24
Jan
2011

What the Market Wants: Inflation Fears Drive Bond Money to Equities?

Inflation Fears Drive Bond Money to Equities?

by David Brown, Chief Market Strategist, Sabrient Systems

We began today with news of the terrorist attack at the Domodedovo Airport in Moscow and real worries about inflation. Last week's PPI and CPI reports indicate that core inflation is still at bay in the U.S. (that doesn’t count food and energy costs), but fears loom that China will raise interest rates yet again (they did it twice in 2010) and that the European Central Bank will do the same to subdue inflationary fears in Europe.

Yet the markets shrugged and surged to a new 2-year high for the Dow, with the Nasdaq gaining over 1% and the S&P 500, over half a percent.

Perhaps it is the fears about inflation that lifted today's markets, but the reaction to some after-market earnings announcements makes me think the market is a tad irrational. American Express (AXP) met their earnings estimates and announced improved profits, but AXP is down more than 1% in after-hours trading. Texas Instruments (TXN) beat estimates by nearly 25% ($0.78 vs. an expected $0.63", and TXN lost nearly 3% in the aftermarket. Yet JC Penney (JCP) made an innocuous announcement earlier today that it will take “strategic actions to maximize growth and profitability" -- (as opposed to the opposite?) -- and JCP rose more than 7%.  


Perhaps the President will give us a sense of where we're headed in his State of the Union address Tuesday night. Or perhaps this week's economic announcements will. The FOMC decision will be announced on Wednesday, along with the numbers for new home sales and (on Thursday) pending home sales. Hopefully, those numbers will reflect a recovering housing industry, as did last week housing permits and existing home sales. Thursday also brings durable goods and the weekly initial jobless claims, and on Friday, we'll see the important all-inclusive measure of economic activity, the GDP report. Surely, that will give us some sense of direction.

On the corporate side, earnings season heats up this week with scheduled reports from 3M (MMM), Johnson & Johnson (JNJ), Boeing (BA) and Chevron (CVX). Last week's reports were a mix of good -- IBM (IBM), Google (GOOG) and General Electric (GE) -- and bad -- Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), but as AXP and TXN can attest, beating estimates doesn't necessarily boost stock prices.

Market stats. All caps and styles were negative last week. Large-cap Value turned in the best performance, down just -0.59%, and Small-cap Growth, the worst, down -4.42% for the week. The other small caps, by the way, didn't fare much better.

As for sectors, last week looked like a classic down market, with Utilities outperforming the other sectors (+0.59%), but following closely behind was Capital Goods (+0.54%). The worst performers were a lot worse. Basic Industries were down -2.99% for the week; Consumer Durables, -2.59%; and Transportation, -2.54%.  Looking forward, our SectorCast favors Basic Industries, Technology, Finance, and Healthcare, and looks askance at Transportation and all three consumer sectors (Services, Durables and Non-Durables).

As we try to make sense out of all this, one fact is very clear:  Inflationary fears are real, and the inevitable hikes in interest rates bring powerful pressure on the bond market. Equities are one of the few places for bond money to go, so this should bode well for the stock market.

Assuming the market is rational at all.

4 Stock Ideas for This Market

This week, I started with the High Growth preset search in MyStockFinder (http://MyStockFinder.com). I then up-weighted Technicals, and limited it to the top-ranked sectors from our SectorCast model: Basic Industries, Technology,  and Healthcare. Here are four intriguing stock ideas worth considering.

The Mosaic Company (MOS) - Basic Industries
Century Aluminum (CENX) - Basic Industries
Applied Materials (AMAT) -  Technology
Emergent BioSolutions (EBS) Healthcare

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
http://www.sabrient.com
and  http://Twitter.com/ScottMartindale

Full disclosure:  The author does not personally hold any of the stocks mentioned in this week’s “Stock Ideas.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

We began today with news of the terrorist attack at the Domodedovo Airport in Moscow and real worries about inflation. Last week’s PPI and CPI reports indicate that core inflation is still at bay in the U.S. (that doesn’t count food and energy costs), but fears loom that China will raise interest rates yet again (they did it twice in 2020) and that the European Central Bank will do the same to subdue inflationary fears in Europe.

Yet the markets shrugged and surged to a new 2-year high for the Dow, with the Nasdaq gaining over 1% and the S&P 500, over half a percent.

Perhaps it is the fears about inflation that lifted today’s markets, but the reaction to some after-market earnings announcements makes me think the market is a tad irrational. American Express (AXP) met their earnings estimates and announced improved profits, but AXP is down more than 1% in after-hours trading. Texas Instruments (TXN) beat estimates by nearly 25 ($0.78 vs. an expected $0.63), and TXN lost nearly 3% in the aftermarket, yet JC Penney (JCP) makes an innocuous announcement earlier today that it will take “strategic actions to maximize growth and profitability”—(as opposed to the opposite?)—and JCP rose more than 7%.

Perhaps the President will give us a sense of where we’re headed in his State of the Union address Tuesday night. Or perhaps this week’s economic announcements will. The FOMC decision will be announced on Wednesday, along with the numbers for new home sales and (on Thursday) pending home sales. Hopefully, those numbers will reflect a recovering housing industry, as did last week housing permits and existing home sales. Thursday also brings durable goods and the weekly initial jobless claims, and on Friday, we’ll see the important, all-inclusive measure of economic activity, the GDP report. Surely, that will give us some sense of direction.

On the corporate side, earnings season heats up this week with scheduled reports from 3M (MMM), Johnson & Johnson (JNJ), Boeing (BA) and Chevron (CVX). Last week’s reports were a mix of good—IBM (IBM), Google (GOOG) and General Electric (GE)—and bad—Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), but as AXP and TXN can attest, beating estimates doesn’t necessarily boost stock prices.

Market stats. All caps and styles were negative last week. Large-cap Value turned in the best performance, down just -0.59%, and Small-cap Growth, the worst, down -4.42% for the week. The other small caps, by the way, didn’t fare much better.

As for sectors, last week looked like a classic down market, with Utilities outperforming the other sectors (+0.59%), but following closely behind was Capital Goods (+0.54%). The worst performers were a lot worse. Basic Industries were down -2.99% for the week; Consumer Durables, -2.59%; and Transportation, -2.54%. Looking forward, our SectorCast favors Basic Industries, Technology, Finance, and Healthcare, and looks askance at Transportation and all three consumer sectors (Services, Durables and Non-Durables).

As we try to make sense out of all this, one fact is very clear: Inflationary fears are real, and the inevitable hikes in interest rates bring powerful pressure on the bond market. Equities are one of the few places that bond money can go, so this should bode well for the stock market.

Assuming the market is rational at all.

4 stock ideas for this market

This week, I started with the High Growth preset search in MyStockFinder (http://MyStockFinder.com). I then up-weighted Technicals, and limited it to the top-ranked sectors from our SectorCast model: Basic Industries, Technology, and Healthcare. Here are four intriguing stock ideas worth considering.

The Mosaic Company (MOS) - Basic Industries

Applied Materials (AMAT) - Technology

T. Rowe Price Group (TROW) - Finance

Emergent BioSolutions (EBS) - Healthcare

What the Market Wants
david / Tag: AMAT, AXP, BA, BAC, C, CENX, CVX, EBS. sectors, GE, GOOG, GS, IGM, JCP, JNJ, MMM, MOS, TXN /