Stocks rallied on Friday on continued enthusiasm spilled over from Thursday’s lower than expected inflation figure. Confidence is waning, according to the latest survey by University of Michigan.
I just want to believe. It has started, the questions, I mean. “Is inflation over?” “Is it time to buy stocks?” It all started last Thursday when the Bureau of Labor Statistics released its Consumer Price Index / CPI for October, and the number came in lower than expected. As the market has grown accustomed to receiving negative surprises as of late, this positive one sent stocks on a ripper, also perhaps, a bit better than expected. So, let’s get an answer on the first question and then see if we can come up with something to inform us on the second.
“Is inflation over?” NO! The CPI came in at +7.7%. Economists were expecting it to be +7.9% after an +8.2% print the month before. So, it is only correct to say that inflation has slowed, and a little better than expected. If we look at the so-called Core CPI which excludes food and energy, that number also surprised positively, coming in at +6.3% after logging a +6.6% growth in September. Let’s consider 2 things with regards to the Core CPI. First, the Fed’s target for that number is +2.0%, more than three times lower than where it is today. For some reference, the number was below +2% in the first quarter of last year and was almost -2 percentage points less than today’s just a year ago. The second thing to consider about the Core CPI is thatit excludes food and energy because historically those 2 categories were more volatile making it difficult for economists to spot trends. However, in case you haven’t noticed, food and energy have been one of the biggest drivers of inflation in the past year. Additionally, and if you also haven’t noticed, we all need food and energy to survive and thrive. On those trends, energy is still high, though it is less than a few months ago, but food costs are still stubbornly high. Even if you are the type of person who doesn’t pay attention to your grocery bill, you can’t help but notice some supersized price jumps.
You have probably noticed the new trend at many retailers where you have the choice to self-checkout. I like this option because in New York and New Jersey you pretty much have to bag your own groceries anyway, so self-checkout is the more efficient option, for me at least. Yesterday, I went to the local grocery store for some lettuce, and as I checked myself out, I was shocked that the romaine lettuce I bought was $7.99. Now, I, unlike my Mother-in-law, don’t memorize the cost of every single item in the store, but that price did seem high. So, I went to the CPI report from last Thursday – it was still on my desk, and what I found was that lettuce was +17.7% higher than it was last year – BINGO. I also bought a dozen eggs which I already know have gone up in price, but for the record, the CPI release confirmed that eggs cost +43.0% more than a year ago. Another essential, if you are my daughter, is pet food for the rapidly growing Cavapoo Eloise, which costs +15.0% more than last October. Veterinarian services are +11.1% more costly and onerous than human medical care services which are only +5.4% more expensive than a year ago, though health insurance cost has gone up by +20.6%. Below is a nice chart of annual inflation from Bloomberg. It illustrates just how rapidly inflation got the jump on us. You will also notice that it appears to have peaked in June. So, will prices continue to pull back, and where will inflation be a year from now? Well, according to the latest University of Michigan Sentiment indicator, respondents believe that inflation will be at +5.1%. That is, incidentally, higher than last month’s expectation and still more than 2 times higher than the Fed’s target. No, inflation has not gone away. It is improving marginally but it is still expected to be higher than normal a year from now. The big question beyond that is what the Fed will do about.
Understanding the Fed’s response to all this inflation stuff will give us a better understanding of how the markets may react in the months to come. To be clear, there are many more factors than just interest rates which will dictate the path of stocks, but interest rates have been of particular interest in the past 12 months as they are one of the primary drivers of the indexes’ under-performance during that timeframe. Growth stocks, in particular, have been hammered in the past 12 months as they are most sensitive to interest rates. Now, many of them appear to be value stocks, because even though revenue growth has slowed down somewhat, many of the most popular ones are still quite healthy but their share prices have been under pressure with rising interest rates. Last week’s positive surprise in CPI saw bond yields plummet which is why we witnessed such a strong rally in the growth-heavy Nasdaq. With that behind us now, we need to think carefully about how the Fed will respond in next month’s FOMC meeting.
At the moment the market is expecting a smaller +50 basis-point hike, but that can change a lot, in either direction, in the next 30 days. That means that we have to pay close attention to the economic numbers and Fed speakers to get more color on future policy moves. Fed speakers are not likely to let up on their hawk talk, because there is no incentive for them to do otherwise. Just this weekend, WHILE YOU SLEPT, Fed Governor Christopher Waller said that policy makers had “a ways to go” before hiking would stop. He further commented that the market got “way out in front” of the easing of inflation. In other words, he thinks the market overreacted to the inflation figure. On this, I am not sure that I side with him completely. Markets attempt to factor in the future, perhaps beyond the banker’s preferred timeline, so we would expect markets to respond positively to the budding trend. What this all means is that while this slight cooling of still-high inflation is positive for the market, it is clear that we still have “a ways to go” before we can safely say that stocks are out of the woods. This is a time to be cautiously optimistic… very cautiously.
WHAT’S SHAKIN’
Tyson Foods Inc (TSN) shares are higher by +1.62% in the premarket after it announced an EPS miss this morning. The company warned of higher poultry costs (we knew that) but lower beef costs (we also knew that). The stock is rallying because it beat Revenue targets in the last quarter and its forward guidance for the year is higher than analysts were expecting. Dividend yield: 2.84%. Potential average analyst target upside: +29.7%.
Hasbro Inc (HAS) shares are lower by -5.24% in the premarket after it got a received A rating and price target downgrade from Bank of America Securities. The analyst cited poor management of one of the company's key product lines. On average, analysts have raised their current quarter EPS targets by +8.16% in the past month, while revenue estimates have been trimmed by -1.94%. Dividend yield: 4.41%. Potential average analyst target upside: +36.2%.
DENTSPLY SIRONA Inc (XRAY) shares are lower by -9.55% in the premarket after it missed EPS and Revenue targets by -28.49% and -7.48% respectively. The company also cut full year guidance, citing macroeconomic headwinds. Dividend yield: 4.56%. Potential average analyst target upside: +19.3%.
FRIDAY’S MARKETS
Stocks continued Thursday’s rally on the cooler-than-expected inflation figure. The S&P500 gained +0.92%, the Dow Jones Industrial Average added +0.10%, the Nasdaq Composite Index jumped by +1.88%, and the Russell 2000 Index advanced by +0.29%. The bond market was closed on Friday in observance of Veterans Day. Cryptos fell by -6.39% and Bitcoin dropped by -5.9%.
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