Mixed Earnings Reports Deliver Market Jitters

After a strong first quarter, the historically robust market month of April is suffered a bad spell. The main culprit is inflation, as Fed Chair Jerome Powell confirmed last week that there has been a “lack of progress” on the inflation front recently, so it will take more time for the Fed to reach its 2% inflation goal and start cutting key interest rates. However, with the presidential election season nearing full stride, the Fed may want to stay out of the fall political season and start cutting sooner.
Meanwhile, the economy is humming along fine, as the Atlanta Fed raised its first-quarter GDP estimate to a 2.8% annual pace, up from its previous 2.4% estimate, and the Commerce Department announced last week that March retail sales rose 0.7% (month over month), substantially higher than the economists’ expectations of a 0.3% increase. It was also encouraging that February’s retail sales were revised higher to a 0.9% increase, up from the 0.6% previously reported. Excluding auto sales, March retail sales rose by an even more impressive 1.1%. Also, online sales surged 2.7% in March, so the strong March retail sales rise and February’s upward revision may cause economists to revise their 2023 GDP estimates higher.
What the market needs now, more than just a stock-by-stock analysis, is a good psychoanalysis.
Here are the most important market news items and what this news means:
* Energy stocks have been exhibiting relative strength due to the chaos in the Middle East as well as the fighting between Ukraine and Russia. Frankly, the key to reducing risk is to mix technology stocks with energy stocks, since when one sector “zigs” the other sector tends to “zag.” If you just trade technology stocks, you may need a psychologist, because technology investors are impulsive and worry too much. As an example, when Netflix recently beat analyst subscriber growth, the stock was hit with profit-taking in a sign that the “tail is wagging the dog” and traders are overreacting.
* The AI race is on and in addition to chips (Nvidia) and faster data centers (Super Micro Computer) the next big opportunity is going to be boosting the electricity and internet speeds that cloud computing demands. Typically, the cloud migrates to where electricity is cheaper, like hydroelectric, nuclear and coal. Natural gas peaker power plants are also important since they come on and off during peak demand, like when it gets hot and air conditioning demand rises. The next great investment opportunity is now in the companies that are expanding the electrical grid (Eaton, Emcor and Quanta Services) and benefiting from the growth in cloud computing (CrowdStrike, Fortinet and Nutanix).
* The European Central Bank (ECB) and the Bank of England are anticipated to cut their key interest rates in June. The International Monetary Fund met in New York City recently and the biggest complaint has been about a strong U.S. dollar. Since the Fed telegraphed that it will likely not cut key interest rates in June, the U.S. dollar has gotten stronger on the anticipation of high U.S. interest rates persisting. Although a strong U.S. dollar lowers the prices of imported goods, it raises the price of commodities (priced in U.S. dollars) for the rest of the world, so anger is brewing at the Fed dragging their heels on cutting key interest rates. There is also anxiety about the U.S. imposing new tariffs as President Biden is proposing and Donald Trump has discussed on the campaign trail.
* The good news is change is coming and in an uncertain world, the one thing that is certain are companies and their underlying earnings results. The U.S. companies that have been overly dependent on China, like Apple and Tesla, are now suffering from the deflationary forces and overproduction that have enveloped the Chinese economy. In fact, Tesla cut the price of its vehicles again worldwide by $2,000 this week. As a result, of this deflation that will hinder Apple and Tesla’s earnings, institutional money is on the move seeking safer havens where sales, earnings and guidance are more predictable. That is why many growth stocks have emerged as new market leaders and are benefitting from institutional buying pressure.
We can either react like a dog chasing its tail or wait for positive first-quarter sales, earnings and guidance to dropkick and send stocks higher. After the recent NASDAQ selloff, which was partially due to the fact that traders did not want to maintain inventory over a weekend in case the fighting in the Middle East escalated. Fortunately, I am expecting wave after wave of positive announcements in the upcoming weeks that should propel growth stocks significantly higher in the upcoming weeks.