Economy Archives - Page 27 of 52

The PCE Inflation Index and Sector Outperformers

Posted on February 24, 2023February 24, 2023 by phoffman@channelchek.com

What Sectors Outperformed the Market after the PCE Inflation Shock?

When an investor inquires, “What stocks do well with high inflation?” they are often asking, “What sectors do well with rising interest rates?,” because inflation expectations often drive rate moves. The text book response usually given are: consumer staples, banks and financials, and commodities. The PCE indexes are considered the Fed’s preferred indicator of inflation trends. The PCE surprised markets on the high side when released on February 24^th. What can investors now expect from higher-than-forecast inflation?

Rather than look at old information on what outperforms the overall market when inflation expectations rise, I thought it would be informative and more useful to see what is outperforming under current 2023 conditions and climate. The chart below and the remainder of this simple study is a snapshot three hours after the news settled in among investors (11:30am ET, February 24^th).

Personal Income and Outlays

Source: U.S. Bureau of Economic Analysis

Sectors Outperforming Overall Market

There were five S&P sectors that outperformed the S&P 500 a few hours after the inflation number showed an almost across-the-board acceleration in price increases. At this point, the S&P 500 had already fallen 1.31%.

Beating the S&P larger index, but the worst of the five outperformers was Health Care (XLV). The Health sector is considered to be a necessity that consumers find a means to pay for regardless of cost. Within the sector there are companies providing goods and services that are more embraced by investors than others. Within the XLV, many stocks were green after the report.

Outperforming the Health Care sector were stocks making up the Industrial Sector (XLI). This includes large industrial manufacturers like John Deere, General Electric, and Caterpillar. Many of these companies have contracts well out into the future that assures business. What is not ordinarily assured is the cost of manufacturing which can go up with inflation. A number of the top holdings in XLI barely budged on the morning – GE was up .08%, Honeywell was down .18%, and UPS was down just .20%.

Almost even with the Industrial Sector was Consumer Staples (XLP). As with Health Care and to a lesser degree Industrials this sector is where money moves to during inflationary periods. Consumers may be postpone a new car purchase, but they’ll keep their buying habits unchanged for products produced by Colgate, Coca-Cola, Proctor and Gamble, or cigarette manufacturers.

Performing second best after the inflation numbers was the Utility sector (XLU). Again this follows the mindset that consumers can only cutback on water, electricity, and natural gas so much. It is more likely that cutbacks would come in other areas like entertainment, or technology. Technology was the worst performing sector.

The top performer, although still modestly negative, was the Financial sector. This includes insurance, banks and credit card companies, as well as investment firms. Banks, particularly those with a higher percentage of traditional banking business, benefit from a steepening yield curve. Banks use cash as their product line. They borrow short from customers, and lend longer term. As the yield curve steepens, their net income can be expected to rise. This may explain why two of the top three holdings were positive after the report, JP Morgan (JPM), and Wells Fargo (WFC). Brokerage firms also may benefit as accounts uninvested balances can be a source of revenue as financial firms earn interest on them. Rising rates means every balance they can earn on creates additional income.

Larger Index Observations

As indicated earlier, technology was the worst-performing sector. This causes the tech heavy Nasdaq to far underperform the other major indexes. The best performing a few hour after the open was the Dow Industrials, which is comprised of just 30 industrial stocks, many paying consistent dividends. The second best performer, beating both the Dow and S&P 500 was the Russell 2000 Small-Cap index. Small-cap stocks tend to be less affected when borrowing costs change, and tend to have more of their end customers located domestically. The U.S.-based customers is an advantage to smaller stocks when rising rates cause rising dollar values. A rising dollar makes goods or services from the U.S. more expensive overseas.

Take Away

The textbook reply to questions related to rising rates, inflation, and sector rotation in stocks held up after the surprise PCE index increase. Banks, and necessities like heat and consumer goods outperformed. Also small-cap stocks did not disappoint, they also held up better than the overall large cap universe.

One difficulty small and even microcap investors face is that information is less available on many of these companies. And there are a lot of them, including in the sectors that outperform with inflation. One easy way to find which smaller companies are rising to the top is Channelchek’s Market Movers tab. This can be viewed throughout the trading day by clicking here for the link.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bea.gov/news/2023/personal-income-and-outlays-january-2023

https://money.usnews.com/investing/news/articles/2023-02-24/u-s-inflation-accelerates-in-january-consumer-spending-surges

The Pace of Tightening is Too Slow, Says FOMC Member

Posted on February 22, 2023February 22, 2023 by phoffman@channelchek.com

Upcoming PCE Data May Revise St. Louis Fed President’s Increasingly Hawkish Stance

Federal Reserve Chair Jerome Powell testified before Congress in June of last year and said there is a risk the Fed could go too far raising rates. He didn’t believe overdoing it was a “top risk” to the economy. The greater risk, he thought, was that wage and price pressures could possibly keep inflation at a boiling point. He reiterated this position a few months later, saying it is easier to restart the economy if the FOMC is too heavy on the brake pedal rather than too unaggressive and left needing to do even more later. Today, FOMC members seem to agree, at least the St. Louis Fed President does, but he’s not alone. The non-voting member of the Committee says he wants to step up the pace of tightening.

A full percentage point of tightening is needed, and sooner is better, according to James Bullard, who is the President of the St. Louis Federal Reserve. The hawkish comments were made on CNBC February 22^nd, but they echo those he made the previous week during his slide presentation titled: Disinflation: Progress and Prospects, deliveredto businesses in Jackson Tennessee. The comments come as inflation is still well above the Fed’s target and not receding toward the 2% goal at a pace that is in line with achieving the target.

Image Source: “Disinflation: Progress and Prospects” (J. Bullard, February 16, 2023)

During the CNBC interview, Bullard said the “risk now is inflation doesn’t come down and reaccelerates.” He used the 1970’s entrenched inflation experience as an example. Explaining that when rising prices become the norm over a long period of time, they become the mindset, the expectation, and then self-fulfilling. Bullard expressed that this is undesirable.

While speaking about where he expects the peak in Fed Funds should be this tightening cycle, he explained he supports a rate near 5.375%. Currently, the Fed targets 4.50% to 4.75%.

Another Fed president has also been vocal recently. Cleveland Fed President Loretta Mester, like Bullard, is a non-voting member this year. Last week she said she saw a “compelling economic case” for a 50 basis-point interest-rate hike at the Fed’s Jan 31- Feb 1 meeting. This conversation is expected to be reflected in the FOMC minutes being released this week. The markets may start reacting to comments of members that supported a more aggressive posture than the 25 basis points the Fed decided upon.

The next FOMC meeting is to be held March 21-22. Over the next month, there will be only one more look at the PCE index and several more employment reports. Overall the markets have recently begun to behave more in line with the data and Fed rhetoric. Bonds have begun trading off, although yields still price in much lower inflation, and the stock market, which traded up in January, appears to understand that if the economy wasn’t hot, there would be no reason for the Fed to throw cold water on it.

Expectations for a rate hike at the next meeting can change over the next month. Currently, according to the CME Fedwatch gauge, a 25 bp hike is where speculators have congregated. However, a 50 basis-point hike has gained popularity. The odds have moved up to 24% from 12.2% a week ago, according to the gauge.

Take Away

On the trading desk we label market moving news stories and interviews from influential policymakers, “tape bombs.” This is because as they come across news tapes (like Bloomberg), they could do damage to your positions.

The evenings before each trading week (usually Sunday), Channelchek emails to subscribers known events scheduled during the upcoming week that could become “tape bombs” to your holdings. Subscribe to Channelchek here to be sure you receive these potential risks before the action starts that week.

Paul Hoffman

Managing Editor, Channelchek

The Week Ahead – PCE Inflation Measures and FOMC Minutes

Posted on February 20, 2023February 20, 2023 by phoffman@channelchek.com

Will the Regional Fed President Speeches Change the Market’s Thinking This Week?

The markets will have to wait until late week to view the Fed’s preferred inflation indicator, the PCE price index, and PCE core index. Leading up to that report we will be treated to FOMC minutes on Wednesday, which could change the market’s view of what the Fed was thinking at the time of the last meeting, and a number of regional Fed President’s speeches which could give insight into any change to hawkish versus dovish bias. There has been a lot of new data since the FOMC meeting that ended three weeks ago.

Monday 2/20

US markets are closed for President’s Day.

Tuesday 2/21

9:45 AM ET, the Purchasing Managers Composite flash report (PMI) has been receding for the past three months. This contraction is expected to reverse itself minimally with expectations at 47.3 with services at 47.2. The flash PMI is an early estimate of current private sector output using information from surveys of nearly 1,000 manufacturing and service sector companies. The flash data are released around 10 days ahead of the final report and based upon around 85% of the full survey sample.

10:00 AM ET, Existing Home Sales have been shrinking but are expected to have held steady in January, at a 4.10 million annualized rate versus December’s 4.02 million.

Wednesday 2/22

2:00 PM ET, FOMC Minutes from the meeting held January 31 and February 1 where the Fed Funds level was lifted by 25 bp will be released. The Fed’s minutes could be a market mover as investors and analysts parse each word looking for clues to policy changes.

5:00 PM ET, John Williams the President of the New York Fed will be speaking.

Thursday 2/23

8:30 AM ET, Gross Domestoc Product (GDP) second estimate of fourth-quarter is 2.9% growth according to the consensus of economists surveyed by Econoday. Personal consumption expenditures (PCE), which was 2.1% in the first estimate, is expected to come in at 2.0% in the second estimate.
10:50 AM ET, Atlanta Federal Reserve President Raphael Bostic is scheduled to speak.
4:30 PM ET, The Federal Reserve Balance sheet data are released each Thursday. This information is becoming more of a focus as headway on quantitative tightening is revealed in these numbers.

Friday 2/24

8:30 AM ET, Personal Income and Outlays expected to rise 1.0% in January with consumption expenditures expected to increase 1.2%. The previous experience was a December rise of 0.2% for income and a December fall of 0.2% in for consumption. Inflation readings for January are expected at monthly gains of 0.4% overall and also 0.4% for the core (versus respective increases of 0.1 and 0.3%) for annual rates of 4.9 and 4.3% (versus December’s 5.0 and 4.4%).
10:00 AM ET, New Home Sales, which have been falling, are expected to hold steady in January, at a 617,000 annualized rate in versus 616,000 in December.
10:00 AM ET, Consumer Sentiment is expected to end February at 66.4, 1.5 points above January and unchanged from February’s mid-month flash.
10:45 AM ET, Loretta Mester the President of the Cleveland Federal Reserve Bank is schedulked to speak.

What Else

The four day trading week in the US will feature earnings reports from major retailers Walmart and Home Depot. Other companies reporting with enough of a following to adjust investor thinking are Nvidia, Coinbase, Alibaba, and Moderna.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.econoday.com/

Choosing Investments While Government Spending Levels Grow

Posted on February 17, 2023February 17, 2023 by phoffman@channelchek.com

The US Budget Office Just Laid Out its Ten-Year Forecast – What Investors Should Know

The US National Debt Clock app might be useful for those that suffer from low blood pressure. I’m being facetious – the app and website provide a visual of the current estimated overall national debt. It breaks out what each citizen’s theoretical share is, and then divides it up in dozens f other categories. The clock is an estimate of real-time. For a future projection, the better place to turn is the just-released forecast from the Congressional Budget Office (CBO). The CBO’s website can be insightful and idea-provoking for investors as it includes a 10-year forecast for government spending, which is broken down by industry type.

Source: USdebtclock.org (February 17, 2023)

Direction of Overall US Debt

The US is on track to accumulate more than $19 trillion in additional debt over the next decade, according to a CBO document released on February 15.

This new expectation is $3 trillion more than previously forecast. Coming at a time when there is headbutting and chest pounding going on in Washington surrounding the debt ceiling (US Treasury borrowing cap), the significantly larger 10-year budget may additionally stress the governments ability to pay its bills. Phillip Swagel, a director at the CBO expressed his concern saying, “The warning is that the fiscal trajectory is unsustainable.”

The federal government is expected to collect $65 trillion in revenue over the next ten years. More than half is expected to come from individual income taxes, and another third comes from payroll taxes. Individually, we can’t change what may be higher taxes, or a weakened government financial situation, which, separate from the Federal Reserve, puts upward pressure on interest rate levels.

Drilling down deeper into where the funding is expected to flow from, individual income taxes are planned to remain level through 2025, then ramp up at a pace quicker than payroll taxes and corporate taxes.

But the country will spend much more than what it collects. Rising interest payments, large federal stimulus bills, and the growing costs of Social Security and Medicare benefits for retiring baby boomers are some of the government’s largest spending items.

Source: CBO (Data excludes offsetting receipts)

Of the Federal agencies budgeted to spend the highest amount, health and human services top the list. Small percentage increases are a lot in actual dollar amounts when trillions are involved. Social Security is the agency consuming the second most amount, followed by the Treasury, which is experiencing growing interest expenses.

Looking at a broader swath of areas that should benefit as a result of government budget expansion, we see in the graph above the top three areas already mentioned, followed by at least a trillion spent over ten years in defense, veterans affairs, agriculture, transportation, personnel, education, and homeland security.

For Investors to Think About

Short-term investors tend to ignore some approaching realities while overly focusing on others. Long-term, investors may find that the cost and expansion of public debt will eventually have the US responsible to pay more in interest over the next decade. By 2033, the net interest on public debt is expected to make up 14% of the federal government’s total spending.

There was another period in US history when net interest made up such a large slice of Federal spending, this was in the mid-to-late 1980s. Eventually, Congress did pay some attention to deficit reduction; it took years to taper the growth. The resurgence of the expanding debt trend in recent years has been explosive.

Interest rates on bonds could have built upward pressure as more debt would need to be issued to refinance at higher rates and pay for additional spending. A greater supply of debt without a growing supply of buyers is a recipe for higher bond yields. Are higher yields attractive? In bond markets, the value of a fixed bond goes down when rates rise. Floating rate bonds tend to approximate par throughout their life, but the Treasury and Wall Street have not been quick to issue these in the face of rising coupon rates.

Stock market investors may find value in investing in companies that receive 25% or more of their revenue from government contracts, particularly those agencies on the chart above that are budgeted to grow by billions or trillions. This could include smaller companies where the impact is greater. Within this category are aerospace contractors like Kratos (KTOS), communications companies like Comtech (CMTL), or transportation-related spending that could benefit dredging from companies like Great Lakes Dredge and Dock (GLDD).

The smaller companies mentioned may benefit from the massive budget growth. But they are not alone, Channelchek is a great source of data and discovery of many companies doing great things that are destined to become even greater. Be sure to sign-up for all the free resources available to investors by going here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.cbo.gov/

https://www.cbo.gov/publication/58848

https://www.cbo.gov/data/budget-economic-data#11

https://www.cbo.gov/data/estimate-presidents-budget-proposals

https://www.usdebtclock.org/

Will AI Allow for Better Service, Higher Profit?

Posted on February 16, 2023February 16, 2023 by phoffman@channelchek.com

Will AI Learn to Become a Better Entrepreneur than You?

Contemporary businesses use artificial intelligence (AI) tools to assist with operations and compete in the marketplace. AI enables firms and entrepreneurs to make data-driven decisions and to quicken the data-gathering process. When creating strategy, buying, selling, and increasing marketplace discovery, firms need to ask: What is better, artificial or human intelligence?

A recent article from the Harvard Business Review, “Can AI Help You Sell?,” stated, “Better algorithms lead to better service and greater success.” The attributes of the successful entrepreneur, such as calculated risk taking, dealing with uncertainty, keen sense for market signals, and adjusting to marketplace changes might be a thing of the past. Can AI take the place of the human entrepreneur? Would sophisticated artificial intelligence be able to spot market prices better, adjust to expectations better, and steer production toward the needs of consumers better than a human?

In one of my classes this semester, students and I discussed the role of AI, deep machine learning, and natural language processing (NLP) in driving many of the decisions and operations a human would otherwise provide within the firm. Of course, half of the class felt that the integration of some level of AI into many firms’ operations and resource management is beneficial in creating a competitive advantage.

However, the other half felt using AI will inevitably disable humans’ function in the market economy, resulting in less and less individualism. In other words, the firm will be overrun by AI. We can see that even younger college students are on the fence about whether AI will eliminate humans’ function in the market economy. We concluded as a class that AI and machine learning have their promises and shortcomings.

After class, I started thinking about the digital world of entrepreneurship. E-commerce demands the use of AI to reach customers, sell goods, produce goods, and host exchange—in conjunction with a human entrepreneur, of course.

However, AI—machine learning or deep machine learning—could also be tasked with creating a business-based model, examining the data on customers’ needs, designing a web page, and creating ads. Could AI adjust to market action and react to market uncertainty like a human? The answer may be a resounding yes! So, could AI eliminate the human entrepreneur?

Algorithm-XLab explains deep machine learning as something that “allows computers to solve complex problems. These systems can even handle diverse masses of unstructured data set.” Algorithm-XLab compared deep learning with human learning favorably, stating, “While a human can easily lose concentration, and possibly make a mistake, a robot won’t.”

This statement by Algorithm-XLab challenges the idea that trial and error leads to greater market knowledge and better enables entrepreneurs to provide consumers with what they are willing to buy. The statement also portrays the marketplace as a process where people have perfect knowledge and an equilibrium point, and it implies that humans do not have specialized knowledge of time and place.

The use of AI and its tools of deep learning and language processing do have their benefits from a technical standpoint. AI can determine how to produce hula hoops better, but can it determine whether to produce them or devote energy elsewhere? If entrepreneurs discover market opportunities, they must weigh the advantages and disadvantages of their potential actions. Will AI have the same entrepreneurial foresight?

The acquisition of market knowledge can take humans years to acquire; AI is much faster at it than humans would be. For example, the Allen Institute for AI is “working on systems that can take science tests, which require a knowledge of unstated facts and common sense that humans develop over the course of their lives.” The ability to process unstated, scattered facts is precisely the kind of characteristic we attribute to entrepreneurs. Processes, changes, and choices characterize the operation of the market, and the entrepreneur is at the center of this market function.

There is no doubt that contemporary firms use deep learning for strategy, operations, logistics, sales, and record keeping for human resources (HR) decision-making, according to a Bain & Company article titled “HR’s New Digital Mandate.” While focused on HR, the digital mandate does lend itself to questioning the use of entrepreneurial thinking and strategy conducted within a firm. After AI has learned how to operate a firm using robotic process automation and NLP capacities to their maximum, might it outstrip the human natural entrepreneurial abilities?

AI is used in everyday life, such as self-checkout at the grocery store, online shopping, social media interaction, dating apps, and virtual doctor appointments. Product delivery, financing, and development services increasingly involve an AI-as-a-service component. AI as a service minimizes the costs of gathering and processing customer insights, something usually associated with a team of human minds projecting key performance indicators aligned with an organizational strategy.

The human entrepreneur has a competitive advantage insofar as handling ambiguous customer feedback and in effect creating an entrepreneurial response and delivering satisfaction. We seek to determine whether AI has replaced human energy in some areas of life. Can AI understand human uneasiness or dissatisfaction, or the subjectivity of value felt by the consumer? AI can produce hula hoops, but can it articulate plans and gather the resources needed to produce them in the first place?.

In what, if any, entrepreneurial functions can AI outperform the human entrepreneur? The human entrepreneur is willing to take risks, adjust to the needs of consumers, pick up price signals, and understand customer choices. Could the human entrepreneur soon become an extinct class? If so, would machine learning and natural processing AI understand the differences between free and highly regulated markets? If so, which would it prefer, or which would it create?

The One -Two Punch that Caught Gold Off-Guard

Posted on February 16, 2023February 17, 2023 by phoffman@channelchek.com

Image Credit: RaymondClarkeImages (Flickr)

Gold Softens as Yields Rise on US Treasuries From Inflation Stickiness

As the month of February began, the talk was for gold to hit $2,000 an ounce in the first quarter. But, as is often the case with investment markets, once certainty creeps into the mindset, something unexpected often comes along and undermines it. Gold may very well reach the $2,000 price in early 2023, but it has, for now, taken a small hit caused by a resurgence of expectations related to inflation’s pervasiveness. The inflation itself isn’t necessarily a problem, it is the chain reaction of events that then follows.

The One Two-Punch Catches Gold Off-Guard

Gold futures reached 10-month highs near $1,975 just before the release of January U.S. non-farm payrolls were reported on February 3rd. The Friday release showed large gains in the employment condition which stoked old inflation worries.

Concerns about inflation had been settling down before the jobs number. One indication of that is US bond yields had been priced, by most measures, for an eventual easing of rates, not tightening of conditions. The employment report itself began to unwind gold’s strength. The price sank to below $1,830 before recovering to around $1,875. The reason is that higher inflation, begets higher expectations of bond yields, which then begets capital flows into dollars to take advantage of the higher rates available. Gold becomes relatively weaker and less desirable under these conditions.

On February 14^th, as some AU investors were falling out of love with gold, an inflation report (CPI) for January showed a tick-up in January prices over December’s numbers. This exacerbated U.S. inflation fears and helped to bring gold back under $1,850.

New Expectations

The shift in expectations over a two week period are not likely to unwind without new information which undermines the new employment and inflation reports. That doesn’t seem likely in the coming days as a just released wholesale price report (PPI) now indicates inflation is more than a services sector concern.

Gold long positions are now caught in the crosshairs of the Fed’s resolve to fight inflation. Every treasury yield spike has led to a dollar spike and been used as an opportunity to reduce demand for gold or reduce it’s relative value against US dollars.

Historically, gold prices had risen with inflation as investors bought the currency alternative as a hedge against paper currency. Currency typically loses value when prices go up. What happened then is more typical and is what is still taught in textbooks – good economic news was good for risk assets.

More recently, good economic news, worries investors because it has the potential to make inflation hotter, prompting the Fed to dial up rates and hurt everything from stocks to gold and oil. The positive correlation is on hiatus, probably until the Fed’s finger comes off the rates trigger.

Take Away

The markets had begun looking past the tightening phase after 450 bp worth of Fed Funds increases. The numbers reported in February have many investors, including those that trade currencies, precious metals, stocks, bonds, and other commodities less certain about the Fed calling for a cease fire in its inflation battle.

Of course, this new trend is young, it can conceivably be unwound in an instant in a changing world with many concerns outside and away from price increases.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://app.koyfin.com/charts/

https://www.bls.gov/

The Record Levels of Cash Held by Investors May Not Indicate a Bear Market

Posted on February 14, 2023February 14, 2023 by phoffman@channelchek.com

Image Credit: Pictures of Money (Flickr)

Investors Receiving a 5% Yield are Losing to Inflation

The CPI inflation report and the Fed’s relentless increases in Fed funds levels have pushed the six-month US Treasury Bill (T-Bill) above 5%. This is the first time since 2007 that this low-risk investment has topped 5%. Last year on this date, the six-month T-Bill was 0.76%. While the stock market is concerned that higher borrowing costs will have the Fed’s intended effect of slowing demand, rates are reaching a point where another concern creeps in. The concern is will traditional stock investors lay back and be satisfied getting paid interest.

More likely, the high cash position represents “dry powder” waiting for an opportunity.

Short Term Rates

Money Market fund assets were $4.81 trillion for the week ended Wednesday, February 8, according to the Investment Company Institute. Just shy of the record MF balances reported in January. Higher than average cash levels have often been thought of as a bullish sign as it represents potential to drive stock prices up when flows toward equities increase.

This may be part of the situation as we come off a dismal 2022 for equities, but there is likely something else incentivizing the retreat to safety. The higher interest rates are in the short end of the curve, investors are getting paid to retreat. High-yielding cash equivalents with six-month T-Bills now at 5% (10-year Treasuries are only 3.75%) may be more than a parking place. It may represent an alternative investment with a much more assured return.

Ten Year Quarterly Returns S&P 500

Is 5% an Acceptable Return?

With inflation at 6.4%, the answer is no. But it is definitely preferable to seven of the periods on the 10-year chart above. And with January’s consumer price index (CPI) report revealing signs of sticky to reaccelerating inflation, the Federal Reserve is more likely to be hiking rates for longer than expected.

For investors looking to invest for longer periods, the stock market handily beats inflation. In other words, for the various time frames below, S&P 500 investors did not see their assets erode due to inflation.

Beating inflation is foundational to investing. Far exceeding it is the goal of many. Investors are not doing this choosing cash, in fact they are choosing to lose buying power rather than risk that the market doesn’t perform as it has historically.

S&P 500 Return for Periods 5-Years to 30-Years

Take Away

Data released on Tuesday February 14 showed the inflation rate (CPI) slowed to 6.4% in January. The cost of goods and services rose 0.5% during the month. The half percentage is the largest one month erosion of purchasing power in three months.

Investors content with 4%-5% returns should consider that they are losing ground to persistent inflation.

Investors with a five-year time horizon or longer should weigh the risks of earning yields below the inflation rate to the ups and downs of stocks. In fact, as more do, the 4-5 trillion in cash can make or quite a bull market.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2022

https://www.bls.gov/news.release/archives/cpi_01162008.pdf

https://www.cnbc.com/2023/01/18/investors-are-holding-near-record-levels-of-cash-and-may-be-poised-to-snap-up-stocks.html

https://www.ici.org/research/stats/mmf

https://www.nerdwallet.com/article/investing/average-stock-market-return#:~:text=The%20average%20stock%20market%20return%20is%20about%2010%25%20per%20year,other%20years%20it%20returns%20less.

The Week Ahead – Inflation (CPI), Jobs, and 13-f Holdings Reports

Posted on February 12, 2023February 12, 2023 by phoffman@channelchek.com

Will the Inflation Numbers on Valentine’s Cause the Market to See Red?

As earnings season fades investors that like to get a glimpse into the portfolios of successful money managers will look for the 13-f filings of some of the most followed investors as they are made available. Tuesday and Wednesday should bring Michael Burry’s and Warren Buffet’s filing. The CPI report on Tuesday is expected to show a continuation of inflation tapering. The Jobs report on Thursdays has been missing consensus, it has the potential to either calm or rattle the markets.

Monday 2/13

With no consequential economic releases, market direction may take its tone from traders positioning ahead of Tuesday’s CPI report.

Tuesday 2/14

8:30 AM ET, January’s headline CPI rate is expected to increase month to month by 0.5% after a .1% decline experienced in December, and year-over-year at 6.2% versus 6.5% the prior 12 months. Ex-food and energy (core rate) is expected to show unchanged at a 5.5% annual rate versus 5.7% the prior 12 months.
In previous years Michael Burry has made a public filing of Scion Asset Managements 13-f holdings on Valentine’s Day. Warren Buffet of Berkshire Hathaway will make available his changed positions. This filing is also likely on Tuesday or perhaps Wednesday.

Wednesday 2/15

9:15 AM ET, Industrial Production, which includes data for Manufacturing and Capacity Utilization has been contracting. January’s consensus estimates are for monthly gains of 0.5% for production and 0.4% for manufacturing and would be a welcome sign for those fearing a recession. The positive direction would be welcome after December’s monthly decline of 0.7% overall and 1.3% for manufacturing. Capacity utilization is expected to remain at a non-inflationary 78.8%.
10:00 AM ET, Business Inventories data for December are expected to rise 0.3% following a 0.4% expansion in November. Intentional inventory growth can be a sign of business optimism surrounding future sales. If unintended inventory accumulation occurs, then production will probably be throttled back as inventories are worked down. This is why Business Inventories a leading economic indicator.

10:00 AM ET, The Housing Market Index fell each month in 2022. The weak streak ended in January, as it rose 4 points to 35. February’s consensus is a further but smaller 1-point improvement to 36. The Housing Index is a monthly composite that tracks home builder assessments of present and future sales along with buyer traffic
10:00 AM ET, Atlanta Fed Business Inflation Expectations survey provides a monthly measure of year-ahead inflation expectations and inflation uncertainty from the perspective of firms. The survey also provides a monthly gauge of firms’ current sales, profit margins, and unit cost changes. The year over year estimate is for 3%.

Thursday 2/16

8:30 AM ET, Jobless Claims, including Initial Claims and Continuing Claims, have been a big focus of the market as unemployment is running at a historically low pace. The consensus is for growth in Jobless levels to 199,000 versus 196,000 the prior week. Overall low claims would seem to be good news for the economy. The problem now is that it is worrisome for a Fed that views current inflationary pressures, including wage pressures unacceptably high.

Friday 2/17

8:30 AM ET, The Index of Leading Indicators has been in steep decline; it is expected to fall further, but less steeply, by 0.3 percent in January versus a fall of 0.8% in December.

What Else

Investors with interest in telecommunications company Comtech (CMTL) and located in South Florida, may be able to attend one of four special presentations by management on Monday or Tuesday. Get information here to see if this is suited for you.

Monday, February 20^th, is a holiday, and the US markets will be closed.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.thearmchairtrader.com/macroeconomic-news-6feb23/

https://us.econoday.com/byweek.asp?cust=us

Wage Inflation, Labor Shortages, and Who Stopped Working

Posted on February 9, 2023February 9, 2023 by phoffman@channelchek.com

Is the Mismatch in Workers and Open Jobs Proving to Be Transitory?

Inflation has been the most bearish word for the stock and bond markets over the past year or more. Shortly after many of the supply chain issues cleared up, and the cargo ships were no longer stacked up outside of major ports, attracting scarce workers with higher pay became a growing cause of inflationary pressure. At the end of November 2022, Federal Reserve Chair Jerome Powell stated that “job openings exceed available workers by about 4 million.” That number has now grown to 4.7 million after the continued strengthening of the market for qualified labor.

This mismatch, depicted in the Fed Data below, between available positions and workers to fill them, developed a more inflationary trend. The graph depicts the mismatch of labor supply and demand and the extent that it has worsened.

When the civilian labor force is greater than employment plus job openings, the economy has an immediate capacity to fill open positions. Currently, the employment level plus job openings are at 170.5 million, while the total labor force is at 165.8 million. Thus the 4.7 million quoted earlier. There are a whopping 4.7 million more jobs available compared to people available to fill them.

The civilian labor force, the amount of people working or looking for a job, is shown below in red; the current employment level plus the number of job openings is shown in blue.

Labor Participation Hesitancy

The pandemic has been emphasized as a cause of this not-very-transitory labor shortage, but the trends in labor demand and labor supply in the graph above indicate that demand was already outpacing supply as the US entered 2018. This was two years before the novel coronavirus hit US shores. Back then the mismatch was about one million workers fewer than jobs available before the economic disruption.

As the US began to move toward business-as-usual, news and market analysts offered many explanations for the labor shortage. These included childcare problems, health concerns, minimum wage pushback, and even a wave of new retirees.

The visual below shows the change experienced in the labor force participation rate (LFPR) for specific age groups: 20 to 24 years old, 25 to 54 years old, and 55+ years old. By subtracting the most recent LFPR from that of January 2020 we get the percentage-point change in labor force participation relative to the month just before the pandemic began impacting businesses.

When the pandemic hit, the sharpest decline in the LFPR was for workers between the ages of 20 and 24. Their LFPR decreased from 73% to 64.4% in 4 months before increasing again. However, at the end of 2022, the LFPR for 20- to 24-year-olds still hadn’t fully recovered and remained 1.7 percentage points below its January 2020 value.

This overall pattern is similar but less extreme for the other age groups. Although no age group fully recovered by the end of 2022, the 25-54 group was closest, at 0.7 percentage points below its January 2002 level. There’s been speculation older workers retired early (and permanently) during the pandemic, and the 55+ group remained 1.4 percentage points below its January 2020 level as of December 2022, with no sign of further recovery.

Take Away

The mechanisms that cause inflation are widely understood. If there is a shortage of goods because of the supply chain, sellers can ask more for the product. If the cost of producing goods or providing services increase, perhaps because of the cost of labor, the seller may try to pass those higher costs along. On the demand-pull side, if there is an abundance of currency, this increases demand for goods and services and is also inflationary.

While the Fed has been waging a fight against rising prices by removing liquidity and ratcheting up the cost of money (interest rates), the number of open jobs compared to the number of workers available to fill them has widened.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm

https://www.bls.gov/news.release/empsit.nr0.htm

https://fred.stlouisfed.org/searchresults/?st=unemployment%20rate&isTst=1

Michael Burry Warns Against the Market Hoping for Economic Weakness

Posted on February 8, 2023February 8, 2023 by phoffman@channelchek.com

Further Evidence of his Future Outlook is Provided By “The Big Short” Michael Burry

It has been three-plus years since Michael Burry first warned that index funds’ popularity is creating distorted valuations of stocks included in the larger indexes. The reason for his warning is fund managers need to own the companies in the index. This creates buying pressure on stocks that might not otherwise be as strong of a buy candidate. In other words, investments are not being purchased on their own merit and, therefore could be thought of as overvalued. He called this the “passive investment bubble,” and he is still warning investors about a stock market investment bubble.

“Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade,” he tweeted late last year. “All theaters are overcrowded, and the only way anyone can get out is by trampling each other. And still, the door is only so big,” Burry said in October 2022. While his SEC filings show he is not opposed to owning individual stocks with a unique opportunity, he’s expecting a market collapse that dwarfs the dot-com crash because there’s so much money parked in index funds.

This week Burry provided a backup argument to his thesis in the form of a chart. The Bloomberg produced chart showed the S&P’s 40% plunge between February 2001 and October 2002. The S&P data was plotted alongside the sharp decline in the Fed Funds overnight benchmark interest rate. Burry’s latest tweet suggests a feeling of deja-vu that includes the stock market’s surge in early 2001, when rates were 6%. There seems to be concern that market participants are looking for enough weakness for the Fed to drop rates. The chart, and his written message is one to be careful what you wish for.

His tweet read, “This time is different.” This apparent sarcasm could be read, if you want lower rates, it may come at a cost.

Burry seems to expect enough economic weakness that the Fed will again ratchet down rates in a hurry. The poor economic scenario would likely cause the S&P 500 to tumble.

Take Away

Higher rates encourage traditional savings, which then becomes money not used to stimulate the economy. It also slows growth by making borrowing more expensive. This dampens demand and increases the risk of a bad recession. Burry, a widely followed hedge fund manager has been warning of the broader market taking a huge hit.

Burry has noted that blistering but brief rallies are common during market downturns.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.thestreet.com/investors/jim-cramer-michael-burry-tweet-seemingly-opposite-views-on-the-market-15-minutes-apart

https://markets.businessinsider.com/news/stocks/big-short-michael-burry-stock-rally-dot-com-bubble-crash-2023-2

https://nypost.com/2022/10/03/michael-burry-flags-passive-investing-bubble-as-market-risk/

How is the Economy Really Doing (Just the Facts)?

Posted on February 7, 2023February 7, 2023 by phoffman@channelchek.com

Do the Most Current Economic Measurements Suggest a Trend Toward Recession or Growth?

How is the US Economy Doing?

US GDP increased 2.1% in 2022 after increasing 5.9% in 2021.
Year-over-year inflation, the rate at which consumer prices increase, was 6.5% in December 2022.
The Federal Reserve raised interest rates seven times in 2022 and again on February 1, 2023 to curb inflation, increasing the target rate from near zero to 4.5-4.75%.
When accounting for inflation, workers’ average hourly earnings were down 1.7% in December 2022 compared to a year prior.
The ratio of unemployed people to job openings remained at or near record lows throughout 2022.
The unemployment rate was 4.0% at the beginning of 2022 and ended the year at 3.5%.
The labor force participation rate remains almost one percentage point below February 2020.
From January to November 2022, the US imported $889.9 billion more in goods and services than it exported. This is 7% higher than the trade deficit in 2021 for the same months.

US GDP increased 2.1% in 2022 after increasing 5.9% in 2021

Gross domestic product (GDP) fell in the first half of 2022 but grew in the second half. GDP reached $25.5 trillion in 2022.

Year-over-year inflation, the rate at which consumer prices increase, was 6.5% in December 2022

That’s down from June 2022’s rate of 9.1%, the largest 12-month increase in 40 years. Inflation grew at the beginning of the year partly due to rising food and energy prices, while housing costs contributed throughout 2022.

The Federal Reserve raised interest rates seven times in 2022 and again on February 1, 2023 to curb inflation, increasing the target rate from near zero to 4.5-4.75%

Rate increases make it more expensive for banks to borrow from each other. Banks pass these costs on to consumers through increased interest rates. Read more about how the Federal Reserve tries to control inflation here.

When accounting for inflation, workers’ average hourly earnings were down 1.7% in December 2022 compared to a year prior

Inflation-adjusted average hourly earnings fell in all industries except information and leisure and hospitality, where earnings were flat.

The ratio of unemployed people to job openings remained at or near record lows throughout 2022

In a typical month from March 2018 and February 2020, there were between 0.8 and 0.9 unemployed people per job opening. But after more than quadrupling in April 2020 at the onset of the pandemic, the ratio fell and settled from December 2021 to December 2022 to between 0.5 and 0.6 unemployed people per job opening, the lowest since data first became available in 2000.

The unemployment rate was 4.0% at the beginning of 2022 and ended the year at 3.5%

It decreased most for Black and Asian people, 1.2 and 1.1 percentage points, respectively. Black people still have unemployment rates higher than the rest of the nation.

The labor force participation rate remains almost one percentage point below February 2020

An additional 2.5 million workers would need to be in the labor force for the participation rate to reach its pre-pandemic level.

From January to November 2022, the US imported $889.9 billion more in goods and services than it exported. This is 7% higher than the trade deficit in 2021 for the same months

During this time, the goods trade deficit reached $1.1 trillion. Complete 2022 data is expected on February 7, 2023.

This content was republished from USAFacts. USAFacts is a not-for-profit, nonpartisan civic initiative making government data easy for all Americans to access and understand. It provides accessible analysis on US spending and outcomes in order to ground public debates in facts.

The Week Ahead – Powell Speaks, Jobless Claims, Consumer Sentiment

Posted on February 6, 2023February 6, 2023 by phoffman@channelchek.com

The Fed Chair’s Comments May be the Most Critical Market Event of the Week

It’s a quiet week for economic data. If the market takes a direction this week, it may have to take its lead from something other than statistics that indicate economic strength or weakness. This could be a Fed governor speaking, or a central bank outside of the US altering its hawkish stance.

Monday 2/6

With no consequential economic releases, market direction may take its tone from earnings reports from a wide swath of industries.

Tuesday 2/7

11:00 AM ET, New York Federal Reserve inflation expectations.
3:00 PM ET, Consumer Credit, or more definitively, the installment credit outstanding by consumers is expected to have increased by $25 billion in December versus November’s $27.9 billion increase. There is such a long delay reporting this number that it seldom has a market impact.
Fed Chair Jerome Powell will be speaking at the Economic Club of Washington.

Wednesday 2/8

10:00 AM ET, Wholesale Inventories revision for December is in line with the first estimate of 1%. Wholesale sales and inventory data can provide investors a chance to look below the surface of the consumer economy. Activity at the wholesale level can then be a precursor of consumer trends.

Thursday 2/9

8:30 AM ET, Jobless Claims, including Initial Claims and Continuing Claims, have been a big focus of the market as unemployment is running at a historically low pace. The consensus is for growth in Jobless levels to 190,000 versus 183,000 the prior week. Overall low claims would seem to be good news for the economy. The problem now is that it is except that it is worrisome for a Fed that views current inflationary pressures, including wage pressures unacceptably high.

Friday 2/10

• 10:00 AM ET, The University of Michigan’s Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Consumer sentiment is not expected to show much improvement, at a consensus 65.0 in the first reading for February versus 64.9 in January.

What Else

The FOMC meeting that ended on February 1 was the last before Chair Powell delivers the semiannual monetary policy testimony in late February or early March (not yet set). Any remarks by Fed officials in the February 6 week should be viewed in that context. Powell and associates will not want to confuse any upcoming message given at the semiannual Monetary Policy Report to Congress. Whatever is said is likely to foreshadow what will be in the report when he speaks before the Senate Banking Committee and the House Financial Services Committee.

Paul Hoffman

Managing Editor, Channelchek

https://www.thearmchairtrader.com/macroeconomic-news-6feb23/

https://us.econoday.com/byweek.asp?cust=us

Ongoing Increases in the Overnight Interest Rate Target Can be Expected Says FOMC Statement

Posted on February 1, 2023February 1, 2023 by phoffman@channelchek.com

Jerome Powell and FOMC Will “continue to monitor the implications of incoming information”

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from the previous target of 4.25% – 4.50% to the new target of 4.50% – 4.75%. This was announced at the conclusion of the Committee’s first scheduled meeting of 2023. The monetary policy shift in bank lending rates was as expected by economists and the markets as the overwhelming consensus was for a 25 bp move. It has been less than 12 months since the Fed began this tightening cycle, overnight rates since the beginning of last year have increased from near 0.00% to the current target of up to 4.75%.

One recent market focus has been that inflation has been, by most measures, trending lower each month. While lower increases may suggest that inflation is successfully being wrung out of the system, Powell and the other FOMC members have a 2% target for inflation which guides their policy. The current level is more than two times as high. The art of being the nation’s top bankers and economists trying to provide a soft landing for the still strong economy, is difficult. The result of the actions taken by the Fed can only be seen in the rearview mirror, months after the action.

Synopsis of Fed Decisions

The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 4.75 percent, effective February 2, 2023. In a related decision, the Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent, effective February 2, 2023.

Text from Federal Reserve’s Statement February 1, 2023

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated.

Russia’s war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Take-Away

Higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. The risk of inflation also weighs on the markets. Additionally, investors find that alternative investments that pay a known yield may, at some point, be preferred to equities. For these reasons, higher interest rates are of concern to the stock market investor. However, an unhealthy, highly inflationary economy also comes at a cost to the economy, businesses, and households.

The statement suggests the Fed continues to remain data dependent, but expects further increases will follow. The statement did not provide strong guidance as to what to expect following future meetings.

Chairman Powell’s 2:30 PM ET press conference can be viewed here.

Paul Hoffman

Managing Editor, Channelchek