Don’t let the Fed’s nasty tone get you down

Stocks managed to close in the green despite many ups and downs as traders try to figure out what’s next. This week’s economic data void leaves traders in no-man’s zone – Fed speakers will be happy to fill the void.

What is important. Consensus is building beyond the obscure probabilities that I quote for you quite often. Sure, there are those overnight swaps and Fed futures, but what do YOU think? I am sure that you are still a bit shellshocked from last year’s market rout and this year’s volatility. I am also sure that you couldn’t have imagined that the Fed would raise rates so aggressively… so quickly as they did last year. I am also quite sure that you couldn’t have imagined treasury yields jumping to pain levels… and then in yet more painful pain levels. I get it, and you are not alone. But don’t let those things cloud your judgement today when making decisions going forward.

Let us please take a step back and think for a moment. The economy is trudging along. Companies are not experiencing the breakneck growth that they had immediately after the pandemic lockdowns. Those were, indeed, the anomalies, reflecting supply and demand shocks, which rarely happen at the same time. Coupling those with temporary demand shifts allowed some companies to reap great rewards. Now, safely on the other side of the anomaly, we can clearly see those companies whose gains were a flash in the pan, and those who rode the wave. I won’t mention names, but I am sure that you can think of some companies which would only benefit from global lockdowns. Still, there were others that may have benefited from the lockdowns but also have value beyond. There, I will mention some obvious names like Apple and Microsoft. During lockdowns everyone was clamoring to spiff up there home tech and connectivity, which obviously benefited those two iconic tech giants. Now that those boom days are behind us, folks still buy computers, tablets, and smartphones, just not ALL AT ONCE, like they did in 2020 and 2021. Got it? Sure, you do. I went through this to remind you that there are plenty of good and healthy companies for investors to choose from. For the record, I am NOT endorsing Apple and Microsoft but simply betting that most of you know those two companies well. Let’s move on.

All of that crazy stuff from the last paragraph – the supply and demand shocks, etc. were the principal causes of inflation. That was the cause of the Fed’s interest rate outburst, which, by design, caused markets to throw a tantrum. The Fed has been, for the most part, in a wait and see mode for most of this year. Rightly so, as inflation has indeed receded and the labor market has, indeed given up some ground. But clearly the Fed is not ready to open the gates and let consumers run out of the barn just yet. Inflation is still high and if you are a student of history, you may remember that inflation has a habit of relapsing, as it did in the 1980s. This is why the Fed must remain vigilant, which it is. It is doing so by not relenting by lowering rates, hinting about lowering rates, and threatening to keep raising rates if necessary. That is, it. Now let’s clear all that smoke and see what is left.

Next week, we will get a read of inflation when the Bureau of Labor Statistics releases Consumer Price Index / CPI. Analysts are expecting a month over month decline. The last year over year read was +3.7%, which is not quite down to the +2% that the Fed would like, but declining months are how we get there… slowly. So, what are the last holdouts of inflation? I will tell you, then I will leave you with a chart to contemplate. The answer is… wait for it… SERVICES. Drilling down further into services, we find SHELTER as the main perpetrator. To get an idea of that, graphically, just look at the chart that follows and look at the light-blue bars. You can see how they rose, remained high, and then re-surged in September. Oh, and there are those other things, but shelter is clearly a problem. Neel Kashkari, Minneapolis Fed President, like his colleagues, is doing his job when he says that he would rather risk raising rates too high over risk cutting too early. That is, no doubt, good to know, but what is really important is next week’s CPI release. Focus on the signal and try to avoid the noise.

WHAT’S SIGNALING THIS MORNING

Emerson Electric Co (EMR) shares are lower by -3.02% in the premarket after the company announced that it missed EPS and Revenue targets last quarter. The company provided full-year EPS guidance that was above analysts' expectations. In the past 30 days, 25% of analysts have modified their price targets 0 up, 6 down, 17 unchanged, and 1 dropped. Dividend yield: 2.28%. Potential average analyst target upside: +19.8%.

Coterra Energy Inc (CTRA) shares are higher by +2.99% after the company announced that it beat EPS estimates by +13.53%. The company also raised its full year guidance. IN the past months 7 analysts have raised their price targets while none have lowered. Dividend yield: 2.91%. Potential average analyst target upside: +19.0%.

YESTERDAY’S MARKETS

NEXT UP

• No economic releases today, but plenty of Fedspeak from Goolsbee, Barr, Schmid, Waller, Williams, and Logan. Kashkari will kick things off and has already left his mark in the premarket with a hawkish tone.
• After the closing bell earnings: Rivian, Occidental Petroleum, Bumble, Mosaic, DaVita, Coupang, Lucid, Gilead, Akamai, Viatris, Extra Space, eBay, Cava Group, and Coty.