CWS Market Review – February 13, 2024

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Inflation Is Still With Us

Maybe inflation is more stubborn than we thought. On Tuesday, the government said that consumer inflation rose by 0.3% last month. That was 0.1% higher than expected.

Even though the CPI report was only slightly higher than expectations, it upset the consensus that inflation has been licked. Prior to the report, it looked as if the 12-month rate of inflation was about to fall below 3%. That hadn’t happened in nearly two years.

Well, it still hasn’t happened. Over the last year, inflation is now running at 3.1%. That’s down from 3.4% which was the 12-month rate ending in December. Inflation is still running well above the Federal Reserve’s goal of 2%.

Today’s CPI report is a perfect extension of Jerome Powell’s recent comments that the Fed is in no hurry to cut rates and that the central bank wants to see more benign inflation data. Today, we didn’t get it.

The stock market was less than pleased. That makes sense if interest rates stay higher for longer. The S&P 500 dropped 1.37% today, and the index is now back below 5,000. The small-cap Russell 2000 fell more than 4%.

We should also bear in mind what a strong stock market this has been. The S&P 500 has risen 14 times in the last 15 weeks (see above). Since late October, today was the index’s third daily loss of more than 1%.

What’s driving the stubborn inflation numbers? That’s not hard to find. Last month, shelter prices increased by 0.6%, and shelter costs make up a sizeable portion of the CPI. Shelter costs accounted for two-thirds of the entire increase in inflation. Over the last 12 months, shelter prices are up by 6%.

Let’s break down the numbers. The core rate of inflation, which excludes food and energy prices, rose by 0.4% last month. That was also 0.1% higher than expectations. Over the last year, core inflation is running at 3.9%.

“Food prices moved higher as well, up 0.4% on the month. Energy helped offset some of the increase, down 0.9% due largely to a 3.3% slide in gasoline prices.”

Used vehicle prices declined 3.4%, apparel costs fell 0.7% and medical commodities declined 0.6%. Electricity costs rose 1.2% and airline fares increased 1.4%. At the grocery store, ham prices fell 3.1% and eggs jumped 3.4%.

Here’s a look at the seasonally-adjusted monthly core rate of inflation.

Notice how the right-most bar appears to break the downward trend. That could be a small outlier or it may show that inflation is pushing back.

Last Friday, the government revised its seasonally adjusted data. Normally, these revisions are the territory of serious data nerds, but last year it actually made news. That’s because the revisions showed that inflation wasn’t coming down as quickly as previously believed. This time, however, the data was largely unchanged.

Don’t Expect the Fed to Cut Anytime Soon

One favorable note is that wages are still rising even after being adjusted for inflation. Last month, inflation-adjusted hourly earnings rose by 0.3%. Over the last year, real earnings are up by 1.4%.

The problem, however, is that wages are measured in per-hour, and number of hours worked has declined. In other words, employers haven’t stopped hiring, but they are cutting back on the number of hours. Real weekly earnings have declined by 0.3%.

Today’s CPI had a major impact on the outlook for the economy and for stocks. It now looks like a March rate cut from the Federal Reserve is completely off the table. A rate cut in May be doubtful as well.

One month ago, the odds for a rate cut at the March meeting stood at 77%. Now it’s at 8%. The odds of a rate cut in May are at 35%. Interestingly, traders are merely changing their timetable for rate cuts but not for their degree. One year from today, futures traders see interest rates a full 1% lower than they are now.

Tuesday was an interesting day on the markets. For one, the S&P 500 had one of its worst days in months, but it was also interesting to see how the pain was spread. For example, the Utilities and REITs were the two worst-performing sectors today. That makes sense if interest rates are to remain high.

Many defensive stocks did well today, and this is a good reminder that having a large dividend doesn’t necessarily make a stock defensive. From our Buy List, shares of Hershey (HSY) and Cencora (COR) both closed higher today. If the economy suffers, those two businesses will likely hold up well.

On days like today, I like to watch the relative performance of High Beta stocks compared with Low Volatility Stocks. This is a quick and easy way to see how the stock market is reacting to risk. Today, the market didn’t like risk at all. The S&P 500 High Beta Index fell 2.96% while the S&P 500 Low Volatility Index fell only 0.79%.

Many hard assets, like gold, did well today. Oil also had a good day. These are classic “inflation trades.”

One stock that’s received a lot of attention recently is Arm Holdings (ARM), a British semiconductor stock. SoftBank bought Arm in 2016. A few years later, Nvidia tried to buy Arm but the deal fell through. Arm eventually went public five months ago at $51 per share, but SoftBank still owns 90% of the shares. It’s basically a publicly-traded subsidiary.

In Arm’s first day of trading, the stock got to $61 per share, but it was trading below its IPO price a few days later. Then things got interesting. The company reported very good earnings and gave optimistic guidance.

One week ago, Arm closed at $72.98 per share. It then jumped 5.5% on Wednesday followed by a blistering 48% increase on Thursday. The stock rallied another 29% on Monday. All told, the stock doubled in four trading days. Arm is actually worth more than SoftBank, if you can imagine that.

There are also rumors that Arm is the victim (or beneficiary) of a short squeeze. This is when many investors bet against a stock, but it goes up anyway. At some point, those shorts are forced to close out their positions which entails buying more stock. In turn, that causes the price to go even higher, and more shorts are squeezed.

The prospects of higher interest rates aren’t good for such volatile stocks. Shares of ARM fell 19.5% today.

Stock Focus: Casey’s General Stores

I have to confess that I was not familiar with Casey’s General Stores (CASY) until recently. I was told about it by some friends in the Midwest where Casey is very popular. It’s basically a gas station masquerading as a pizza shop. Or vice versa. It really doesn’t matter.

The idea is simple. If you drive a car, you’ll need gas. If you’re going to go to a gas station, you might as well choose the place that has pizza as well.

Casey’s is based in Iowa and the stores are mostly in Iowa, Missouri and downstate Illinois. The company also has an impressive presence in the other Midwestern and Plains states. There are now over 2,500 locations in 16 states. Casey’s prefers to locate in small towns where there’s less competition. There isn’t a Casey’s within several hundred miles of Wall Street.

The stock has been a huge winner over the years. Since 1991, Casey has returned more than 300-fold. Check out this chart:

The S&P 500 Total Return Index (in blue) nearly looks like a flat line when compared with Casey.

The company currently has a market value of $10 billion. It’s a member of the S&P Mid-Cap 400. Last year, it did $15 billion in sales.

In November, Casey reported very good fiscal-Q2 earnings. For the three months ending on October 31, Casey made $4.24 per share which beat expectations by 44 cents per share.

The fiscal Q3 earnings report should be out in early March. Wall Street currently expects earnings of $2.10 per share.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on February 13th, 2024 at 7:16 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.