Inflation and the Fed, and two portfolio earnings hold the keys to the market in the week ahead
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Tech was back this week as Advanced Micro Devices unveiled its newest artificial intelligence chip and Alphabet released its latest AI model . Friday’s rally pushed the S & P 500 to a new 2023 high as the broad market index, the Dow and the Nasdaq all extended their weekly winning streaks to six straight. Last week, we saw what looked to be the beginning of a rotation out of tech. However, we weren’t quite convinced it would be sustainable. As it turns out, it may well have been a head fake. While the updates from AMD and Alphabet certainly helped the Nasdaq reclaim the leadership position, we also got several key economic reports leading up to Friday’s November employment report that shouldn’t give the Federal Reserve any reason to step off the sidelines. Last Monday, the October factory orders report came in a tick lower than expectations. On Tuesday, the November ISM Services results were slightly ahead, while job openings in October declined to their lowest level in over two years. Wednesday brought the November ADP employment report , which came in lower than expectations at 103,000. In addition to a weak headline reading on hiring at U.S. companies, we saw a 5.6% increase in annual pay, the smallest gain since September 2021. We always caution not to read too much into the ADP data as a means of predicting the government’s jobs report , which came Friday and showed modestly stronger than expected November nonfarm payrolls growth of 199,000. While October’s 150,000 additions were unchanged, September’s total was revised lower by 35,000 to 262,000. Additionally, the November unemployment rate fell to 3.7% when it was forecast to hold steady. But, perhaps the most important metric of all as far as the market is concerned revealed wage inflation right in line with estimates at 4% growth. Putting it all together, we’re certainly getting a mixed picture of the economy with some areas proving more resilient than others. However, we think it’s something of a Goldilocks setup for stocks into year-end. The labor market is holding up as the economy slows. That’s exactly what a soft landing should look like, and it supports the notion that the Fed should continue to hold, especially given the lagging effect of monetary policy changes. The market still thinks the Fed’s next move will be an interest rate cut sometime next year after 11 rate hikes from March 2022 to July 2023 to fight inflation, which brought the fed funds overnight bank lending rate from near zero percent to the current target range of 5.25% to 5.50%. Looking ahead, it’s all about earnings and the economy. The Fed holds its final scheduled meeting of the year on Tuesday and Wednesday. Both days also bring key inflation data. On Monday and Thursday, meanwhile, we get earnings reports from two Club portfolio companies. Inflation and the Fed: The big economic report in the week ahead is the November consumer price index (CPI), which is set for release Tuesday before the market open and as the Fed begins its December meeting. While not the Fed’s preferred inflation metric, core CPI is the second-best thing we have as far as a direct read on prices. As of Friday, the expectations for the core CPI, which excludes the food and energy sectors, is expected to rise 4% year over year, which would be on par with what we saw in October. As we’ve noted previously, anything below expectations, closer to the 2% Fed target would be welcome by investors so long as the reading is not so weak that it sparks fears of an economic hard landing on the horizon. In addition to the core rate, the 12-month increase in shelter will be something to watch because housing inflation has proven stickier and represents large, unavoidable costs for consumers. We’ve been seeing disinflation here since March 2023, and we’re looking for that to continue, so anything below the 6.7% rate we saw in October will have us breathing a sigh of relief. On Wednesday, the second day of the Fed meeting, the November producer price index (PPI) is out before the opening bell. As we’ve noted in the past, the CPI is the more meaningful report for the market, but the PPI is still important because it provides insight into input costs for companies. Of course, the dynamic between input costs and selling prices is what determines profits. So, what we don’t want to see is any major rebound as it could highlight a need for companies to consider acting on price (which would support higher inflation) to protect profit margins. In the afternoon on Wednesday, the Fed ends its meeting, with a virtual certainty that rates will be kept steady. The focus will be on Fed Chairman Jerome Powell’s commentary at the post-meeting news conference and the quarterly summary of central bankers’ economic projections. The current belief is that the fed funds overnight bank lending rate has peaked — and, as we mentioned earlier, that the next move will be a rate cut (though we certainly are not saying a cut should happen anytime soon). So, we want to hear that the Fed remains data dependent as any hint of consideration of another rate hike is sure to spook the market. On Thursday, it’s the November retail sales report, which is notable because it will include the big holiday shopping period from Black Friday to Cyber Monday. As a result, it will provide helpful insight into the state of the consumer buying power. Remember, roughly two-thirds of the U.S. economy is driven by consumption. While it could carry a similar weight to the CPI release in terms of forecasting the health of the economy, it will be after the conclusion of the Fed meeting. A sales drop in November of 0.2% is expected, greater than the 0.1% decline the prior month. Rounding out the week, on Friday, is November industrial production and capacity utilization, which helps us better understand the state of the manufacturing and mining, as well as electric and gas utilities industries. Combined, they make up another roughly 14% of U.S. gross domestic product. Industrial production for last month is seen rising 0.4% after falling 0.6% in October. Capacity utilization of 79.2% is expected for November, slightly higher than the prior month’s level. Club earnings : Oracle reports its quarter after the closing bell Monday, and Costco delivers earnings after the bell Thursday. ORCL YTD mountain Oracle YTD From Oracle, commentary on customer interest relating to the Oracle Cloud Infrastructure (OCI) will be key. Analysts at JPMorgan stated that according to recent checks, OCI is “gaining mindshare,” adding that “people are starting to include Oracle’s OCI in conversations when discussing Azure, AWS, and GCP,” which are the big three clouds from Microsoft, Amazon and Google. Meanwhile, analysts at Mizuho said that “many investors continue to underappreciate the attractiveness of Oracle’s OCI offering both from a price and performance perspective,” noting it’s roughly 33% less expensive than Amazon Web Services “for basic compute services.” At Morgan Stanley, the analysts also called out OCI as the primary focus for investors but said their “expectations have slightly moderated” following the mixed results and lower-than-expected guidance we got with Oracle’s fiscal 2024 first-quarter earnings release back in September. To be sure, moderated expectations do provide us with a better setup heading into this fiscal second quarter print than the setup we got last time around when shares were at record highs. In addition to general OCI commentary, we’re interested to hear what if any discussions are going to move existing on-premises customers into the cloud. COST YTD mountain Costco YTD As for Costco, remember that sales usually aren’t the focus of the release, not because they aren’t important (they absolutely are) but because Costco reports sales numbers monthly. As a result, the real focus is on margins and what’s impacting them, including input costs inflation, consumer activity (including foot traffic and basket size) and the sales mix – where are consumers focusing their buying power? Costco will be delivering first-quarter results for its new 2024 fiscal year. Here’s the full rundown of all the important domestic data in the week ahead after the Club sent out three trade alerts this week concerning four stocks. After the close on Friday, the S & P 500 Short Range Oscillator moved out of an overbought condition to a more neutral market. Monday, Dec. 11 After the bell earnings: Oracle (ORCL) , Casey’s General Stores (CASY) Tuesday, Dec. 12 8:30 a.m. ET: Consumer price index FOMC meeting begins Before the bell: Johnson Controls (JCI) Wednesday, Dec. 13 8:30 a.m. ET: Producer price index 2 p.m. ET: FOMC meeting ends After the bell: Adobe (ADBE) Thursday, Dec. 14 8:30 a.m. ET: Initial jobless claims 8:30 a.m. ET: Retail sales Before the bell: Jabil (JBL) After the bell: Costco (COST) , Lennar (LEN) Friday, Dec. 15 9:15 a.m. ET: Industrial production & capacity utilization Before the bell: Darden (DRI) (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
People walk near Nasdaq MarketSite at Times Square on July 12, 2023 in New York City.
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