Inflation Takes Center Stage This Week With CPI Reports And Fed Chair Powell Testifying Before The Senate

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key takeaways:

  • Could Friday’s Unofficial Earnings Help Stocks’ Kickoff Turn It Around?
  • Will rising interest rates turn the stock bearish?
  • Will Rising Interest Rates Cool Down the Hot Housing Market?
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Equity index futures are pointing to a lower open as investors pick up where they left off last week. Nasdaq 100 Index futures are all but down more than 1% before the opening bell. Many investors expect an informal opening of earnings this Friday to help strengthen stocks. With the first week of the new year under our belt, we’ll see if the bias towards energy, banks and value stocks continues and whether selling in technology and growth stocks will continue.

Some stocks are rallying this morning as “Merger Monday” returns. Gaming stock Take-Two (TTWO) plans to buy Zynga
(ZNGA) in stock and cash of $12.7 billion. Take-Two is down 8.31% while Zynga is up 53% in premarket trading. The announcement appears to have prompted a rally in another gaming company, Playtica (PLTK), which was up more than 8% in premarket trading despite no news specifically about the stock.

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Health care equipment and services company Owens & Minor
(OMI) announced plans to buy healthcare services company Apria (APR) for $1.45 billion in cash. Apriva rose 24.5% in premarket trading while Owens & Miner fell 9.1%.

Analysts’ stock upgrades continue. This morning ViacomCBS (VIAC) was upgraded to “buy” from Deutsche Bank, leading to a premarket rally of 3.42%. SolarEdge (SEDG) was added to Goldman Sachs
The “conviction buy” listing and raised its price estimate of $28 per share to $448, leading to a 2.4% rally in premarket trading. Dell Technologies
(DELL) was upgraded by Berstein to “outperform” the stock, up 2.4% before the bell.

Investors on Lululemon (LULU) appeared to be bearish as it was falling about 6.5% in premarket trading. The company adjusted earnings guidance to the lower of the estimated ranges.

Riskier assets also continued to decline, with Russell 2000 index futures down 0.61% and bitcoin futures down 2.53% in premarket trading. Also in the futures market, oil prices are down 0.41%. The 10-year Treasury Yield (TNX) is up 0.62% before the open, and the VIX (Cboe Market Volatility Index) is up about 12% and trading around 21 which is often a level of concern for many traders.

Many investors are hoping that earnings season could help stable markets with a strong fourth quarter. However, JPMorgan (JPM), Wells Fargo (WFC.)
), black Rock
(BLK), and Citigroup
(c) are among the biggest names, and banks are already doing well. The S&P 500 Bank Industry Group Index rose 9.37% last week. However, the earnings announcements should provide insight into inflation and how CEOs are working with Omicron, hiring employees, and how types are influencing the products and goods they bring to market.

On Friday, the 10-year Treasury Yield (TNX) rallied for the sixth-straight trading day and closed at a 52-week high, flirting with the level of 1.8%. When the Fed first launched its economic stimulus program, the 10-year yield has now returned to pre-COVID-19 levels. However, investors are still preferring energy stocks over all other sectors, despite a more than 1% drop in oil prices.

After energy, utilities and financials entered the top three sectors on Friday. Energy was also the top-performing sector last week, with the Energy Select Sector Index rising 11.19%. Three other sectors saw positive returns last week, with the Financial Select Sector Index rising 5.41%, the Industry Select Sector Index rising 1.25%, and the Consumer Staples Select Sector Index returning 1.30%.

The first three areas are sensitive to inflationary conditions, either through rising commodity prices, undercutting commodities, or as part of a causal relationship where rising commodity prices drive inflation, leading to higher interest rates. Huh. Later this week, we’ll get another update on inflation, along with the Consumer Price Index (CPI) and Producer Price Index (PPI) for the United States and China. Investors will hear Fed Chairman Jerome Powell testify before the Senate regarding his second nomination; They may have to face many questions related to inflation.

complicated relationships

It’s important to note that just because interest rates are rising doesn’t necessarily mean doom and gloom for stocks. While rising rates hurt growth stocks, stocks and interest rates have a history of rising together. According to BlackRock, in 1995, in months where the 10-year Treasury yield increased by more than 50 basis points, the S&P 500 reported a 3.2% price increase compared to typical months. Furthermore, another study comparing real rates (rates adjusted for inflation) for equity valuations found a positive correlation between the two variables. The study found that for every 50 basis point increase in 10-year returns, a single point increase in multiples can be expected. Of course, there is no guarantee that these relationships will continue.

Simultaneously, rising rates affect different segments of the market. Lately, we have seen several times that rising rates have boosted value stocks but hurt growth stocks. They have increased financial stocks but hurt technology stocks. If we saw an extended period of rate hikes where Treasury rivaled utility stock dividend yields, we would see a decline in utilities as well as any other high-yield stock.

Of course, we can look back in history and see instances where rates went too high, resulting in recessions. A more notable example would be 1982 when Federal Reserve Chairman Paul Volcker was trying to fight stagflation and the federal funds rate exceeded 20%. However, it was relatively short-lived. Overall, higher rates do not necessarily depress the stock market as much as they do to drive sector rotation.

housing market: Rising interest rates have even less impact on home prices than one might imagine. Of course, it’s also a more complicated relationship that has a lot of factors. Historically, rising rates have had a tendency for people to lock in a rate on a house to try and close quickly. An increase in rates often has a short-term cooling effect on home prices, but then as home buyers get used to the new conditions, buying will eventually pick up.

If you compare the S&P/Case-Shiller Home Price Index with the 10-year yield on the Thinkorswim® platform, you can see that many times home prices and returns rise and fall simultaneously.

Good in the Hood: Accommodation also tends to be very localised. While some parts of the country may experience buoyancy, others may experience bustle. Most are likely to be somewhere in between. Let’s look at some examples using data from the National Association of Realtors. The 2007 housing bubble busted by the credit crisis, Cape Coral—Fort Myers, Florida experienced a 50.8% change in home prices from Q4 2007 to Q4 2008. Buffalo-Niagara Falls, New York saw almost no change in housing prices, rising just 0.08%. Whereas, Dover, Delaware experienced a 6.5% increase in housing prices.

our home: Perhaps a better indicator of changes in housing prices is the relationship between housing prices and personal income. When the cost of buying a home exceeds the family budget, something has to be paid. Unfortunately, the current national home price-to-income ratio is above where it was before the housing bubble popped in 2006.

However, it is also better seen locally. In November 2021, a study by Clever Real Estate found that New York, San Jose, San Diego and Los Angeles were among the cities with the highest price-to-income ratios. But Pittsburgh, Cleveland, Oklahoma City and St. Louis were among the cities with the least.

TD Ameritrade® Commentary for educational purposes only. Member SIPC.


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