Good things come to those who have patience

Stocks pulled back yesterday as traders digested hawkish comments by Fed officials. China is on the menu once again as eyes turn to a meet up between President Biden and President Xi Jinping.

Wide awake. Last night was a late one for me… especially for a Monday. I had the pleasure of enjoying a fantastic meal with some of my fantastic colleagues. It was a fantastic evening in what I consider to be one of the most fantastic cities in the world (and I have seen a few). I did seem fantastically cold as the autumn chill arrived a bit later than usual this year. It also seemed fantastically dark for the hour. Because of this, we chose to cram ourselves into an Uber which was billed as “XL”, meaning it was supposed to fit 6 passengers comfortably, though it barely fit 4 of us. There were no complaints, we are good friends, but we were happy to arrive at our destination and stretch our limbs. Something wasn’t right, however. We looked into the front window but did not recognize the very same bar that at least 3 of us were at just a few weeks ago. We were at the wrong restaurant. “Fantastic,” we collectively thought.

Yesterday was less than fantastic for stocks. Last week ended with a bang when inflation figures came in lighter than expected. Lots of pent-up demand for good news drove stocks on a feelgood rally. Everyone likes a good rally… everyone except for maybe the 12 members on the FOMC who are in a pitch battle with inflation. You see, when stocks rally and bond yields come down, the event, in effect, is a loosening of financial conditions. Lower yields… for obvious reasons, and a rising stock market, because that increases consumer confidence, the scourge of inflation fighters. One of those inflation fighters was quick to quip about it over the weekend reminding investors that the Fed has “a long ways to go” with its market mauling activities. I reported this to you yesterday morning. Markets struggled with it at first but ultimately managed to find the green… momentarily. Another FOMC member, this time a well known dove, hit the tape with her take. At first glance her comments seemed on-brand as she was quoted saying that “it might be appropriate soon to move to a slower pace…” However, she also said that the Fed had “additional work to do.” That second bit was enough of a reminder to let out whatever air there was holding stocks higher, and equities sold off into the close.

Those types of moves are typical for a Monday with no real economic news or major earnings announcements to contemplate. They are also typical with investors sitting at a low point of confidence. It’s not just high interest rates that have investors worried. There is that whole “recession” thing hanging above us. Inflation, which appears to be slowing is still high, which combined with recession could lead to stagflation, which is another bearish buzzword. Well, I suppose the good news is that today, we will have some real news to guide our investment decisions… and emotions. Starting with earnings, we will hear from retail heavy-hitter Walmart this morning. Of course, the market will be happy to see the company beat estimates and perhaps provide some positive guidance, but what we should really be looking for is commentary on its inventory. You may recall that Walmart was, just a few quarters back, somewhat of a canary in the coalmine as it announced that inventories were beginning to build up. The reason was that food prices were rising so fast that Walmart customers were spending less on non-food items so that they could afford to buy food. For Walmart, that is bad news because hardlines and softlines have higher margins… er, they are good for profits. However, there is a hidden positive in all that. At some point Walmart would presumably have to lower prices on those rapidly building inventories to make room for new inventory. “Wait, did he just say lower prices,” you are thinking. Yes, I did, and if Walmart is feeling that pressure, so are others, and those lower prices will eventually find their way into the overall inflation landscape. Following Walmart earnings, we will hear from a slew of other retailers over the next few days, and inventory will be a hot topic. Later this morning, we will hear from the Bureau of Labor Statistics when it releases its Producer Price Index / PPI number. The PPI covers prices paid by producers… you know, upstream from us consumers. That is why the PPI is considered a leading indicator for inflation. If companies are facing cost pressures, they will raise prices to maintain margins, which, if you haven’t noticed, they have done. On the other side of the equation, lower costs would enable companies to lower prices to control inventory and maintain market share. Oh, and by the way, lower cost is also good news for investors, who like when companies are more profitable. The PPI peaked at +11% earlier this year and has retreated to +8.5% in September. For October, economists are expecting it to further decline to +8.3%. That or anything lower is likely to make the bulls happy. That would also make those trash talking FOMC members happy because their job, at the end of the day, is to fight inflation.

Don’t expect them to vocalize their happiness however, as an +8.5% PPI is still high – very high by historical standards. What members say at this point is less important than what the Fed actually does in its next meeting a month from today. Waiting for a pivot? It will come, though it may take some patience. It was chilly, we were not exactly dressed for it, and we were late for our reservation. We kept our eyes on the prize. In this case, we were in Manhattan’s SOHO at the famous restaurant’s steakhouse while our reservation was at its trattoria in TriBeCa. We pivoted and walked toward the beautiful Freedom Tower which served as a beacon. It was a 15-minute walk which seemed like a thirty-minute walk because of the cold. The cobblestones were no match for one of our group, who negotiated the ancient streets in high heels. In the end, our patience paid off. The food was fantastic, and so was the company. Be patient.

YESTERDAY’S MARKET

Stocks traded lower yesterday as elation from last week’s lower inflation figure faded. The S&P500 fell by -0.89%, the Dow Jones Industrial Average gave up -0.63%, the Nasdaq Composite Index dropped by -1.12%, and the Russell 2000 Index declined by -1.14%. Bonds declined and 10-year Treasury Note yields added +4 basis points to 3.85%. Cryptos declined by -3.87% and Bitcoin inched higher by +0.12%.

NEXT UP

• Empire Manufacturing (Nov) is expected to have eased to -6.0 from -9.1.
• Producer Price Index / PPI (Oct) may have slipped to +8.3% from +8.5%.
• Today’s Fed speakers: Harker, Cook, and Barr.