Stocks Or Inflation? The Fed Has A Choice To Make

By Michael Lebowitz and Lance Roberts | January 26, 2022
stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

At 2 pm ET, the Fed will conclude its FOMC policy meeting and inform us on how it plans to proceed with QE and potential rate increases. Of most importance, between the statement and press conference, is how much is the Fed is willing to fight inflation at the expense of the stock market. A focus on inflation entails aggressive actions to end QE, start QT and raise rates 4 or 5 times this year, undoubtedly to the detriment of stock prices. Please read our article – Instability or Inflation, Which Will The Fed Choose for more on the topic. The article ponders the delicate balance between supporting stock prices and broader financial stability versus reducing inflation.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make
stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

What To Watch Today

Economy

  • 7:00 a.m. ET: MBA Mortgage Applications, week ended January 21 (2.3% during prior week)
  • 8:30 a.m. ET: Advance Goods Trade Balance, December (-$96.0 billion expected, -$98.0 billion in November)
  • 8:30 a.m. ET: Wholesale Inventories, month-over-month, December preliminary (1.3% expected, 1.4% in November)
  • 10:00 a.m. ET: New home sales, December (760,000 expected, 744,000 in November)
  • 2:00 p.m. ET: Federal Reserve Monetary Policy Decision

Earnings

Pre-market
  • 6:00 a.m. ET: Stifel Financial Corp. (SFto report adjusted earnings of 86 cents on revenue of $1.43 billion
  • 6:00 a.m. ET: Anthem Inc. (ANTM) to report adjusted earnings of $5.12 on revenue of $36.58 billion
  • 6:30 a.m. ET: AT&T (T) to report adjusted earnings of 75 cents on revenue of $40.47 billion
  • 7:00 a.m. ET: General Dynamics Corp. (GDto report adjusted earnings of $3.37 on revenue of $10.67 billion
  • 7:00 a.m. ET: Nasdaq Inc. (NDAQ) to report adjusted earnings of $1.73 on revenue of $867.80 million 
  • 7:30 a.m. ET: Kimberly-Clark Corp. (KMB) to report adjusted earnings of $1.24 on revenue of $4.89 billion
  • 7:30 a.m. ET: Boeing (BA) to report adjusted losses of 4 cents on revenue of $16.67 billion
  • 7:30 a.m. ET: Abbott Laboratories (ABTto report adjusted earnings of $1.21 on revenue of $10.73 billion
  • 8:15 a.m. ET: The Progressive Corp. (PGRto report adjusted earnings of 99 cents on revenue of $12.09 billion
Post-market
  • 4:00 p.m. ET: Intel (INTC) to report adjusted earnings of 90 cents on revenue of $18.38 billion
  • 4:05 p.m. ET: Las Vegas Sands Corp. (LVSto report adjusted losses of 26 cents on revenue of $1.05 billion
  • 4:05 p.m. ET: Whirlpool Corp. (WHR) to report adjusted earnings of $5.93 on revenue of $5.89 billion
  • 4:10 p.m. ET: ServiceNow Inc. (NOWto report adjusted earnings of $1.43 on revenue of $1.6 billion
  • 4:10 p.m. ET: Qualtrics International (XMto report adjusted losses of 2 cents on revenue of $297.72 million
  • 4:10 p.m. ET: Tesla (TSLA) to report adjusted earnings of $2.37 on revenue of $16.64 billion
  • 4:20 p.m. ET: Xilinx (XLNX) to report adjusted earnings of $1.02 on revenue of $949.44 million 

Support Holding, Is The Bottom In?

While the Fed debates between supporting stocks or fighting inflation, the market is holding support at the October lows. The deep oversold is beginning to reverse, and the stochastic “buy signal” has turned up suggesting we may have seen the lows temporarily. However, as noted the lows from last Friday’s option expiration washout continue to provide resistance.

We should get some better clarity on where markets are headed to after the FOMC announcement this afternoon. However, this morning futures are pointing solidly higher. After two days of accumulation, and the ongoing battle between stocks or inflation, the question is whether the bottom is in.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make
Chart Courtesy Of SimpleVisor.com

The Fed’s Calendar

The timeline below from The Market Ear is based on Goldman Sachs’s Fed forecast. We can use it to help assess whether the Fed is more hawkish or dovish than expected. The forecast below calls for QE to end in March. They believe the first of four rate hikes in 2022 start in March. Lastly, Goldman thinks the Fed could announce QT in July.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

Home Prices Remain on Fire

The Case-Shiller Home Price Index rose 18.8% year over year in November. While still a huge increase, the good news is the rate of change in annual prices is slightly lower than October’s 19% pace. Keep in mind mortgage rates are about .75% higher today than in November. It will be interesting to see how higher rates affect this index going forward. The graph below from the Calculated Risk Blog shows this latest reading is the first time the index has come in lower than the prior month in over a year and a half. Given housing is the largest component of CPI, this index bears following closely over the next few months.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

Time To Buy The Dip

This to shall pass. Yes, the markets have been under considerable pressure this year, but eventually, this will pass. Bank of America posted yesterday a list of candidates to start building your buy list from.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

MicroStrategy MSTR Bitcoin-Backed Bonds

Led by crypto enthusiast Michael Saylor, Microstrategy has been aggressively buying bitcoin. Recently the company used the debt markets to fund and leverage bitcoin purchases. The graph below shows MSTR’s $2.2 billion bonds maturing in 2027 is now trading at 63 cents on the dollar, producing a yield of just under 10%. The bond, backed by bitcoin, has become a fixed income proxy for bitcoin as MSTR’s solvency has become very dependent on bitcoin prices.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

Earnings Guidance

Bianco Research shows below that there has recently been more negative earnings guidance than positive guidance. This is the first time we have seen this since April 2020, when the pandemic devastated economic growth. Of greater concern, the negative to positive guidance ratio is worse today than in early 2020. Further, it is at levels last seen in 2009.

stocks or inflation, Stocks Or Inflation? The Fed Has A Choice To Make

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2022/01/26
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