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Economy Goes Two-for-Two on Inflation: Stocks to Watch
Investors rejoiced on Wednesday morning after digesting a second cool inflation report, helping to alleviate renewed concerns over higher prices. Positive quarterly earnings out of megabanks JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo also contributed to the positive sentiment.
Last week’s release of the latest jobs report added fuel to the fire for treasuries, sending the benchmark 10-year yield to a 14-month high near 5%. The welcomed inflation data will likely alleviate recent upward pressure on treasury yields.
Light inflation figures should also help to further relieve weakness in rate-sensitive pockets of the market like small-caps. The Russell 2000 only has about 23% of its constituents trading above the 50-day moving average, which is in line with prior washout levels.
Still, oversold conditions can prevail for some time before a trend reversal. We never know what will happen with incoming economic data (and more importantly, the market’s reaction), and it’s best not to predict such matters. Part of being a successful investor is having a gameplan for a variety of scenarios. But the action in early trading on Wednesday clearly gives the nod to the bulls.
PPI, CPI Figures Come in Below Estimates
The producer price index (PPI), which tracks price changes companies see at the wholesale level, rose 3.3% over the last year, up from 3% in November but below the median forecast. Wholesale prices rose just 0.2% on the month, also less than the 0.4% projection.
On a “core” basis, which excludes volatile food and energy components, wholesale prices increased 3.5% year-over-year, lower than the 3.8% advance economists had expected. Core prices were virtually unchanged on the month.
Rate-cut hopes dwindled following the December jobs report, which showed nonfarm payrolls surged by 256,000. The figure was up from 212,000 in November and well above the 155,000 forecast. Probabilities for a rate cut at the January meeting barely budged following the cool inflation data; odds that the Fed stands pat this month are roughly 97%.
Today’s release of the December consumer price index (CPI) figures showed that prices rose 0.4% over the previous month and 2.9% year-over-year, according to the Bureau of Labor Statistics. Both figures were in line with estimates. Excluding food and energy, the core CPI showed an annual increase of 3.2%, slightly better than the 3.3% projection from economists. The core measure rose 0.2% on a monthly basis, also lower than expectations.
Market volatility had been picking up lately amid fears of an inflation resurgence and uncertainties surrounding some of President-elect Donald Trump’s policies. But the volatility (VIX) index plunged nearly 9% in early trading Wednesday. From a longer-term perspective, spikes in volatility can represent lower-risk entry points in leading stocks.
Stocks to Watch as Inflation Pressures Ease
Homebuilders are one of the groups that had been hit hardest by higher rates, but that could be changing in short order as markets experience a clear rotation into rate-sensitive areas. Homebuilders as evidenced by the SPDR S&P Homebuilders ETF (XHB - Free Report) have risen more than 4% this week.
The industry felt the love yesterday after Los Angeles-based KB Home (KBH - Free Report) , a well-known builder and one of the largest in California, reported impressive fourth-quarter results. Quarterly earnings of $2.52 per share topped estimates by 2.86%, while revenues of $2 billion also beat expectations. KBH stock rose nearly 5% during Tuesday’s session and was set to open sharply higher on Wednesday.
Image Source: StockCharts
Meanwhile, the major story this morning was strength out of the big banks. JPMorgan Chase (JPM - Free Report) delivered Q4 earnings of $4.81 per share, which represented a 19.35% surprise versus the $4.03/share estimate. The bottom line jumped 21.2% from the same quarter last year. The company posted impressive fourth-quarter revenues of $42.77 billion, surpassing the Zacks Consensus Estimate by 4.4%.
JPMorgan is a Zacks Rank #2 (Buy) stock. Shares have advanced more than 50% over the past year and were up better than 1% in early trading on Wednesday.
Image Source: StockCharts
Wells Fargo (WFC - Free Report) , Goldman Sachs (GS - Free Report) and Citigroup (C - Free Report) also delivered quarterly earnings beats this morning of 5.97%, 48.1%, and 7.2%, respectively. Wells Fargo is a Zacks Rank #1 (Strong Buy) stock, while Goldman and Citigroup boast a Zacks Rank #2 (Buy).
All four banks are part of the Zacks Financials – Investment Bank industry, which is currently ranked in the top 5% of all Zacks Ranked Industries. It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market.
Quantitative research studies have shown that roughly half of a stock's price movement can be attributed to its industry group. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By targeting leading stocks in top-ranked industries, we can dramatically improve our odds of success.
Bottom Line
Cool inflation data is helping to tame upward pressure on treasury yields, in turn providing a tailwind for stocks. In particular, rate-sensitive areas like homebuilders are bouncing back after a prolonged period of weakness.
Strength out of the big banks is certainly aiding the bullish case. The fact that the major banks mainly issued strong guidance for 2025 speaks volumes about their expectations for the economy going forward.
Remember, markets will be closed next Monday for MLK Day (which is also Inauguration Day). Make sure to keep an eye on leading stocks as we make our way into the latter half of January.
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Economy Goes Two-for-Two on Inflation: Stocks to Watch
Investors rejoiced on Wednesday morning after digesting a second cool inflation report, helping to alleviate renewed concerns over higher prices. Positive quarterly earnings out of megabanks JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo also contributed to the positive sentiment.
Last week’s release of the latest jobs report added fuel to the fire for treasuries, sending the benchmark 10-year yield to a 14-month high near 5%. The welcomed inflation data will likely alleviate recent upward pressure on treasury yields.
Light inflation figures should also help to further relieve weakness in rate-sensitive pockets of the market like small-caps. The Russell 2000 only has about 23% of its constituents trading above the 50-day moving average, which is in line with prior washout levels.
Still, oversold conditions can prevail for some time before a trend reversal. We never know what will happen with incoming economic data (and more importantly, the market’s reaction), and it’s best not to predict such matters. Part of being a successful investor is having a gameplan for a variety of scenarios. But the action in early trading on Wednesday clearly gives the nod to the bulls.
PPI, CPI Figures Come in Below Estimates
The producer price index (PPI), which tracks price changes companies see at the wholesale level, rose 3.3% over the last year, up from 3% in November but below the median forecast. Wholesale prices rose just 0.2% on the month, also less than the 0.4% projection.
On a “core” basis, which excludes volatile food and energy components, wholesale prices increased 3.5% year-over-year, lower than the 3.8% advance economists had expected. Core prices were virtually unchanged on the month.
Rate-cut hopes dwindled following the December jobs report, which showed nonfarm payrolls surged by 256,000. The figure was up from 212,000 in November and well above the 155,000 forecast. Probabilities for a rate cut at the January meeting barely budged following the cool inflation data; odds that the Fed stands pat this month are roughly 97%.
Today’s release of the December consumer price index (CPI) figures showed that prices rose 0.4% over the previous month and 2.9% year-over-year, according to the Bureau of Labor Statistics. Both figures were in line with estimates. Excluding food and energy, the core CPI showed an annual increase of 3.2%, slightly better than the 3.3% projection from economists. The core measure rose 0.2% on a monthly basis, also lower than expectations.
Market volatility had been picking up lately amid fears of an inflation resurgence and uncertainties surrounding some of President-elect Donald Trump’s policies. But the volatility (VIX) index plunged nearly 9% in early trading Wednesday. From a longer-term perspective, spikes in volatility can represent lower-risk entry points in leading stocks.
Stocks to Watch as Inflation Pressures Ease
Homebuilders are one of the groups that had been hit hardest by higher rates, but that could be changing in short order as markets experience a clear rotation into rate-sensitive areas. Homebuilders as evidenced by the SPDR S&P Homebuilders ETF (XHB - Free Report) have risen more than 4% this week.
The industry felt the love yesterday after Los Angeles-based KB Home (KBH - Free Report) , a well-known builder and one of the largest in California, reported impressive fourth-quarter results. Quarterly earnings of $2.52 per share topped estimates by 2.86%, while revenues of $2 billion also beat expectations. KBH stock rose nearly 5% during Tuesday’s session and was set to open sharply higher on Wednesday.
Image Source: StockCharts
Meanwhile, the major story this morning was strength out of the big banks. JPMorgan Chase (JPM - Free Report) delivered Q4 earnings of $4.81 per share, which represented a 19.35% surprise versus the $4.03/share estimate. The bottom line jumped 21.2% from the same quarter last year. The company posted impressive fourth-quarter revenues of $42.77 billion, surpassing the Zacks Consensus Estimate by 4.4%.
JPMorgan is a Zacks Rank #2 (Buy) stock. Shares have advanced more than 50% over the past year and were up better than 1% in early trading on Wednesday.
Image Source: StockCharts
Wells Fargo (WFC - Free Report) , Goldman Sachs (GS - Free Report) and Citigroup (C - Free Report) also delivered quarterly earnings beats this morning of 5.97%, 48.1%, and 7.2%, respectively. Wells Fargo is a Zacks Rank #1 (Strong Buy) stock, while Goldman and Citigroup boast a Zacks Rank #2 (Buy).
All four banks are part of the Zacks Financials – Investment Bank industry, which is currently ranked in the top 5% of all Zacks Ranked Industries. It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market.
Quantitative research studies have shown that roughly half of a stock's price movement can be attributed to its industry group. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By targeting leading stocks in top-ranked industries, we can dramatically improve our odds of success.
Bottom Line
Cool inflation data is helping to tame upward pressure on treasury yields, in turn providing a tailwind for stocks. In particular, rate-sensitive areas like homebuilders are bouncing back after a prolonged period of weakness.
Strength out of the big banks is certainly aiding the bullish case. The fact that the major banks mainly issued strong guidance for 2025 speaks volumes about their expectations for the economy going forward.
Remember, markets will be closed next Monday for MLK Day (which is also Inauguration Day). Make sure to keep an eye on leading stocks as we make our way into the latter half of January.