Stocks closed higher after rallying later in the session as investors weighed a strong Retail Sales figure. A strong consumer may just help the Fed engineer that hard-to-find soft landing.
Pick your poison. Well, what do you want, a strong economy or lower interest rates? You can’t have both. Or can you? Yesterday, investors were faced with a dilemma. Still reeling from a stronger than expected Consumer Price Index / CPI figure, traders held on to their armrests tightly as the US Census Bureau released its Retail Sales figures yesterday morning. On Tuesday, the CPI figure threw us a bit of a curve ball when it came in higher-than-expected causing traders to quickly factor in higher rates for longer. To be fair, not much higher and not much longer, but adjusted, nonetheless.
Look, we all just want to go back to those nirvana-market times where rates were 0% and buying dips was considered a hobby for retirees. The economy seemed bullet-proof. I was giving presentations in 2018 and talking about how the modern era record economic expansion was “long in the tooth” and with an inverted yield curve along with a slowdown in earnings growth, the probability for recession was increasing. Every month that went by, I would add another month to that “long in the tooth” slide, as the economy sauntered along with no worries. Consumers just could not be stopped. They singlehandedly kept the economy expanding, though not booming. That was good enough for a goldilocks scenario in equity markets.
The pandemic and lockdowns changed all that. Everything came to a screeching halt, and in what seemed an instant, accelerated to an unsustainable pace. Inflation was borne out of that forge. It was not just tight supply, but also hungry consumers that pushed prices to nosebleed heights. That caused the Fed to take action, which instigated stocks to post a recently rare yearly loss. If you polled average investors today, most would hope for lower rates and a booming economy, like in the “old days”. The problem is that inflation is still high, and the Fed is committed to its ongoing rate-hiking. Based on commentary from earnings season, we are hearing that demand is slower, but not by any means, gone. That is a good sign. Consumers may be pulling back allowing prices to return to a light simmer from a rolling boil. But wait, yesterday’s Retail Sales release proved otherwise. It came in with a monthly gain of +3.0% after falling by -1.0% in the prior month, and economists were expecting a +2.0% increase. The largest gain came from the Department Stores category which grew by +17.5% in January! After that, Food Services and Motor Vehicles were the next biggest contributors (+7.19% and +5.9% respectively). Are you surprised? Probably not.
At first, investors were unsure of what to make of the strong print. Initially, stocks sold off as bond yields jumped. The Fed would surely have to raise rates higher and keep them high for longer. But wait, is that a problem if the economy is doing well? By the afternoon, as the shadows grew long on Wall Street, traders answered the question for themselves. The answer was another half percentage point or so on Fed Funds would be OK, as long as the consumer remains strong and keeps the economy buoyant, AKA a soft landing. It’s not a given, still just a theory, or a pocketful of hope. This morning we will get a glimpse of the Producer Price Index / PPI which certainly has the possibility of throwing a spanner into the works ⚙. A collection of Fed speakers and FOMC meeting minutes after the upcoming long weekend can gum things up as well. Right now, the scales can tip either way, so pay attention… stay focused.
WHAT’S SHAKIN’
Cisco Systems Inc (CSCO) shares are higher by +2.99% in the premarket after it announced that it beat EPS and Revenue targets by +2.85% and +1.18% respectively. The company attributes the surprise to strong demand for network infrastructure equipment. Companies may be laying off workers, but they are spending on upgrading their networks. Cisco’s forward PE of 13.17x is cheaper than the median 19.01x of its peers. Dividend yield: 3.21%. Potential average analyst target upside: +16.0%.
Albemarle Corp (ALB) shares are higher by +2.97% in the premarket after it announced that it beat EPS and Sales targets by +5.23% and +0.10% respectively. The company offered forward guidance that exceeded analysts’ expectations, citing China reopening as a demand driver for EVs, batteries, and lithium. In the past 30 days 43% of analysts have changed their price targets 10 up, 0 down, and 13 unchanged. Dividend yield: .057%. Potential average analyst target upside: +15.4%.
YESTERDAY’S MARKETS
Stocks rallied into the close yesterday as investors chose to view a hotter-than-expected Retail Sales number as a sign of a soft landing. The S&P500 rose by +0.28%, the Dow Jones Industrial Average traded higher by +0.11%, the Nasdaq Composite Index jumped by +0.92%, and the Russell 2000 Index advanced by +1.09%. Bonds slipped and 10-year Treasury Note yields added +6 basis points to 3.80%. Cryptos gained +7.02% and Bitcoin climbed by +8.66%.
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