Stocks climbed yesterday, led by tech shares as investors had high hopes for AI posterchild NVIDIA… and they were rewarded. Purchasing managers indexes came in on the softer side fueling hopes that the Fed will have to remain passive for the moment.
What is there to lose? Imagine a comic con-like get together in Wyoming where the participants, rather than donning their favorite superhero and supervillain costumes, showed up with mismatched socks, comfy shoes, and threadbare sweaters. In their hands are not mythical magical war hammers, light sabers, or Poke balls. No, these attendants could be seen clutching piles of papers, laptop computers, and the occasional calculator with at least 1 carefully concealed slide rule. I am referring to the Jackson Hole Economic Policy Forum.
As its name implies the confab is a place where academics and global central bankers alike get together to discuss… um, economic policy. I am sure that you would just love to attend, but you probably have some gardening or house chores to attend to. But don’t worry, there is good news. Also in attendance will be a throng of reporters who will chase after the star attendants with hopes of being the first to break a soundbite or quote of someone hinting at future policy decisions.
Now, I am sure at this stage that I don’t have to describe why those reporters are there, but I will… just in case. INTEREST RATES. The bane of our recent stock investing existence. You have done your homework, you have been patient, you have saved your hard-earned pennies, listened to the experts, and READ MY REPORT REGULARLY. Your savings have grown, and things were looking up for your future, even with that nasty, deadly COVID pandemic. Then came the invasion. The other pandemic. I am talking about inflation. At first it was just an annoyance to pay more for gasoline and eggs, but then it became more widespread and began to eat into your monthly budget. But you were okay with it because your portfolio was doing quite well. And then came the third pandemic. Interest rate hikes. This was the final straw that managed to damage your stock portfolio’s value.
So, here we are and there are hints that we are past the bulk of the rate hikes and hope is returning. A new hero, AI, has come to rescue our beloved stock portfolios. AI has been with us for some time, concealing its superpowers, but last year’s abysmal performance in equities set the perfect stage for AI’s reveal as the new, new game changer. There was a new hope.
But the Fed is resolved in its battle with inflation, and it will not stop assaulting your savings until inflation gets back down to some magical level (+2%) that it has set. A long-dated legend has it that +2% is the magical inflation number that will allow all to live in peace and prosperity. Another legend talks of a second magical number called the “r-star” or simply r*. That is an interest rate which does not hurt or help the economy. Let’s call it the neutral rate. There is much debate over what that rate is. It used to be thought that it was somewhere around 2.5%, but lately that has shifted. Side note, Fed Funds is currently 5.5%, way higher than what used to be the generally accepted neutral rate. That means that the brakes are on. And those brakes appear to be working.
Inflation has moderated though it is not yet at that legendary target. This weekend, we can expect the Jackson Hole attendees to debate the r-star. In other words, how much more can they tighten up monetary policy to finally vanquish inflation? Clearly, your stock portfolio would like to have rates remain here or lower. So, the bar is high for those policymakers. They run the risk of saying something so hawkish that stocks sell off. But wait, why would they care about your stock portfolio. Strong stock market performance fuels inflation. Another risk that policymakers are taking is tightening their grip so much as to cause the economy to fall into a recession. That risk appears to be getting lower as recent economic numbers suggest a slower, but healthy economy. So, what are central bankers to do? With very little risk of causing trouble for the economy, they have a slight downside in talking tough. The big question is whether the market’s new hero, AI, will be intimidated by the tough talk.
THIS MORNING
NVIDIA Corp (NVDA) shares are higher by +7.91% in the premarket after the company announced a blowout EPS and Revenue beat last quarter. The company also provided revenue forecasts that were higher than expected. Dividend yield: 0.03%. Potential average analyst target upside: +29.1%.
Dollar Tree Inc (DLTR) shares are lower by -4.30% in the premarket after the company announced that it beat on EPS and Revenues last quarter. The company provided current quarter guidance that broadly missed analysts’ expectations. The company’s forward PE of 23.63x is lower than its peer group median of 25.53x. Potential average analyst target upside: +8.4%.
YESTERDAY’S MARKETS
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