by Louis Navellier
May 18, 2021
Many of my fellow authors here have seen high inflation numbers coming – and so have several other leading analysts – but last week’s inflation numbers apparently caught the Federal Reserve by surprise!
Last Wednesday, the Department of Labor reported that the Consumer Price Index (CPI) rose 0.8% (a nearly 10% annual rate) in April, the largest monthly increase in 13 years and four times higher than the economists’ consensus expectation of a 0.2% increase. Food prices rose 0.4%, while energy prices declined 0.1%. Interestingly, gasoline prices declined 1.4% in April, even though the prices at the pump are surging in May due to the Colonial Pipeline disruption. Transportation services surged 2.9% in April, while electricity prices rose 1.5%. Also notable is that prices for used cars and trucks surged 10%, the largest monthly increase ever recorded. This huge gain was likely exaggerated by the chip shortage constraining new vehicle production. Excluding food and energy, the core CPI rose 0.9% in April, which was three times economists’ consensus expectation of 0.3%. In the past 12 months, the CPI and core CPI have risen 4.2% and 3%, respectively, which are both well above the Fed’s 2.4% expectation for inflation.
In the past 12 months, overall energy prices have risen 25.1% as gasoline prices have risen 49.6% and natural gas prices have risen 12.1%. Used car and truck prices have risen 21% in the past 12 months, while new vehicle prices have risen only 2%. These dramatic price increases may very well be “transitory,” as the Fed maintains. However, energy prices may not decline until the fall when demand naturally ebbs. The semiconductor chip shortage should also begin to ebb by the fall and eventually help boost new vehicle production, which in turn should put downward pressure on used car and truck prices.
Then, on Thursday, the Department of Labor reported that the Producer Price Index (PPI) rose 0.6% in April, which was double the economists’ consensus expectation of a 0.3% increase. Wholesale food prices rose 2.1%, while energy prices declined 2.4%. The core PPI, excluding food, energy, and trade services, rose 0.7% in April, which was also above consensus expectation of a 0.4% increase. In the past 12 months, the PPI and core PPI have risen 6.2% (the largest increase since 2010) and 4.6%, respectively.
Higher housing, food, and energy prices are going to hurt the Biden Administration’s popularity, so I expect there will be some interesting comments from the Administration’s economic advisors. Most of Biden’s inner circle aren’t that well known but Treasury Secretary Janet Yellen was known as the “Fairy Godmother” when she was Fed Chair, so I expect that her economic commentary will likely be the most authoritative and most upbeat. Therefore, I expect Secretary Yellen to sprinkle some of her “fairy dust.”
Amazingly, Fed Vice Chairman Richard Clarida said that he was “surprised” at the CPI announcement, saying, “This number was well above what I and outside forecasters expected.” Well, we weren’t that surprised. We (and many other analysts) have been predicting these higher numbers for a long time.
Fed Vice Chairman Clarida, in a video link before the National Association for Business Economics International Symposium, signaled that the Fed remained more focused on its unemployment mandate, saying, “Right now, that means focusing especially on the labor market.” Interestingly, Clarida summed up his comments by saying “Honestly, we need to recognize that there’s a fair amount of noise right now, and it will be prudent and appropriate to gather more evidence.” Translated from Fedspeak, he signaled that the Fed may not change its policies until the unemployment rate falls much lower, to perhaps 4%.
Another Fed Governor, Christopher Waller, said on Thursday that “The economy is ripping, it is going gangbusters,” but he said we must see several more months of job data before scaling back monetary policy. Specifically, Waller said, “The May and June jobs report may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our policy stance.” Waller added that “We also need to see if the unusually high price pressures we saw in the April CPI report will persist in the months ahead.” Translated from Fedspeak, the Fed is not ready to change its easy money policies.
Fortunately, the U.S. economy is booming. According to the Atlanta Fed, it is now growing at an 10.5% annual pace, despite last Friday’s flat retail sales report. Surprisingly, the Commerce Department announced on Friday that retail sales were unchanged in April, which was a big shock, since economists were expecting a 0.8% increase. However, this is not so bad when you consider that March retail sales were revised UP to a whopping 10.7% increase from the 9.7% rise originally reported, making “no rise” in April a 1% increase from the original reports! Core retail sales, excluding vehicles, gasoline, building materials, and food services, declined 1.5%, so that gives the Fed an excuse to remain accommodative.
Most First-Quarter Earnings are In – Here’s “What Worked Best”
Over 90% of the stocks in the S&P 500 have announced their first-quarter results and, so far, the average sales and earnings surprises are running at 3.7% and 23.2% (respectively) above consensus analyst estimates. This is why analysts are so busy revising their consensus sales and earnings estimates higher.
I once predicted that sales and earnings momentum would peak in the first quarter, but I was premature, since second-quarter results could surpass the first quarter and help sustain this earnings momentum.
Our friends at Bespoke issued a great report on Tuesday that illustrated “what is working in the S&P 500” based on their decile analysis since February 12th. Here are the highlights based on their decile analysts. (Bear in mind that the overall S&P 500 rose just 5.5% in those 90 days, so these gains are exceptional.)
- The Top 30% of stocks in the S&P 500 with the lowest P/E ratio have risen 16.42% (lowest 10%), 16.48% (next lowest 10%) and 17.15% (third lowest 10%), respectively.
- The Top 30% of stocks in the S&P 500 with the lowest Price to Sales have risen 19.37%, 16.98% and 15.00%, respectively.
- The Top 50% of stocks in the S&P 500 with the highest Dividend Yield have risen 12.75%, 15.09%, 16.05%, 15.11% and 13.19%, respectively.
- The Bottom 20% of stocks in the S&P 500 with the lowest Share Price are up 11.59% and 12.15%, respectively.
- The Bottom 10% of stocks in the S&P 500 with the lowest Market Capitalization are up 10.63%.
- The Bottom 30% of stocks in the S&P 500 with the least International Revenues are up 8.61%, 11.24% and 10.25%, respectively.
In summary, what the Bespoke decile report on the S&P 500 illustrates is that we are in a “mean reversion” market, since NASDAQ (the previous leader) has been correcting. Although this can also be interpreted as a “value shift,” value stocks without strong forecasted sales and earnings are expected to stall in the upcoming weeks. Essentially, mean reversion markets build a base for NASDAQ and growth stocks to “re-launch,” so I think it is important that if and when you buy value stocks, you stick to those with strong forecasted sales and earnings, like some of the steel and copper stocks that I recommend.
Also, since many companies are awash in cash, stock buy-back announcements have soared. According to The Financial Times, $484 billion in stock buy-backs have been announced in the first four months of this year. This is the biggest surge in stock buy-backs in two decades, according to Goldman Sachs. In absolute terms, this “buy-back bonanza” is expected to increase at least 35% vs. a year ago. Due to low rates, many companies can borrow in the bond market at ultralow interest rates to issue new bonds to refinance their existing debt as well as buy back outstanding shares, so I expect this trend to continue indefinitely.
Chaos Whips the Market from Day to Day…But the Market Usually Keeps Rising
Let’s face it, there is a lot of chaos in the world, and the market is reacting to it; but in the end, the market usually rises, month after month – and most weeks. Last week, Israel was under siege from rocket attacks, and Russia’s DarkSide criminal group was apparently responsible for the cyberattack on the Colonial Pipeline that serves the Southeast region. They collected almost $5 million ransom via cryptocurrency.
Speaking of cryptocurrencies, according to The Wall Street Journal, the cryptocurrency market was worth more than all of the physical U.S. dollars in circulation at the end of April. But then, so far in May, the cryptocurrency market has lost as much as $365.85 billion, according to CNBC, especially after Elon Musk tweeted that Tesla suspended taking bitcoin for vehicle purchases due to environmental concerns associated with Bitcoin mining. It is widely known that many bitcoin miners were setting up operations in Wyoming to take advantage of cheap electricity there – approximately 80% of which is derived from coal, according to the Energy Information Administration. Elon Musk responded: “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal.”
The cynic in me finds it hard to believe that Elon Musk would mislead his listeners about how bitcoin is “mined” (not like a metal or mineral, but by using vast amounts of electric power). I suspect that he may have tweeted about bitcoin “mining” to deflect attention from news that Tesla’s April vehicle sales in China were disappointing. I also find it interesting that Musk said Tesla wouldn’t sell bitcoin and would resume using cryptocurrency for transactions “as soon as mining transitions to more sustainable energy.”
In an interesting coincidence, the cryptocurrency market collapse appeared to trigger a stock market recovery on Thursday, so at least Elon Musk helped Tesla stock recover a bit! Confused? Join the crowd.