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| November 14, 2022

The Week On Wall Street

A cooling inflation number ignited a powerful rally on Thursday, sending stocks to strong

gains for the week. The Dow Jones Industrial Average gained 4.15%, while the Standard &

Poor’s 500 added 5.90%. The Nasdaq Composite index rose 8.10% for the week. The

MSCI EAFE index, which tracks developed overseas stock markets, picked up 5.72%.

Stocks Surge

A lower-than-expected inflation report triggered the biggest one-day stock market gain in

more than two years as the news raised investors’ hopes that the Fed might consider easing

the pace of future rate hikes. The day’s gains were pronounced in the hard-hit technology

sector, as the tech-heavy Nasdaq added 7.35%. Stocks initially rallied to start the week,

but gave up some of the gains on Wednesday following a muddy and indecisive outcome

to the midterms. Friday saw stocks build on their gains to close out an exceptional week.

Inflation Moderates

Consumer prices rose slower in October, increasing 0.4% for the month and 7.7% from

12 months ago. Both numbers were below market expectations of 0.6% and 7.9%. The

core CPI (excludes energy and food sectors) rose a more modest 0.3% on a monthly

basis and 6.3% from a year ago. The deceleration in prices was mainly attributable to

price declines in used cars (-2.4%), apparel (-0.7%), and medical care services (-0.6%).

Despite the progress, inflation remains well above the Fed’s 2% target rate. A look

behind the numbers shows that October’s 7.7% CPI was fueled by the largest monthly

jump in shelter costs since 1990 (+0.8%). Shelter costs account for one-third of the CPI.

Energy was up 1.8%, while food costs rose 0.6% for the month.

This Week: Key Economic Data

Tuesday: Producer Price Index (PPI). ***Potentially market moving***

Wednesday: Retail Sales. Industrial Production.

Thursday: Housing Starts. Jobless Claims.

Friday: Existing Home Sales. Index of Leading Economic Indicators.

This Week: Notable Companies Reporting Earnings

Monday: Tyson Foods, Inc. (TSN).

Tuesday: Walmart, Inc. (WMT), The Home Depot, Inc. (HD).

Wednesday: Nvidia Corporation (NVDA), Cisco Systems, Inc. (CSCO), Target

Corporation (TGT), Lowe’s Companies, Inc. (LOW), The TJX Companies, Inc. (TJX).

Thursday: Applied Materials, Inc.(AMAT), Palo Alto Networks, Inc. (PANW), Ross Stores,

Inc. (ROST).

Final Thoughts

Well, last week was a busy week for data.  I mentioned a few weeks ago it would be coming

out of a firehose the next few weeks and it didn't disappoint.  First, the Fed hiked 75 basis

points, took a slightly more dovish tone with their "official" statement, but Chairman Powell

gave a hawkish speech that sent the markets down a few percentage points by the end of his

Q&A session with the media.  For the record, he has to talk tough.  Fed posturing can move

market rates sometimes without them actually having to push rates up.  At a minimum, it helps 

maintain market rates and they need them higher a little longer to make sure inflation is

vanquished.  More on the Fed in the coming weeks.  

Second, CPI.  Just take a look at the futures market around 8:30am EST when the, slightly

cooler than expected CPI number came out.  Go ahead, look at the picture below.

It's not too hard to tell where 8:30AM is.  It's when we saw the massive, instant move up,  

And the market strengthened as the day went on.  The move in the more tech heavy NASDAQ

was even more pronounced.  We got a fair amount of follow through on Friday as well.  As of

this writing today, the bulls are trying to push the market through heavy overhead resistance.

 After such a big move up in short order it wouldn't surprise me to see a little bit of a pullback

or pause before they try again.  CPI is the Consumer Price Index.  PPI (Producer Price Index)

comes out tomorrow.  This is what inflation for manufacturers are experiencing.  As mentioned

above it could be market moving.  

Based on the data we have seen so far, it appears CPI can continue to trend down giving the Fed

a little breathing room.  Remember, the market is looking for visibility as to when interest rates

can stop going up.  Based on last week's data that may be coming into focus for the markets.  

We are certainly not out of the woods.  Corporate earnings need to hold up and there are

certainly headwinds, but there may be some tailwinds too.  The chart below shows the latest

spike in inflation compared tp the average of the last 5 spikes from the 1940's through the

1990's.  It looks like we're on time and trending in the right direction.  The blue line is the

current spike with the red being the aforementioned average. 

We're also starting to see the U.S. Dollar pull back.  Companies that do business outside the

United States have to bring whatever foreign currency they get paid in back to U.S. Dollars.  

When the Dollar is climbing like we've seen the past few years it is a real headwind for those

companies.  This is caused by converting foreign currency into Dollars.  If the Dollar is moving

up they get less of them, but if it is moving down (like it has been lately) the companies get more

Dollars and the headwind becomes a tailwind.  This boosts earnings instead of eroding them.

 For example, Microsoft, a big company that does business all over the world cited a strong

dollar as to part of the reason their earnings were less thank expected this past quarter.  The

stock was punished in the short-term over this.  As you can see, the strength of the Dollar can

have a pretty big impact on earnings.  We don't want the Dollar extremely weak either as some 

commodities like oil are priced in U.S. Dollars.  Typically a stronger dollar means lower oil

prices while a weaker one means higher oil prices. Of course, this year geopolitical events

have sort of trumped that relationship, but generally it is highly correlated.  So, there is balance

that needs to be maintained and perhaps we are moving back into a more normal range from the

extremes of late.

We'll discuss CPI and the Fed more in the coming weeks.  For now, sentiment has shifted a bit

and the market may try to make a bit of a run higher if it can.  The Fed will meet again mid-

December with the latest CPI number coming out a day before their rate decision.  Regardless

of the CPI data I'd still expect tough talk, but the the market will begin to ascertain the difference

from talk and reality if we get another cooler than expected number.  Stay tuned...

One last item.  You may have seen the news regarding one of the cryptocurrency exchanges known

as FTX.  We don't do anything with crypto because it is unregulated and somewhat like the Wild West.

Essentially, the CEO made bets with client assets that went bad and now the company is bankrupt with

a lot of client funds missing.  I suspect too things related to this.  One, the CEO is probably going to

prison.  Second, that whole industry, provided it survives this, will go from being run by kids in cargo

shorts and flip-flops to men and women in suits. Regulation is coming and that will definitely be a

good thing for those who put their hard earned money to work there.

Have great week!