The market broke its streak last week and closed 1.27% lower than it did the week before.
Inflation, as expected, spoiled the sentiment; officials from the U.S. Federal Reserve were far bolder last week than we had expected as they discussed their plans to fight inflation by hiking rates significantly.
If you were hoping for less volatility this week, you will have to be patient. Unfortunately, we have another round of inflation reports to contend with, and corporate earnings season (more on that later) is kicking off with the big bank reports.
To quickly review, traders worry about inflation because it means interest rates are going up. Neither inflation nor rising rates have to be an issue for stocks unless they are rising very quickly… which is the case this year.
So keep your eye on these market-moving inflation announcements:
- Tuesday, Apr. 12: The Consumer Price Index (CPI) will be released, and estimates are for a month-over-month change of 1.2%. On an annualized basis, that is 15.4% inflation. The only thing we can say for now is that the biggest investors in the world are still not pricing inflation that high for longer than a month or two. So we think levels that high may be temporary.
- Wednesday, Apr. 13: The Producer Price Index (PPI) is due, which is a lot like the CPI but for businesses and manufacturers rather than consumers. Estimates are also depressingly high.
The big thing to watch is how the market reacts to these reports. In our view, the bad news is already priced in. So unless we see a big surprise, the net effect on volatility shouldn’t be too great.
Neither report is likely to help the market, but last week’s bad news from the Fed has properly prepared the market.
The following question, of course, after all this negativity is, is there any good news?
Let’s hit the bad news first: Earnings season is kicking off with profit reports from JPMorgan Chase (NYSE:JPM) on Wednesday and Morgan Stanley (NYSE:MS), U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) on Thursday.
Expectations for bank profits are low, and we don’t expect to see any big surprises from this group. Growth should still be positive but very low. Unfortunately, while rising rates are usually good for banks, short-term rates have been rising too fast and have neutralized a lot of the benefit.
As you can see, the banking sector isn’t looking desirable right now. However, within finance, there are some sub-groups where current market conditions are in their favor. We like property-casualty companies right now like Allstate (NYSE:ALL) and Aflac (NYSE:AFL), and we expect companies like this to break out on even moderately positive news in the market.
And now for the good news: Earnings reports are the best real-time economic data we can get. Fortunately, we have already seen a lot of “early” reports from companies that report before everyone else does, and growth looks solid.
According to Zacks Research, profits should be up 3.2% and revenues up 10%, on a year-over-year basis. That may not sound like much, but keep in mind that the bar was set pretty high last year, so any positive number is good.
We think there are some interesting, undervalued opportunities in consumer discretionary stocks like Target (NYSE:TGT) and Costco Wholesale (NASDAQ:COST). We have been mentioning COST for a few months now, and the stock is up 28% since its lows in January. We think the strong discount retailers still have room to move higher.
The Bottom Line
It’s another big week for inflation data, but with all the bad news last week, we aren’t expecting any big disruptions. Earnings season starts this Wednesday with the big banks reporting. As earnings season progresses, we should see sentiment improve with rising profits.
Be sure to tune in to our free livestream tonight on our YouTube channel, Learning Markets.
Kicking off at 7:00 p.m. ET sharp, we’ll further examine inflation’s impact on bond prices (hint: it’s almost always negative). And if you are looking for a great way to profit from inflation, there’s an easy type of trade to execute.
Finally, we hope everyone has a chance to relax on Good Friday before the flood of earnings data hits us next week. Because of the holiday, we are going to send our usual Friday Trading Opportunities letter to you a day early on Thursday.
Please note that InvestorPlace will be closed on Friday, Apr. 15. The market, too, will be closed.
We’ll talk to you on Thursday.