Stocks limped to losses yesterday as strong economic numbers put Fed-fear into their minds. Economic output came roaring back last quarter, which was not entirely surprising to economists, but it still hurt the eyes of traders hoping for something to boost stocks.
What are you buying? That should really read “what are you NOT buying?” Come on people, maybe a little…moderation. You may have already heard that the US economy is… or was on fire last quarter. On fire in a good sense, as quarterly Annualized GDP came in at a strong +4.9%, higher than economists were expecting. The quarter before, the US economy put out a +2.1% growth, which was also solid. But +4.9%? That would be unarguably healthy. Like, 2021 healthy, if you recall the last time we had growth numbers like that. Those big growth numbers are believed by many to be the start of inflation, the effects of which are still with us, and vexing investors… BUT NOT CONSUMERS.
Let’s have closer look. Macro economists break the economy into 4 aggregates. Consumption (C), Investment (I), Government (G), and Net Exports (NETEX). You add them all up C + I + G + NETEX, and you get GDP. Simple, right? Consumption (C), as my regular readers know, is an obsession of mine. Why? Because it makes up more than 2/3 of the US economy, so one can safely say that healthy consumers make a healthy economy. Investment (I), at a very basic level, lives in the hands of businesses. When businesses are spending money, Investment (I) is in good shape. We can avoid the other two for this morning’s conversation. So, C and I are the ones we have to be concerned about 88% of economic growth in the US. Got it? Sure, you do. When those two aggregates are growing well, so then, is the economy, but also so is the threat of inflation. Remember that one of the key types of inflation is demand pull inflation, which results in strong demand pushing prices higher.
This is the type of inflation that the Fed is most concerned about. Why? Because, yes to what I just wrote about, but also because that is all that the Fed can really impact. By raising interest rates, the cost of borrowing for consumers and corporations, the Fed is attempting to squelch demand to allow prices to moderate. If you are following me, you would be thinking to yourself “self, if that demand is squelched by higher interest rates, wouldn’t that mean the consumption (C) and investment (I) would be weaker?” You would be correct in your thinking, and that is certainly on the minds of Fed members, economists, and even everyday stock market investors. Inflation is bad, but an economic collapse combined with inflation is worse. That would be stagflation, but let’s not get into that now. In fact, we don’t need to worry about it at the moment, because clearly, the economy is not contracting! And inflation, while still high, is certainly moderating. We will get a refresh on that later this morning with the PCE Deflator release. Digging one layer down… for your information. Personal Consumption Expenditures (the official name of consumption (C)) grew by +4.0% last quarter, while in the prior quarter it grew by just 0.8%. In that category, Durable Goods, big things that would hurt if dropped on your foot (cars, TVs, computers, dishwashers, etc.) grew by +7.6%. In the Gross Private Domestic Investment aggregate (that is the fancy name for Investment (I)), manufacturing grew by +18.8%, which is high, but not so much when you look back in the prior 2 quarters in which it grew by +86.5% and +190.4%, going backwards. Wow! Another interesting data point in that category is investment in Single Family Residential Structures, which grew by +21.6% after growing by +1.3% in Q2 and declining in the prior 3 quarters. Are you getting a sense where all this growth is coming from? All those growth areas, ONE WOULD THINK, would be highly sensitive to higher interest rates. Go on, think about it again for a second, it is important. Ah, yes, they would… but clearly, they haven’t yet. So, then, are you surprised that the Fed is calling for higher interest rates for a longer period of time? Of course, you’re not.
Including the current quarter that we are in now, the one just reported, and the 2 prior quarters, economists are expecting the year to end up with a +2.2% increase in GDP. Fed members are expecting that number to be +2.1%... pretty close. Economists are also expecting inflation to end the year around +3.8%. The Fed is hoping for +3.3%, based on its latest forecast. Next year, the Fed is expecting a +1.5% GDP growth with inflation at +2.5%. Private economists are expecting GDP to be at a +1.0% growth level (worse than the Fed) and inflation at +2.6% (also worse than the Fed). Which one will be right? Unfortunately, we are going to have to just wait and see. For now, it looks like higher rates for longer. But you already knew that. AND SO HAS THE MARKET for some time now.
WHAT’S UP OR down IN THE MARKET THIS MORNING
Intel Corp (INTC) shares are higher by +7.1% in the premarket after announcing a blowout beat after last night’s close. The company also provided strong Q4 guidance. Analysts are pointing to a recovery in the PC as the reason behind the strong results and guidance. Good news for the whole sector, if true. Dividend yield: 1.5%. Potential average analyst target upside: +38.01%.
Amazon (AMZN) shares are higher by +6.64% on high volume in the premarket after it beat analysts’ targets for the quarter. The results show that Amazon’s cloud business is stabilizing and expecting to make gains next year. Investors like that . Potential average analyst target upside: +45.7%.
Also, this morning: Chevron and ExxonMobil both came up short on their Q3 earnings.
YESTERDAY’S MARKETS
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