what’s happened to valuations…
The S&P 500 started the year trading at 22 times forward earnings. Today, it’s around 18, below both its five-year and 10-year averages. Earnings estimates have climbed nearly 34% this year, while the index has gained less than 10%. That’s certainly not the sideways market of 1994, but it’s subdued market performance relative to the underlying earnings strength.
Now, remember how the 1994 story ended – the earnings growth didn’t disappear. And once the bond market topped and the Fed stopped hiking, investors found themselves looking at a market that had spent a year getting cheaper while profits climbed.
Sound like a buying opportunity? That’s putting it mildly.
As I just noted, stocks didn’t just recover in 1995; they surged 34% as Wall Street made up for lost time.
I’m not predicting that’s what 2027 will bring, and it’s not a perfect match. By most measures, stocks were cheaper in 1994 than they are today. Still, earnings are compounding while valuations compress, and eventually, markets tend to close that gap.
If the market does catch up to its earnings, though, it’s unlikely to lift every stock equally
The biggest gains should go to companies whose earnings can withstand higher rates and prices. Others could get left behind.
As legendary investor Louis Navellier, editor of Growth Investor, recently put it:
The Federal Reserve’s next moves could have a major impact on the stock market. With interest rates and market leadership shifting, investors need to be especially careful about where they put their money.
Louis’ tool for that job is his Stock Grader system, which grades more than 6,000 stocks on eight fundamental factors, including sales growth, earnings growth and operating margins, along with the institutional buying pressure behind each stock.
Looking ahead to next year, Louis expects the gap between the winners and losers to widen:
And as we head into 2027, I think the difference between the winners and losers could become even more pronounced.
This is the focus of Louis’ free presentation this Thursday, Nov. 12, at 2 p.m. Eastern.
He’ll explain why he believes the bond market is sending an important warning heading into 2027 and how higher rates could expose weaknesses in some popular stocks.
He’ll also reveal a new way he’s putting Stock Grader to work, one designed to help investors find opportunities and avoid potential losers without needing to predict where the broader market goes next.
Louis will dive deeper into all this on Thursday, along with which opportunities his Stock Grader is flagging today. Plus, he’ll share two free stock recommendations: one to buy and one to avoid.
You can reserve your free spot right here.
The cockroach consumer, part two
Yesterday, our senior analyst Brian Hunt, editor of Money & Megatrends, told us that in the event of global thermonuclear war, two things will survive: cockroaches and the American consumer.
Today’s real wage figure doesn’t make his case any easier. Paychecks merely kept pace with prices last month after falling behind in September. But as Brian showed us yesterday, that hasn’t stopped Americans from spending.
Our global macro expert Eric Fry and his lead analyst Tom Yeung are in Brian’s camp. In last week’s Fry’s Investment Report update, Tom called the U.S. consumer “one of the most powerful investment themes of the past century.”
Here’s Tom:
The strength of the U.S. consumer has long defied expectations.
Similar fears resurfaced during the stock market corrections of the 1970s, the late 1980s, and early 2000s. American consumers shrugged off these concerns.
Consumption only dipped slightly during the two oil shocks (less than 1% in real terms) and actually went up during the mild 2001 recession.
The current data backs him up…
Consumer spending grew at a 3.8% annualized rate in the third quarter, beating forecasts. Retail sales rose a solid 0.8% in September, according to the Commerce Department.
Meanwhile, Visa (V) reports that U.S. card payment volume rose 10% year-over-year in the first three weeks of October. And the National Retail Federation expects holiday sales to climb 4.2% to $1.013 trillion, which would be the first holiday season to top $1 trillion.
So, how is Eric playing it?
One way is Deckers Outdoor Corp. (DECK), the company behind Hoka running shoes and UGG boots. Back to Tom:
Deckers Outdoor Corp. (DECK) is one of the cheapest names in retail. Shares trade at just 10X forward earnings – their lowest since 2015.
That discount comes from two worries: whether Deckers’ brands can keep winning, and how long the U.S. consumer can keep spending. Eric and Tom believe both fears are overblown.
On the first, Hoka has been taking market share thanks to a series of missteps by Nike. Tom lays them out:
1. Hires a Bain & Co. consultant to raise profits.
2. He cuts out middleman retailers to focus on higher-margin direct sales.
3. Hoka (and On) take shelf space.
4. Nike realizes its mistake, but it’s too late.
5. New Nike CEO adopts a new strategy: “Just Undo It?”It turns out that Step 5 is particularly difficult. Casual runners have become used to wearing oversized, ultrapadded running shoes from Hoka, and Nike has struggled to woo customers back.
Meanwhile, UGG has found a new generation of fans among millennial and Gen Z shoppers, helped along by celebrities like Charli XCX and Gigi Hadid.
Now, beyond the indefatigable U.S. consumer, there’s one last reason to consider DECK…
Why Eric calls Deckers an “AI survivor”
Regular Digest readers know that Eric has been one of our more cautious voices on the AI trade this year.
Back in July, he told readers to “Panic in Advance” ahead of a potential AI shakeout, and he’s been steering them toward opportunities that don’t depend on the AI buildout – oil, healthcare and the American consumer among them.
Deckers fits that bill. As Tom puts it, it’s “a quintessential AI survivor stock.” And here’s how Eric described it back in May:
It has no AI factory. No GPU cluster. No agentic inference.
Instead, it has two of the most culturally resonant footwear brands on Earth, a best-in-class profitability profile, and a stock price that is still recovering from a growth scare that has largely passed.
So, if you’re looking to diversify out of some of your more speculative AI plays today, even while you ride your core AI holdings, give DECK a look. Eric thinks it’s a good buy below $115.
Coming full circle…
Today’s CPI report tells us what prices did last month. But Louis and Eric would agree on the bigger takeaway: In a market where rates are rising and prices are still climbing, what you own matters more than simply being invested.
For Louis, that means companies with surging earnings and healthy margins. For Eric, it means beloved brands like Hoka and UGG that don’t need the AI buildout to win.
Have a good evening,
Jeff Remsburg
