Fedspeak, Earnings and Key Inflation Release

Quincy Krosby (00:00):

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good afternoon everyone. This is Quincy Krosby. It's the Talking Point. It is the afternoon of February 12.The market, yes, hit its 5,000 on the S&P 500 500 continues to move. NASDAQ moving. And people say, how is this possible? Well, with the market, it is possible and that is the way it is. And I'm hearing people say, well this is wrong. The market's not wrong. The market's the way the market is. The market sees things and distills information. One of those things is that the earning season actually has picked up momentum in terms of companies earning more than expected. And it has been actually positive because it's been broader. It's not just the big tech names. And that's been good. The thing is that the market has been rewarding the big tech names, but we're seeing a pick-up in earnings and guidance from companies across the board.

Quincy Krosby (01:05):

And why is that? Well, first of all, the economic backdrop remains strong. We also have consumers who have jobs and their spending. And the mergers and acquisitions, let's take a look. For example, in the energy sector picking up, we just had a big announcement of, and again, it's in the Permian Basin and everyone says, why? Why is the Permian Basin so important for these mergers and acquisitions? Well, the point of getting the oil out through fracking, hydraulic fracturing, is about $33 to maybe $38. And that is lower than the bringing oil up, for example, offshore. And so the companies are saying, well, we will be able to make more money. So we're seeing deal flow beginning to pick up. And the deal flow in the energy sector has been actually leading ever since ExxonMobil bought Pioneer Natural Resources. I'm just giving you an example.

Quincy Krosby (02:06):

What happens is when we have deal flow in sector, other companies in that same sector start picking up momentum and the reason is the market perceives even more deals. And again, just using that as an example. So one of the things too is that companies realize that rates are going to come down and it's simple. It may not be on the schedule that the market wanted, and perhaps the market is now more in tune what the Fed is saying. The Fed is saying, yeah, we're going to have rate cuts, not as many as you want, but we will have them. And right now, by the way, the market, the futures market, the probability market is looking at maybe on May 1, it's not that strong, but certainly in June. That said, keep in mind if the numbers come down, and we're going to have the CPI number tomorrow morning, if that comes down more than expected, the Fed will adjust.

Quincy Krosby (03:03):

I mean the Fed has been known, especially under Powell, to surprise the market with a move that the market never factored in. But again, the reason they want to be careful is this. They don't want to make a mistake. They don't want inflation starting to pick up and be caught off guard and only to have to come around and raise rates again. So they're basically saying to the market, just give us some more time. But it doesn't mean that there won't be rate cuts. There will be rate cuts and the market likes that. The market is also appreciative of the fact that the labor market remains solid. And do we see more layoffs? Yeah, we do see the announcements, but nonetheless, believe it or not, with all of these announcements and financial services and in technology, it is still actually stronger than before COVID hit us. So that's something that, you know, people say, well, it's okay, but there are cracks in there.

Quincy Krosby (03:58):

When we see the cracks, we will start to see them in initial unemployment claims. That is the area that we look first and that is where the, obviously, it has been actually pretty healthy. The market enjoys that and the market is looking ahead to fiscal stimulus. Now this gets dicey because you don't want to have too much stimulus in the system. We all know that because it leads to inflation. But in an election year, the administration wants to win again and they will come in and they will start priming the pump. And that will come in some kind of, you know, fiscal stimulus. We'll see it and we will see more. This is all part of the reason that the market felt secure enough to make that move and cross over to a very important number because it was round over 5,000. The question is what's next?

Quincy Krosby (04:47):

Now, what's also interesting and today's market, we see the Russell coming back and I have mentioned time and time again the importance of broadening the participation in the rally. And the reason I watch the Russell 2000 is very clear. It is home to many small banks and obviously smaller companies, technology and industrial names. And it serves as a bellwether for the most granular part of economic conditions in the country. They are the local companies and that Russell 2000 picks it up. And so what we want to see, and I'm going to stress this again and again, to have it participate every day with or without big tech, okay? Even on its own. But it is very, very important. And the other thing is when we get the economic data for the fourth quarter, the expectations are it is going to be a very solid number, not the shallow slowdown that we had expected.

Quincy Krosby (05:46):

And this is again, putting it all together. It is a view that we are going deeper into this year with a backdrop that is positive for the market. And that is why you see the market climbing higher. Now can it climb higher after this? Of course, it can. Now we are going to get here from Nvidia and that is going to be February 21. The market is expecting an awful lot from that company and the market has no problems whatsoever to punish any company including these big tech names forcefully as those numbers come out. So it's going to be important as the market listens to what they have to say. And one of the reasons is, by the way, that silicon chips, right? They are in everything and they represent global demand. And if that global demand holds up, it means that usually the economy is doing well and that would be the global economy.

Quincy Krosby (06:43):

Even though we know there's a slow down still in China, still in the Eurozone. But nonetheless with Nvidia, they create the faster and faster chip. They are the ones that can process more and more information, and do quickly and cleanly, and with the kind of authority that that company enjoys. So this is why that company is so important. What we are also seeing, which I think is very interesting, and again indicating a broader appreciation for the economy, we have seen rails pick up and trucks pick up. That part of the transportation sector is important because you don't want to have Dow climb higher the S&P 500 climb higher without part of the transportation sector enjoying the stronger economy. And that, when I look at that, I say to myself, this is participation and it's extremely important. So one of the questions that we had recently was what about the idea of a seasonality for the month of February and March?

Quincy Krosby (07:50):

What's interesting is that statistically, and I always have to refer to the data, it's not particularly hospitable. We could argue why. I mean if we want to say why wouldn't it be? Well, part of it could be that money comes in in the month of January, it has to be placed, right? That money comes in, it must be put into the market somewhere, whether it's fixed income or whether it is in the equity market, and it tends to help the markets in the month of January. Then people start saying, well it's so expensive, the valuations are expensive and therefore, February tends to be a bit more difficult for the market to navigate. That's the reason and that is the standard reason. And the same thing for March. Pretty dicey. But it doesn't always mean that in reality and in election year, again, there is uncertainty and certainly this year there is plenty of uncertainty.

Quincy Krosby (08:42):

But with that, you also have the promise of tax cuts from the one part of the political system, the Republicans, tax cuts, the market loves that. Similarly, on the other side of the aisle, the market loves the idea of stimulus. Give us more because it all goes into certain parts of the economy. And that is why they talk about an election year being attractive for the market. Also, if the yields come down, you are going to see a migration coming out of the money market funds. Not completely, because many corporations keep money in those funds, it's liquid and they need it. But you will see that they will start to migrate into the equity market if yields come down. The other part of the story is they will also start focusing on dividend paying stocks because they have been under pressure as the cash is providing more than most of those yields.

Quincy Krosby (09:41):

So you'll see when you go online, you'll see all these articles talking about dividend paying stocks. The reason for that is again, the yield is higher when those yields come down because the Treasury department and the auctions actually were okay. I was watching that, the 10-year Treasury auction last week. It was extremely good. And by the way, it was the largest in history for 10-year Treasuries. By the way, an asterisk here, we saw a lot of foreign buying, which we haven't seen a number like that since last February. So this was important because we've been wondering where are the foreigners, why aren't they coming in? And by the way, it was more than the American domestic purchases. And so one of the ideas behind it was, remember, Treasuries are a safety that perhaps they're worried about geopolitical conditions. And so coming in and buying into the U.S. Treasury, which really is one of the most important products, if you want to call it that during periods of geopolitical concern.

Quincy Krosby (10:47):

So all of this factoring in and the market is just basically a bit more optimistic. Maybe tax cuts certainly fed cutting rates and also the companies doing better. And we will see more and more mergers and acquisitions as we go through the year and as the deal flow picks up and is successful, especially ones that are coming out as IPO's, initial public offeringIs. So most important thing this week is tomorrow and that is on Tuesday. Yes, the CPI report the Consumer Price Index. This is going to be important and we all know the reason why, and I will tell you the probability of rate cuts for the different months will be affected by what we see tomorrow. When we saw the revised number coming out, it wasn't, you know, a major surprise that basically was the same as the actual numbers. Tomorrow will give us another picture of inflation.

Quincy Krosby (11:45):

What we're looking for is for inflation to start coming down and remember this number, it's not hard. It is, we want to see things be below 3% and below 2.9% in that core. And that will be also helpful for the market to decide whether or not there will be a rate cut perhaps in May, rather than just going to June. Right now, it is about 60.5% probability that we may get a rate cut in May and it's early May. Their meeting is May 1. So a lot for the market to digest this week. We have quite a bit of earnings. These are typically the smaller companies, not the big mega names, but it's extremely important to see the consistency of companies saying that they are more optimistic about the economy and consumer spending and also business spending. So that is it. But again, Fedspeak in addition to the CPI report and that will certainly move markets.

Quincy Krosby (12:46):

The other aspect that we are looking at above all else is the political commentary and the events in the Middle East. Right now, it looks as if there will be kind of ceasefire. That's good. However, that would push all prices down a little bit even though they're still in the upper seventies. Remember, oil is very much a function of will this Middle East crisis expand? Will it expand towards Iran? Then you will see all prices shoot up. So all prices pulled back just a little bit as the idea that there may be some conciliatory efforts in the Gaza and Israel. So all of the geopolitical is still being factored into the market, but nonetheless, companies are pushing higher. Take good care. We will be back next week. Thank you very much. Appreciate your listening.

Quincy Krosby (13:37):

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Quincy Krosby (14:36):

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