Weekly Stock Market Report: Stagflation or Just Another Slowdown

Happy Columbus Day! Below is a small excerpt from the ABS Advisor Market Intelligence Report. It is published every Monday morning to help conservative financial advisors and investors save time and outperform. We hope you enjoy it, and please feel free to forward it to your friends. 

Key Market Trends

Tip: Use this as a quick guide on the short-term direction of key markets. I once had a client that would call me nearly every day asking the direction of the markets. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term.

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Key Drivers for the Week of Oct 11, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

  • U.S. jobs report likely met Powell’s “reasonably good” criteria for QE trimming
  • Supply constraints, surging prices are slowing growth — dilemma for central bankers
  • Monday: Treasuries and Fed closed Columbus Day; Canada Thanksgiving Day
  • U.S. data reports: CPI, retail sales, PPI, trade prices, Empire State index, JOLTS
  • FOMC minutes ; Fedspeak with 8 voters, focus on VC Clarida and NY’s Williams
  • China releases CPI, PPI, trade; Japan has PPI, core machine orders; BoK on hold
  • German ZEW sentiment, HICP, Eurozone production; ECBspeak to be monitored
  • UK data on BRC retail sales, unemployment, wages, production, trade data on tap

Stocks & ETF Watch List (Paid Subscribers)

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

  • Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. Click here
  • Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. Click here.
  • Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
  • Dividend Stocks: List of stocks that have excellent dividends and business performance. Click here.
  • Dividend Growth Stocks: List of stocks that have a history of growing dividends. Click here.
  • Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends. Click here.
  • Dogs of the Dow: This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. Click here.

Week Ahead: Stagflation or Just Another Slowdown

The U.S. September jobs report likely met Fed Chair Powell’s “reasonably good” test, as the internals more than offset the disappointing 194k increase in payrolls, solidifying market expectations the FOMC will announce QE tapering at the November 2-3 meeting. Many analysts already believe the Fed is behind the curve as inflation pressures continue to climb.

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Last week Congress passed a bill that would increase the debt by $480 billion which will give the Treasury Department enough money until December 3rd. Get ready for huge market volatility around that time. Republicans are already saying they won’t help this time although I and most people don’t think they have the political strength not to.

Cathie Wood from ARK talks about the “log jams all over the place in Washington,” including the debt ceiling, government shutdowns, and the infrastructure bill. Wood believes the government probably won’t shut down, as “they play this game every year.” She notes that momentum behind tax increases has slowed significantly as a divide widens between progressive and moderate Democrats.

According to ARK, polling swing states showed non-favorable results for the Democratic party if taxes increased. A decrease in pressure to raise taxes means the stock market will likely continue to be in good health, that is, at least until another shock occurs. Quantitative easing will not slow any time soon, according to Wood. The Fed is keeping most of those purchases on their balance sheet in the form of reserves. “They are kindling for loan growth. If they were to light the kindling… then we might have a boom. That’s not happening actually… we are beginning to see the banks worry about loan growth because of DeFi, decentralized finance in the crypto world.”

ABS REPORT

“We [ARK] believe the next big worry is a recession.” Wood thinks that because inventories are so high in households, such as cars, we will begin to see inventories at stores pile up. “There has been a lot of double and triple orders,” Wood says, and combined with a transition from goods to services as the economy reopens, “there will be too much inventory, we believe, on the shelves.” This lack of demand for goods will likely mean retailers and other suppliers stop ordering new inventory altogether. Clorox serves as a visual for inventory backup: due to the pandemic, all of the inventories have been accumulated into households. In effect, Clorox sales have dropped significantly.

Morgan Stanley analysts believe the brunt of the economic slowdown following the Covid pandemic should be in the rearview mirror. According to Morgan Stanley, GDP growth from July to September fell from 6.5% to just 2.9%, stating that, “Growth in the U.S. economy is coming off a torrid pace in the first half of the year as stimulus spending and a reopening-fueled burst of activity cools.”

Stagflation or Slowdown: We have pointed out for months that the “recovery” is losing steam and rising inflation is here to stay. Investors need to embrace a major market correction and/or a long-term sideways market movement. Commodities will likely increase and investors should reallocate around value more than growth stocks.

The U.S. calendar will be busy with more key data, supply, and events on tap. Trading will be light on Monday, however, with the Treasury market on holiday for Columbus Day. The Fed is also closed, though Wall Street will trade. This week’s data highlights include CPI and retail sales for September that are expected to show elevated prices and weaker sales. Indeed, severe supply chain bottlenecks and soaring prices for energy, cars, and other commodities into the final weeks of Q3 hobbled economic growth, and put the trajectory through Q4 at risk.

And these factors will present a major dilemma for the FOMC heading into the November meeting as it contemplates QE tapering. The markets will also monitor supply as $120 bln in 3-, 10-, and 30-year auctions are slated. Fedspeak is on tap too with 8 of the current voters scheduled. The minutes to the September 21-22 FOMC are due too. Another earnings season kicks off with the big banks.

September CPI (Wednesday) headlines and we expect a 0.3% increase overall and a 0.2% rise in the core, following respective August gains of 0.3% and 0.1%. Such figures would result in a 5.2% y/y headline pace, slowing fractionally from the prior 5.3% clip and just shy of the 13-year high of 5.4% in June and July. Core prices should hold steady at a 4.0% y/y clip, though slipping from the 29-year high of 4.5% in June. Widespread production bottlenecks are lifting all the inflation metrics this year. The Fed continues to interpret the inflation spike as “transitory.” However, the jury is still out whether commodity price pressure will abate much into year-end given that supply chain problems seem to be getting worse and could last well into 2022.

September retail sales (Friday) are projected to fall -0.3%, with a 0.2% ex-auto increase, softening measurably following respective August jumps of 0.7% and 1.8%. The weakening is expected to come from declining vehicle sales, due to lack of supply, along with a continued unwind of the lift from Q1 stimulus. Unit vehicle sales plunged -6.4% to a 17-month low of 12.2 mln as the ongoing semiconductor shortages and delayed unloading at ports weighed on production. Vehicle sales were at a 16-year high of 18.3 mln in April. Other economic reports this week include JOLTS (Tuesday), PPI (Thursday), along with trade prices, the Empire State manufacturing index, and consumer sentiment (all Friday).

Supply hits the bond market again this week with $120 bln in coupon auctions, including $58 bln in 3-year notes (Tuesday), $38 bln in reopened 10-year notes, and $24 bln in reopened 30-year bonds. They will provide interesting insight into the demand for Treasuries. Auction results over the last couple of months have shown good to decent buying thanks to safe-haven demand and a grab for yield.

The likelihood the Treasury cuts auction volumes with the November refunding may support ongoing demand too. And yields have cheapened significantly. The wi 3-, 10-, and 30-year rates extended higher on Friday, leaving the short note at 0.318%, the highest since March 2020. The 10-year note rose to 1.620%, with the bond at 2.170%. However, such yields may not be attractive enough considering the possibility of a Fed tapering next month, as well as another debt limit debacle and default threat redux into early December.

Fedspeak will be closely monitored to further gauge QE tapering risks. As many as 8 current voters are on tap early in the week. Also, the FOMC minutes (Wednesday) to the September 21-22 meeting may shed some additional light too. The dovish Evans gives opening remarks at an awards ceremony (late Monday), though no comments on policy are expected. VC Clarida speaks at the IIF annual meeting (Tuesday). Bostic will also highlight (Tuesday) as he discusses inflation at the Peterson Institute.

He has supported the start of tapering this year. Barkin, a voter, is interviewed for in an NPR broadcast. Governor Brainard is at a Fed Listens event (Wednesday), while Governor Bowman (Wednesday) will speak on monetary policy and the economy. Bostic and Barkin are back up (Thursday), with the former taking part in a panel on inclusive growth, while the latter speaks at the Cornell Club. Daly, a voter (Thursday) speaks at a conference on small business. Harker, not a voter this year or 2022, will outline his thoughts on the economic outlook (Thursday). And importantly, Williams, takes part in a panel discussion on monetary policy in a Bank of France event (Friday). The BoE’s Bailey and the PBoC’s Yi Gang (Saturday) are on a panel on “Global Economy: Managing Uncertainty” at a G30 International Banking seminar.

Another earnings season is upon us. Fastenal starts the week Tuesday, but the focus will be on the big banks Wednesday with JP Morgan Chase, Goldman Sachs, BlackRock, and First Republic, along with Infosys, Progressive, Wipro, and Delta Airlines. UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, U.S. Bancorp, Walgreens Boots, and Domino’s Pizza follow Thursday, with J.B. Hunt, Prologis, PNC Financial, and Truist Financial on Friday.

Canada’s markets are closed Monday for the Thanksgiving holiday. A sparse calendar is on offer during the shortened week. The August manufacturing report (Thursday) is expected to reveal a 0.5% gain in shipment values after the -1.5% drop in July. Wholesale shipment values (Friday) are projected rebounding 0.5% in August following the -2.1% tumble in July. The existing home sales report for September is slated for Friday.

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