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Stock Market Today: January 13, 2022

Stock Market Today: January 13, 2022

William G. Ferguson | 1/13/2022

Before The Bell - This morning, the investment community’s attention is once again on inflation, with the latest data on producer (wholesale) prices released at 8:30 A.M. (EST). The report from the Labor Department showed that the Producer Price Index (PPI) rose 0.2% in December, half the consensus expectation calling for an advance of 0.4%. However, producer prices jumped 9.7% year over year, marking the biggest advance on record. This followed yesterday’s highly-publicized report, showing the largest 12-month gain in consumer prices since 1982. We also learned this morning that initial weekly jobless claims for the week ending January 8th came in at 230,000, higher than the median forecast of 200,000, but on a positive note, continuing jobless claims fell to a pandemic-era low. 

 

The reaction to the latest pricing data has been rather muted, with the market likely having already priced in an expected hotter reading on consumer price inflation; such expectations led to notable selling in the technology and higher-growth small-cap sectors last week. (The Dow Jones Industrial Average, broader S&P 500 Index, and tech-heavy NASDAQ Composite each finished modestly higher during yesterday’s trading session.)

 

This morning, the equity futures, which were up marginally heading into the release of the pricing data, rose a bit following the PPI data, with investors probably liking the lower-than-expected month-to-month increase in producer prices. Commentary from Federal Reserve Chairman Jerome Powell before Congress in his confirmation hearing for another term as the central bank’s leader also is helping the market. Chairman Powell noted that inflation is bad right now, but his tone was not as hawkish or tough as many pundits had anticipated.    

 

The pricing data have been closely monitored this week, as the main theme driving trading during the start of 2022 is inflation. Concerns about surging prices and how aggressively our central bank will act to rein in inflation are on the minds of investors. The Federal Reserve, as shown in the minutes from the bank’s December Federal Open Market Committee meeting, plans to reduce the liquidity in the financial system by ending its monthly bond-buying program by early spring and then shortly thereafter to begin raising short-term interest rates, with perhaps as many as three or four hikes by the end of this year. The enormous amount of liquidity pumped into the system over the past 18 months, via monetary and fiscal stimulus packages, to combat the ill effects of the coronavirus on the U.S. economy, has put more cash into the hands of consumers, increasing demand for products and services that often can’t be adequately met by a nationwide supply that has been reduced by COVID-19-driven supply-chain disruptions and labor shortages. Hence, the historical surge in prices seen over the last 12 months.

 

With the Federal Reserve likely wedded to tightening the monetary reins (i.e., removing some liquidity from the financial system), fixed-income yields have moved higher recently, with the rate on the 10-year Treasury bond topping the 1.80% mark earlier this week, the highest level for the benchmark in two years. This has hurt the stocks of the higher-growth, but often more-speculative and less-capitalized, technology and small-cap companies that rose notably in value last year. Conversely, some sectors that would probably fare relatively better in a higher inflation and rising interest-rate environment have been in demand, with the stocks of the banks, which would likely see their earning power enhanced by higher lending rates, trading at multiyear highs. The energy issues have also performed well at the start of 2022, with demand for oil and gas outpacing supply. This has pushed crude oil prices higher, with recent quotations both here and abroad again topping the $80-a-barrel mark.    

 

Meanwhile, investors should note that the fourth-quarter earnings season will unofficially commence tomorrow, with the latest quarterly results from JPMorgan Chase (JPM). The banking giant highlights a batch of reports from the big banks over the next few trading days. The results and forward-looking commentary from the banks are often viewed as a barometer of the overall health of the U.S. economy. The consensus on Wall Street heading into earnings season is that it will be a solid one for Corporate America, but how supportive it is for stocks may ultimately depend on the predictions companies make and how successfully they seem to be managing higher inflation. On point …

 

Wall Street’s reaction to the results from the food processors bears watching, as a number of the industry leaders warned about the negative impact inflation (particularly higher prices for ingredients and packaging) is having on their businesses. During their November-period earnings releases, both Conagra Brands (CAG) and General Mills (GIS) spoke of such an operating environment. In a similar vein, KB Home (KBH), the California-based homebuilder reported full fiscal year results last night that showed continued strong demand for new homes, but also a notable spike in operating costs. Investors seemed to like that housing demand is still running very strong and the company is doing a decent job of managing an onerous operating cost environment. Buyers of KBH shares are bidding them higher in pre-market action. – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.

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