Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords-1.0%

Clearly, US stocks are not listening to the economic data. It took three announcements of inflation danger last week before traders paid any attention.

First, on Tuesday, the US announced CPI inflation. It came in at +6.4% y/y and 0.5% m/m.

Those numbers alone do not look like inflation is slowing down. But in fact, it was the seventh straight month of declines.

The Fed is very worried about inflation becoming entrenched. These numbers don’t show it but behind the numbers the breakdown does.

What you see above is headline inflation. They also report what they call core inflation. This is headline without the volatile parts like fuel. The Fed tends to look at core. Core can be split up into rent and everything else.

Rent makes up about 40% of core inflation and the fact it is running at +9% means core can only fall so far. The other 60% is running at a steady +1.5% so is already within the Fed’s target zone.

You can’t change rent fast and part of the problem is caused by the Fed raising rates so landlords increase rents to offset their costs.

Inflation is heading in the right direction but we could find it stubbornly refuses to drop past a certain point if parts of the total remain high.

Some sections of services are particularly worrisome. Events/movies +8.1%, vehicle repair +23.1%, airline fares +25.6%, motor vehicle insurance +14.7%, day care +5.9%…..

It is these services that has the Fed worried. They are a function of spending. As long as consumers spend these prices will remain high and together with rent, inflation could stubbornly refuse to fall as far as the Fed needs.

But stocks rallied on this potentially bad news.

The second announcement, on Wednesday, was the US retail sales, which was up +3.0% for January. An unexpectedly high number and shows that despite rates being 4.5%, the consumer has not changed behaviour yet.

That will really have the Fed worried.

In response, the 2yr yield moved higher and is pretty much back to the cycle highs of October 2022.

Bonds are telling us the Fed might not be nearly done after all.

The last time the 2yr yield was up this high corresponded with the lows for tech stocks

So you would have thought with these worrying signs of higher rates to come tech stocks would sell off again?

But no. Tech stocks RALLIED on this news.

On the third attempt stocks started to listen. On Thursday, Producer Prices came in at +0.6% month-on-month verses forecasts of +0.2% thanks to a sharp acceleration in both core services and core goods producer prices.

The PPI report gives us a sneak peak in the PCE inflation number that will be released this week. PPI is saying that PCE likely re-accelerated in January. The Fed will really not like that.

Tech stocks fell 2% on this news.

Whilst these signs are a slight inflationary concern, they do not change the overall picture. This year was always going to be bumpy. I consider it a transition year between bear market and new bull market.

After such a good January, February is turning into a consolidation month. I feel there is more downside to come, but we are not going back to the lows. I am still of the view to wait for lower prices before buying.

Back at home we had a lot of company profit announcements. Fortescue (FMG) was down 15% on last year on lower iron ore prices. The expected impact of China re-opening has not happened. China’s focus is on services not building so I can’t get excited about adding iron ore exposure here.

I’m starting to think that maybe I just don’t understand Commonwealth Bank (CBA). Looks extremely overvalued to me. Then it goes and reports record profits last week and a similar dividend to 2016-2017. In all the slides from the report, the one on Net Interest Margin caught my attention. It has peaked and is slowing. That is not a good sign for the future. Or maybe I am just looking for confirmation of my bias. Either way, I won’t be touching it at $100.

Especially when you consider you can get 5% yield on a 6-month US Treasury. That’s a 5% return for a 6-month hold in a risk-free asset. Or you can buy Commonwealth Bank and get 3% from an overvalued asset.

The RBA governor had a whinge last week. Seems he is upset that he is being blamed for the rising cost of living. “It just isn’t fair” is basically what he said “I just announce it but the other 9 on the board decide it”.

Sounds a lot like my 14yr old daughter.

She could probably do as good a job as him because he also said he doesn’t know if they have gone too far and have pushed the economy into recession or not gone far enough and inflation will continue unabated. Good job he has the other board members to decide that for him. I’m sure they are much better at this.

US earnings season is wrapping up and it has been a lot better than expected. This graph explains why stocks have remained strong despite negative inflationary data.

Dark blue columns are actual earnings. Grey are projected earnings. You will notice earnings dip for Q4 2022 (just announced) and Q1 of 2024 but then recover.

I’ve also shown on this chart where earnings were in 2018-2019. Back then, the index spent most of the time around 3000. It had a dip below in December 2018 when the Fed spoke about raising rates but then quickly recovered when the Fed did a backflip. It finished 2019 at 3231 on hopes for better earnings in 2020.

If we look past this quarter and the next, the earnings from Q2 2023 to Q1 2024 are $229.89.

Putting this on a PE of 18 gives us an index level of 4138 – pretty much exactly where it is today.

Summary – traders are looking past this quarter and what interest rates will do and out to the second half of the year. They are convinced corporate earnings will remain strong despite still rising interest rates.

But stocks are certainly not cheap here so I am still of the view to wait for any pullback before buying. You could even take some money off the table at this point as it is hard to see the market pushing much higher at this point.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.