Stocks rose to close out a spectacular month yesterday on optimism that everything is fine. The bar is raising for stocks as valuations get lofty – the answers lie in earnings – at least some answers.
Let’s get something straight, technically speaking. We talk a lot about inflation these days. I am sorry if you are a regular reader and are thinking “oh Marko, not another piece on inflation,” but unfortunately it is at the root of all that may be good or bad news for your portfolio over, at least the next year or so, and I KNOW that you care about that, so here goes.
Because I know that you are curious about AI too, I asked ChatGPT to define inflation and I copied it word for word here:
Inflation is the persistent rise in the overall price level of goods and services, resulting in a decline in the purchasing power of money, affecting consumers' cost of living and economic stability _
You are probably now wondering why I would waste my time with all this. I did because I want you to focus on one key word above and that is: “rise.” When you hear that inflation is increasing, it means that prices are GOING UP FASTER. Inflation, you see, is not a compilation of prices, but rather a measure of the rate of change of the price of a basket of goods.
So, if you are wondering if things will get better in your monthly budget once inflation gets back to the Fed’s +2% target, it all depends on what you mean by “better.” I write about the cost of chicken because I consider myself somewhat of an expert. I go grocery shopping often and my family has a predilection for chicken. In more common dialect that means that I buy lots of chicken. In fact, I am so skilled at it that I can pick up a package and guess the weight of it, and up until 2022, I could guess the correct price within a dollar. My target weight, now that my kids are out on their own, used to cost me between $7 and $8. My mother-in-law is shaking her head right now, saying I paid too much… my wife is thinking that I bought too much. Regardless of my bad buying behavior, that same package now runs me nearly $14!
So, back to my original question. Will things get better? Not if I am hoping that the same amount of chicken will go back to costing $8 anytime soon. Inflation getting back to the Fed’s +2% target means, simply, that prices will stop rising so quickly. Now, it is important to note that prices can decrease, and that is called deflation. It happens, but not often. When we talk about inflation moderating as it has recently, the correct technical term for that is disinflation.
What can cause deflation, so that prices for goods and services can dial back to where they were in 2020? Well, unfortunately, that only really happens in the wake of calamity, like a massive recession or a disaster like… a deadly pandemic. We don’t want that. Someone recently told me that her hairdresser had jacked her prices to breathtaking levels reasoning that her costs have gone up because… you know, supply chain issues . I checked into it… because I was curious. Prices of Hair, Dental, Shaving, and Miscellaneous Personal Care Products did increase by +10% from December of 2021 through December of 2022. I went further and found that Haircuts and Other Personal Care Services rose by only +5% through 2022. I then enquired about how much this hairdresser in question raised her prices… and I am afraid if I published the high double-digit, almost-triple-digit amount, I might get you upset. Let’s just say it was significantly higher. The only way that is going to change is if her clients leave her for a hairdresser with more reasonable prices forcing her to lower prices to stay in business… in theory, at least. The reality is that it is far more complicated than that. People have a great affinity for personal care professionals, making demand for their services highly inelastic. That is a technical economic term that means consumers will tolerate significant price increases without switching. SO, the answer to when things will get better is it’s complicated… sorry .
STOCKS ON THE MOVE
Caterpillar Inc (CAT) shares are higher by +1.67% in the premarket after the company announced that it beat EPA and Revenue estimates by +24.98% and +5.72% respectively. The beat defied expectations that global demand would slow in the wake of economic slowdowns globally. The company claims that demand is strong and that in addition to volume increases, price increases to offset growing costs have been tolerated by its customers. Dividend yield: 1.96%. Potential average analyst target upside: -6.3%. WHY IS THIS NUMBER NEGATIVE? Because the stock is currently trading higher than median average price targets of analysts. While that can be interpreted as the stock being overpriced, it does not mean that the stock will not continue to climb as analysts potentially raise price targets.
Zebra Technologies Corp (ZBRA) shares are lower by -15.57% in the premarket after the company announced a revenue miss in Q2. The company gave current quarter EPS guidance that was significantly lower than analyst targets. Zebra commented that their results were impacted by “softening demand and more cautious customer spending.” Potential average analyst target upside: +8.1%.
Also, this morning: Stanely Black & Decker, Zimmer Biomet, Eaton Corp, JetBlue, Merck, Global Payments, Ares Management, Molson Coors, Howmet Aerospace, Altria Group, Marriott International, and Norwegian all beat on EPS and Revenues while Enterprise Products Partners, Pfizer, Uber, Rockwell Automation, Watsco, and SunPower came up short of estimates.
YESTERDAY’S MARKETS
Stocks rallied yesterday to bring home a months of gains as solid earnings and improving economic conditions raised the bulls. The S&P500 gained +0.15%, the Dow Jones Industrial Average climbed by +0.28%, the Nasdaq Composite Index traded higher by +0.21%, and the Russell 2000 Index jumped by +1.09%. Bonds climbed and 10-year Treasury Note yields were unchanged at 3.95%. Cryptos slipped by -0.92% and Bitcoin gave up -0.29%. The S&P ESG Index advanced by +0.25%.
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