The Steross Market and Investing Thread

[steross]

 

[Big Huck]

There are a ton of rate sensitive companies getting hammered right now that would be good to accumulate. Leggett & Platt is getting the double whammy of housing and auto slowdown. Close to 15 year lows for their stock.

 

[Big Huck]

We’re just about done with Q1 earnings season. More than 90% of companies in the S&P 500 have reported results. So far, the earnings season is much better than expected (or feared). Earnings growth for the S&P 500 is tracking at 5.15%. That’s up 1.46% from just a month ago.

That’s the best growth rate since Q2 2022. More than 76% of companies have beaten their earnings estimates.

There is, however, a statistical footnote to these results and that’s Bristol-Myers Squibb (BMY). If you exclude BMY’s massive loss, then earnings growth for the whole index rises to 8.3%. One company’s loss weighed the whole market down by 3%.

 

[Polds4OSU]

Dow Jones Industrial Average Tops 40000 for the First Time​

The Dow Jones Industrial Average crossed 40000 for the first time, a milestone that appeared implausible little more than two years ago when the Federal Reserve began raising interest rates to cool an overheated economy.

Gloom and doom forecasts abounded. When the central bank ended the era of ultralow rates that prevailed in the years following the global financial crisis, economists predicted painful consequences: a U.S. recession and rising unemployment.


Markets shuddered. The Dow industrials and other equity benchmarks ended 2022 with their biggest declines since 2008, the year Lehman Brothers collapsed.

But as the months passed, employers kept adding jobs. People kept spending, splurging on big-ticket items like cars and blowout getaways to see Taylor Swift. Inflation kept cooling. Perhaps most important, the recession predicted by so many economists hasn’t materialized, giving investors hope that stocks might keep climbing.

“Not only didn’t we have a recession, we had a robust economy with tight labor markets, healthy consumers who were consuming,” said Katie Nixon, chief investment officer for Northern Trust Wealth Management.

Markets got another boost when advances in generative AI, the kind of artificial intelligence used in OpenAI’s ChatGPT, captured investors’ imaginations, helping propel the biggest tech stocks skyward.



The Dow has now soared nearly 40% from its low in September 2022—and more than doubled since the spring of 2020, when attempts to slow the spread of Covid-19 closed swaths of the economy. The 30-stock index has risen about 6% this year.

The latest leg of the rally has been powered by signs of continuing U.S. economic strength, offsetting the retreat of investor expectations that inflation will cool enough to allow central-bank officials to sharply reduce interest rates this year. Recent data showed hiring slowed in April, but the labor market remains robust and inflation has declined from its peaks without returning to the Fed’s target.

Yet interest rates remain much higher than in the years before the pandemic. The yield on the 10-year Treasury topped 5% in October for the first time in 16 years.

Higher yields weigh on stocks by lowering the value of companies’ future earnings in commonly used pricing models. They also give investors opportunities to earn a meaningful return without the level of risk found in the stock market.


The jump in rates is one outgrowth of the pandemic that continues to reverberate throughout the economy. For example, the Fed’s efforts to tame inflation have had a profound effect on the cost of borrowing to buy a home. The average rate on a 30-year fixed-rate mortgage in October reached 7.79%, the highest since 2000, according to Freddie Mac.

Homeowners who would like to move are staying put so they can hold on to their lower-rate mortgages. The resulting lack of homes for sale has pushed prices beyond the reach of many prospective buyers.

“We’re still dealing with a number of these economic distortions that can all be traced back to Covid,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “That’s why a lot of forecasters have had difficulty over the past couple of years.”

Stocks have rallied over the past year as the economy defied expectations and investors exulted in the possibility that innovation in AI leads to a surge in productivity. The enthusiasm around AI fed into last year’s hottest trade, the Magnificent Seven group of big tech stocks.


Nvidia, the chip maker at the heart of the AI boom, has seen its market value soar to more than $2 trillion. Microsoft reached $3 trillion, its shares energized by a partnership with OpenAI.

“AI has definitely changed the picture for investors,” said Que Nguyen, chief investment officer of equity strategies at Research Affiliates. “AI is real. I think that AI is going to have a big impact on productivity and how we work.”

In many ways, the picture for markets looks rosy. Stocks beyond the Magnificent Seven, from small-caps to industrials, have gained ground lately, a potentially promising sign for the rally. Even bitcoin and gold prices have hit records in recent months.

“We sort of have a bull market in lots of different things,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “There are plenty of times where bonds and stocks do well, but that’s usually not a backdrop where gold does well. That’s kind of a manifestation of bullish on everything.”


Still, some investors worry that stocks look expensive, especially the biggest ones. That could leave them vulnerable if corporate performance disappoints.

“I do think there’s a bit of a reckoning coming for U.S. equity market valuations,” said Don Calcagni, chief investment officer at Mercer Advisors. “It just doesn’t seem logical given how high interest rates are at the moment.”

 

[Polds4OSU]

S&P 500, Nasdaq and Dow all hit record highs after encouraging inflation data​

All three major indexes surged to record highs Wednesday after new data showed that inflation cooled in April after ticking up recently.

The S&P 500, tech-heavy Nasdaq Composite and blue-chip Dow all closed at new record highs after the latest Consumer Price Index showed that prices were up 3.4% for the 12 months ended in April, easing from 3.5% the month before.



The broad-market S&P 500 gained more than 1.2% on Wednesday and cracked the 5,300-level for the first time, closing at 5,308.15. The Nasdaq was about 1.4% higher, setting a new record at 16,742.39. The Dow, meanwhile, was up 350 points or 0.9% and teetered near the key 40,000-level, closing at 39,908. All three major indexes are tracking toward a winning week.

Investors believe that the cooler inflation reading, coupled with a separate report showing weak retail sales in April, increases the likelihood that the Federal Reserve will cut interest rates this year.

“Taken [together with retail sales] this supports a Fed rate cut in the fall,” Gary Pzegeo, head of fixed income at CIBC Private Wealth US, wrote in a note to clients Wednesday. “Markets are discounting a cut in September and have moved to price in a second cut by December.”

Wednesday’s report landed mostly in line with economists’ expectations, which is a welcome turnabout from January, February and March, when CPI (and other inflation gauges) came in hot, hot, and hot.


“This was a good report in the context of three hotter-than-expected [CPI] reports, and it makes it look like potentially those were bumps in the road rather than a really stagnant inflation environment,” Tyler Schipper, economics professor at the University of St. Thomas in Minnesota, told CNN in an interview.

On a monthly basis, prices rose 0.3%, a slower pace of growth than the 0.4% seen in the two months prior, according to the Bureau of Labor Statistics’ CPI report.

Economists were expecting a 0.4% monthly increase and an annual gain of 3.4%, according to FactSet consensus estimates.

Rising gasoline and shelter costs accounted for more than 70% of the monthly increase in overall inflation, according to the report.

While elevated housing costs and high prices at the pump continue to weigh on Americans, Wednesday’s report did provide some welcome news on another staple spending area: Grocery prices fell for the first time in a year, dropping 0.2% from March.


A closely watched underlying measurement of inflation showed even more progress. Core CPI, which strips out the more volatile categories of energy and food, slowed from 3.8% to 3.6%, its lowest rate since April 2021. From the month before, core CPI ticked up by 0.3%, its slowest pace since the end of last year.

Prices are cooling but some pain points remain​

In addition to grocery prices falling for the month, overall food prices and the cost of going out to eat saw some easing as well. Food price inflation held pat at 2.2% annually, while food away from home inflation ticked down to 4.1%, its lowest rate since May 2021.

New and used car prices continued to fall from record heights; but, especially in this period of high interest rates, they remain costly endeavors — not only to purchase but also to maintain.

Motor vehicle insurance continued its painful rise in April, climbing 1.8% for the month and rising to 22.6% annually. Repair and maintenance costs were flat for the month but are still running well above overall inflation at 7.6% annually.


Apparel prices jumped higher for the month, with some categories such as men’s shirts and women’s suits up nearly 3%.

For those to leap higher at a time when goods prices are seeing disinflation (in some cases, outright deflation), could be a reflection of broader trade problems globally and a potential issue for consumers — and incumbents — later this year, Schipper said.

“It might not be particularly problematic now; but if you think about the fall, when it’s election season, and people are doing back-to-school shopping, that could be a category that becomes politically problematic,” Schipper said.

A slow drift downward​

However, April’s report did show some slight progress on what’s been the biggest Achilles heel: Shelter inflation eased to 5.5%, its lowest annual rate since May 2022.

Housing costs “have been a pretty persistent area of pain over the past several years,” John Sedunov, professor of finance and real estate at Villanova University, told CNN.


The housing component of the CPI has proved frustrating for economists and other observers because the government’s measurement of shelter costs come with a considerable lag. Private sector sources of real estate data have shown a cooling rental market.

When taking those housing costs out of the equation, a closely watched “supercore” index measuring services inflation that excludes shelter costs rose just 0.2% for the month, its slowest pace since last summer.

The Federal Reserve has been wanting to see meaningful process on inflation before it starts trimming back interest rates. Those rates are at a 23-year high following an aggressive, yearslong rate-hiking campaign by the central bank to throw water on smoldering demand and tame decades-high inflation.

“The last month or two had looked like maybe the improvement was stalling, and this [report] looks like it’s continuing at a slow pace,” Erica Groshen, a former BLS commissioner who serves as senior economics adviser at the Cornell University School of Industrial and Labor Relations, told CNN.


Inflation has cooled considerably after spiking to 9.1% annually in June 2022, and the economy has remained resilient in the process — although there are signals that the once-rampant pace of spending activity has cooled.

A separate report on Wednesday showed that US retail sales were flat in April.

“Potentially, that’s an indication of consumers getting tapped out,” Sedunov said. “At the end of the day, that retail softening is an indicator that maybe there’s going to be less pressure on prices in certain areas going forward, which could have a continuing moderating effect on inflation.”