Stocks rallied on Friday as treasury yields took some of the edge off the bear’s saber. The services sector remains healthy according to the latest ISM report.
Ring for service. The service economy was pummeled during the pandemic. Hotels, travel, food services, personal care, entertainment… even certain subsectors in healthcare. With nowhere to go but a drafty, roadside shanty to eat, drink, and pretend things were normal, we turn our capitalist targets on buying things, or goods, as economists like to call them. These goods that were in high demand were also difficult to come by in many cases. The supply chain of components, materials, and even the finished products themselves was all gummed up. Adding to the pressure was a spike in fuel prices which made transporting goods more costly. All those supply problems combined with high demand became the spark that caused the inflation to erupt.
Turning the clock forward, inflation is still high, showing no signs of relenting any time soon. Things, although very different, are pretty much back to normal. Folks are mostly back in offices, and those roadside eating sheds have become more habitats for wildlife than places to eat out safely. Why then is inflation still going strong?
A big factor with current inflation, which can be easily observed by the following chart, is that once consumers began to shift away from goods, they shifted back to services, which is what is currently driving inflation. The blue colored bars are monthly change in services, while the orange bars are goods. You can see how the orange bars receded, making way for the increases in the blue bars which remain elevated. Keep reading after the chart.
There you have it. Services! On Friday, the Institute for Supply Management released its month ISM Services Index. This PMI gives us a good pulse on the services sector, as its name implies. Remember, these PMIs are constructed through surveying managers in the sector on monthly changes in all aspects of their business, everything from orders, to employment, backlogs, etc. When these numbers are above 50, the sector is expanding, while readings below 50 mean that the sector is contracting. Looking back on the number, we see it spike in late 2021 just as the Fed was ramping up its rhetoric. It declined through 2022 and actually dipped below 50 briefly in December. If the index stayed below 50, we would have expected it to portend declines in services inflation. Unfortunately, the number jumped back above 50 to 55.2 in January. The February number that came out Friday was expected to decline to 54.5 but came in slightly higher at 55.1. That means that the services sector remains healthy and optimistic, but the Fed hawks may view that as another reason to keep rates higher… not good for stocks. However, the number did still decrease, albeit slightly, which can be viewed as positive, a kind-of Goldilocks print. Another positive takeaway from the release was its Prices Paid component which showed a decline to 65.6 from 67.8. This number declined every month but 3 since January of last year. Its continued decline can be viewed as a precursor to disinflation in services. Something we can all appreciate, though that has clearly not occurred just yet. I was recently told from a good source that a blowout at a beauty salon jumped by nearly +50% within the past year. Now, I am not sure how the rise was justified given that there are no poultry products, energy products, or semiconductors required for the service, but I am informed from my close source that it is still difficult to get appointments, which means that, at least the cost of blowouts, is not coming down anytime soon .
WHAT’S SHAKIN’
Apple Inc (AAPL) shares are higher by +1.22% in the premarket after Goldman Sachs rated the company a BUY with a 12-month price target of $199. That would be a +32% upside from here. Goldman cited the company’s strong position as a service provider. Dividend yield: 0.60%. Potential average analyst target upside: +12.3%.
Signature Bank / New York (SBNY) shares are lower by -3.34% as investors look at recent declines in Silvergate Capital (SI) as a warning signal. SBNY has put a strong focus on digital assets recently, and investors may view that as being risky. The company missed EPS and Sales estimates last quarter and is due to announce Q1 results next month. Dividend yield: 2.46%. Potential average analyst target upside: +27.7%.
FRIDAY’S MARKETS
Stocks rallied on Friday as treasury yields eased a bit in response to benign economic numbers. The S&P500 climbed by +1.61%, the Dow Jones Industrial Average rose by +1.17%, the Nasdaq Composite Index climbed by +1.97%, and the Russell 2000 Index advanced by +1.35%. Bonds climbed and 10-year Treasury Note yields traded lower by -10 basis points to 3.95%. Cryptos gave up -4.85% and Bitcoin declined by -5.01%.
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