In his Daily Market Notes report to investors, while commenting on the market’s underlying strength, Louis Navellier wrote:
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
Futures were green right up until the open. Interestingly, US Treasury yields drifted lower before the open and more so afterwards on the heels of very high inflation numbers last week. This yield movement is also disconnected from the relationship with high valued growth stocks, down today in the face of lower yields, which have had an inverse movement from the direction of interest rates for most of the year. Gold higher and crypto lower does point to a risk-off posture along with lower interest rates.
The market looks bad today when you look at the indices, but when you look beneath the surface, things are just fine.
There's a lot of relative strength. All of these names are up more than 1%: Radware Ltd. (NASDAQ:RDWR), BioNTech SE (NASDAQ:BNTX), Tecnoglass Inc (NASDAQ:TGLS), Fulgent Genetics Inc (NASDAQ:FLGT), Willamette Valley Vineyards, Inc. (NASDAQ:WVVI), Datadog Inc (NASDAQ:DDOG), Cloudflare Inc (NYSE:NET), HubSpot Inc (NYSE:HUBS), Enphase Energy Inc (NASDAQ:ENPH), Himax Technologies, Inc. (NASDAQ:HIMX), Daqo New Energy Corp (NYSE:DQ), Lazydays Holdings Inc (NASDAQ:LAZY), Extra Space Storage, Inc. (NYSE:EXR), Joint Corp (NASDAQ:JYNT), Issuer Direct Corp (NYSEAMERICAN:ISDR), EPAM Systems Inc (NYSE:EPAM), Encore Wire Corporation (NASDAQ:WIRE), Atlassian Corporation PLC (NASDAQ:TEAM) & Restoration Hardware Holdings, Inc (NYSE:RH). These stocks represent a good cross-section of the economy indicating the underlying strength is broad-based.
Transitory No More
We are entering the second half of December, which is seasonally stronger than the first half. Obviously, a lot of people are on pins and needles about what the Fed is going to say this week on their Federal Open Market Committee statement.
I fully anticipate that they'll confirm that we'll be raising key short-term rates with the federal funds rate up at least a quarter percent next year. And then, of course, they will be probably reducing their tapering a bit now. The last time the Fed reduced their tapering, they went from $120 billion a month to $105 billion a month and dovish, and a lot less than we anticipated. Now we expect, and have all along, they will go to go from $105 billion a month to $90 billion a month. The Fed is moving in baby steps and will likely be evident in their ensuing FOMC statement.
The Fed has abandoned the word transitory, and at this point well they should. Obviously, inflation is more permanent. The good news is we know where inflation is: used car prices, energy and food. The other good news is we can fix it because the U.S. is such a large country with economies of scale. To wit, a federal judge overrode the Biden administration on the drilling ban on federal land, and with the Energy Department’s cooperation — a bit iffy right now — more oil and gas could come online and drive down energy prices.
But the real bottom line for investors is that inflation is good for stocks because companies tend to increase their earnings. For instance, there’s a lot of commodity-related companies that can prosper from inflation because prices go up much faster than they go down. Even the tone on CNBC — which is normally quick to pile onto bad news — is bullish. Andrew Ross Sorkin was recently talking about how inflation is a good thing, but candidly, it's a great thing for the investor class with large holdings in stocks and real estate. If you are in the middle class or poor, this inflation is horrific.
Tornadoes Hurt Manufacturing
The dollar is very strong. That's why the interest rates are so low. The treasury auctions last week were phenomenal. The ten-year bond yield, as I write this, is now 1.44%. The dollar continues to gain against the Euro. We're on track for very strong GDP growth this quarter 7% to 8%, but we're going to have at least 5% GDP growth this quarter.
The Atlanta Fed tends to overshoot, but we will get more clarity with the November retail sales report. The ISM report is at a record high for services and manufacturing with tremendous order backlogs. The tragic tornadoes in the Midwest are going to further hurt manufacturing. Some of the supply shortages, particularly chips are going to get resolved in the New Year.
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