Stocks stand up to Putin

Stocks staged a huge comeback after an earlier-session fall caused by Russia’s invasion of Ukraine. GDP estimates for the final quarter of 2021 were revised upward to an annualized +7% growth as activity picked up into year-end.

Force of nature.  Is it a coincidence? Prices are surging in the US and EU as the globe slowly but surely recovers from the human and economic devastation caused by the COVID-19 pandemic.  Folks are consuming and demand is high. Supply of goods has been somewhat challenged resulting from multiple shutdowns, restarts and massive, unexpected shifts in consumption patterns. These conditions create a classic inflation environment.  We knew it was coming, we watched it approach, and we are now living in its clutches. It literally unfolded in slow motion, right before our eyes.  This is not the world’s first bout with inflation. We have seen it before, though not too recently and, at least in modern times, it has been remedied by tightening of monetary policy or by a recession, usually caused by…a tightening of monetary policy. Rates go up, consumers can afford less, so they demand less, and prices recede. A recession results when rates rise so quickly that consumption completely drops off along with consumer confidence. Losses mount for companies sparking layoffs causing high unemployment…which causes consumption to further decline. Decreases in consumption, which makes up roughly 2/3 of GDP, cause the nation’s output to contract, which is technically, a recession. The large pullback in demand cause price inflation to cease, and we start the cycle all over again.

In the past year prices of just about everything have gone up resulting from increased labor costs, raw material costs, and transportation costs. In 2021, consumer prices rose by 7%! Motor fuel rose by some +50% while fuel oil rose by +41%.  So, if you drive and want to keep warm your wallet was lighter than it was in the prior year. It was not just consumers who felt the burn. Producer prices rose by more than +12% in 2021. Here, we saw raw materials of all kinds rise as supply chains were snarled up. Transportation costs skyrocketed with rising fuel costs. All those increasing costs borne by producers are slowly being passed on to consumers. There is a notable theme here and that is the rising cost of energy. Supply of fuel is typically controlled by producers who speed up or slow down production to match demand, thereby keeping prices relatively stable. As the world re-opened and demand for fuel ignited, suppliers were slow to increase production. High demand combined with low supply is the culprit here… classic economics. 

Russia is the 2^nd largest energy producer in the world, and its incursion into Ukraine has thrown its share of supply into question. Would the world embargo Russia’s oil production, which makes up some 11% of the world’s supply? That supply disruption would certainly cause already high fuel costs to go higher, and it is precisely why crude futures have been on the climb. When President Biden announced US sanctions yesterday, his excluding of expected energy restrictions caused stocks to rally. Even without energy sanctions, trouble in the region will cause its crude supply to diminish, so prices are likely to stay high and possibly go higher yet. This puts the Fed in a tight bind as it embarks on its impending inflation-fighting campaign. The Fed will have to thread a fine needle as it will surely feel the urge to raise rates more aggressively to tackle a potential acceleration of price increases. It will have to weigh its inflation fighting with its potential to cause a recession. There is another scenario to consider. With the economy mostly back on its feet, demand for fuel should be stable at this point. If fuel prices continue to rise, consumers will simply have less discretionary funding to spend on other items. It is the equivalent to getting a pay cut which typically leads to decreased demand… which ultimately leads to a pullback in inflation.  Markets are starting to believe that the Fed will tread more lightly as result of the eastern Europe crisis not wishing to add further instability to markets, despite the possibility of further rising fuel prices. As of this morning a +50 basis rate hike in March has a 17.2% probability, according to Fed Funds futures. That probability was above 50% just a week ago. Clearly there is more to this story than the possibility of further rising fuel prices resulting from the Russian invasion. Russia is also the 2^nd largest exporter of wheat and Ukraine is the 4^th largest, just ahead of the US. Ukraine also produces noble gasses (Ukraine accounts for 70% of the world’s neon gas supply) and rare earth elements…used extensively in semiconductor manufacturing. All topics for future discussion… and volatility.

WHAT’S SHAKIN’

Foot Locker Inc (FL) shares are lower by -17% in the pre-market after it announced that it beat estimates on EPS and Revenue but offered weak guidance for 2022 sales. In the past month 7 out of 21 analysts have lowered their price targets for the company.  Dividend yield: 2.89%.  Potential average analyst price target upside: +40.7%.

Etsy Inc (ETSY) is trading higher by +16.89% in the pre-market after it announced that it beat EPS and Revenue targets by +39.22% and +4.62% respectively. In the past month 52% of analysts have changed their price targets 0 up, 10 down, 8 unchanged, and 1 dropped.  Potential average analyst price target upside: +71.2%.

YESTERDAY’S MARKETS

Stocks erased deep early losses, closing higher, after a new round of Russian sanctions did not include energy curbs. The S&P500 rose by +1.50%, the Dow Jones Industrial Average climbed by +0.28%, the Nasdaq Composite advanced by +3.35%, the Russell 2000 Index added +2.62%, and the S&P500 ESG index traded higher by +1.51%. Bonds gained and 10-year Treasury Note yields slipped by -2 basis points to 1.96%. Cryptos gained +0.48% and Bitcoin added +2.32%.

NXT UP

• Personal Income (Jan) probably declined by -0.3% while Personal Spending may have gained +1.6% after gaining +0.3% and losing -0.60% respectively in the prior month.
• PCE Deflator (Jan) is expected to come in at +6.0% after registering +5.8% in December.
• University of Michigan Sentiment (Feb) is expected to come in at 61.7 in line with earlier estimates.
• Next week: More earnings along with regional Fed reports, PMIs, Factory Orders, and the monthly employment numbers.  Check back on Monday for calendars and details.