Inflation, Earnings and Lawyers in Parachutes: What's next for your favorite stocks?

David Nelson, CFA, Belpointe Chief Strategist and host of the Money Runner weighs in on the impact of inflation, earnings, and bond volatility. With CPI numbers hotter than expected and a benign PPI report, we explore what it all means for investors. David discusses the Fed's rate dilemma, earnings season kick-off with JP Morgan, BlackRock, and Wells Fargo, and how rising yields are affecting mortgage rates. Plus, find out why the narrative around the Magnificent Seven stocks might be shifting and how "Lawyers in Parachutes" could shake up the markets during the upcoming election. 

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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Let's hit inflation right at the top. Thursday’s, CPI came in at 0.2%, month over month, hotter than expected, and maybe more concerning, the. Core was hotter as well. Not the end of the world, markets hit all time highs again this week. But the moves in the bond market have been violent. Doesn't mean the market can't go higher. In fact, there's a lot of data. Here we should be excited about. But in the end, at a minimum, rates can be a leading indicator as to what's working, what isn't, and what's next. Welcome to the Money Runner. I'm David Nelson. Just a quick. Cut into this week's podcast. We had a follow on piece of. Data to this week's CPI release. The PPI producer price index came in flat a little better than expected. The initial action of bonds is somewhat surprising. With yields across the curve pushing a little higher. On the heels of a pretty tough. Week for bond traders. And I guess the big. Bigger news this. Morning is the kickoff to earnings. Season with JP Morgan, BlackRock. And Wells. Fargo, at least so far. Up in the free market. To be fair, Jamie Dimon. Has been talking down the bank's numbers for the. Last couple. Of weeks and managed to step over, I guess, a lowered bar. A lot of work to do in these numbers. So look for some follow up. Reports. On my substack site. D.CNelson123@substack.com. All right. Back to the show. A lot of action this week. Stocks hit all time highs. We had jobs numbers, inflation data. And, of course, we kicked off earnings. I want to start off this conversation with a look at the S&P 500. Not because they hit all time high. Look at that trend line. I bring this up because I find it notable. It wasn't that long ago. I had this same. Chart up. Here on. This very podcast, and the trend lines were very different. I went back and got that chart. Now look at that yellow band. That goes back to. The October lows last year. Now think back to. What was happening then. Stocks were starting to roll over. But we started to get. Wind of the idea that the Fed was going to cut rates. We weren't sure when, but we were pretty certain it was going to happen. Stocks never looked back. We had a ferocious end to the year last year. We had a very strong first quarter that. Really held up through the first half of the year, very, very. Strong upward movement. Then we kind of stalled out. And you can see the rate of change. Of this this movement higher has started. To slow. And you can see it in this next chart. Where you can actually see a rate of change indicator that 45 degree angle up in the first. Half, kind of, you know. Stalling out for the second. Half. That's not necessarily bad news. In fact, it. Might even be more sustainable. But it does. Tell me that underneath the surface, something is. Likely changing in equity markets. Now, you can't have a conversation. About. Stocks. Without having a strong conversation about rates. Fixed income and the Federal Reserve. Because in the. End, most valuation models start. With the risk free rate. Now look at the yield curve. You can see there the bond, bond market has been violent, very strong move higher in five year yields. 47 basis. Points in just. Four weeks. Now, that's not the playbook. That we were handed when the Fed cut rates just a couple of weeks ago. The idea was that the. Short end was going to come down and the long and with the long. End was going to come down as. Well, but maybe at a. Slower pace. And the yield curve would steepen. Everybody in the bond. Market would would make money. But that's not how it played out. The short end is come down in large part because the Fed has cut rates. But the long end has actually moved higher or at least stayed the same. So that rally that we saw in bonds just a couple of months ago. A lot of that's. Been given back. The question is, where do we go from here? Now, the strong jobs numbers. The hot inflation data has maybe put the Fed. Back on their heels. And you're already starting to hear the narrative change. You're starting. To hear Fed governors. Put out the. Message. That, well, maybe we don't need. So many cuts anymore. And you can see it in Fed fund futures. You know, the idea of a 50 basis point cut in November, that's gone. And I was on. Board with that. I thought they would frontload these rate cuts to support the economy. So they didn't make the same mistake that they've made over the last half century. But right now, it looks like. A likely 25 in November. But then it becomes a little bit more nuanced. And you can see in this next chart, even though it looks like Fed funds are going to be coming. Down at almost every meeting, the terminal rate has been moving higher. Just a couple of weeks ago. The terminal rate, where. We think the Fed is going to end up was was. 2.75. Percent. Now it's up to 3.3 and it's likely to climb from there. So the idea of what. Rates are going to look like. That's at least in my mind, I'm starting to change my opinion here. I think long rates are going to be very, very stubborn for for a lot of reasons. Why does it matter? It matters for me as. An equity as an equity specialist. It's going to change what's going to. Work in the economy and in turn, what. Sectors and what. Industries and what individual stocks are going to work. Now, look at ten year yields. That spike off the bottom there. From 3.6% to 4.1%. What effect what does that effect? Well, right off the bat, mortgage rates. Mortgage rates are in large part dictated by where ten year yields are. So if you're out there. And you're thinking, you know what, I'm ready to kind of sell my current hell home. And move up to a better home. And yeah, I might have to go up in interest rates on my mortgage a little bit, but it won't be so bad. Well, now it's going to be pretty tough to do. You're not going to move from a 3%. Mortgage to a six and a half percent or higher for new. Homebuyers. Same thing. It's going to be a lot more difficult to get a mortgage. And in turn, are you are you going to do you really want to pay that rate? You're probably going to want to wait for something a little better. All right. Let's shift again and and turn to one of the indicators that's actually driving these bond yields, and that's inflation. We had CPI data on Thursday, this week. For the most part, the headline number is. Headed in the right direction, but it was a little hotter than expected. You heard the month over month numbers at the top. What I don't like in this chart. Here is that blue line, that core number. That's something the Fed looks at pretty closely that looks like it's stalled. In fact, it looks like it's even headed higher than where you are right now. Mixed data. When you look at the detail on the month to month. The only good news I saw. Was that owners equivalent rent had fallen. Food prices not good. Egg prices were up 8.4%. I'm sure all of you been feeling that when you go to the grocery store every week. Jobless claims hot data way, way hot. We were. Expecting 254,000, came in at 200 and I'm sorry, respecting 224,000 My bad. And we got 258,000. That was a big jump. When I first saw that. I said to myself, Well, that doesn't. Jive with that jobs report that we got, you know, earlier in the month just doesn't make sense. And then I thought about it, and I think what we're going to find is that it hurricanes, you know, that we're seeing in the in the south, in the southeast are really playing havoc with jobs. I'm sure a lot of people got laid off. This is showing the effects of Hurricane Helene. And I suspect next week we'll start to see the effects of Hurricane. I guess it's Milton. And I would. Also. I was also venture a guess that you're going to probably see estimates for the jobs numbers that we'll see in November, which is a look back to October. That could even be. Under 100,000. But I think of that as a. One off and not indicative of necessarily a bad jobs market. All right. Let's shift gears to equity markets. I want to talk about the narrative that's been out there for the better part of a year, that this market is being driven by nothing but the Magnificent Seven stocks, those large cap secular growth names. And you know the names Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia, Meta. Look at that chart. That's year to date and that's all of the mag seven stocks. And you're going to see a. Very interesting story here at the Top End Nvidia. We know that 167% underneath that. Meta 67%. Very strong numbers. But now zoom in. Take a look at that chart, that white line, that's the Magnificent Seven. Underneath that is the S&P 500. Those other five stocks from the Magnificent Seven, they're underperforming the S&P. Look at those names. Apple 203 stocks are performing better than Apple, Microsoft to 91, alphabet 244, Amazon 182 and Tesla 416. So if the market's hitting all time highs and those stocks aren't really the leading. Cause and it is Nvidia and Meta, the only. Two that are working with all this strength, coming from something else has to be going on. Out there. And it tells me that there's. A lot of strategies out there that are, in fact, working. Dividend stocks are. Working, there are value stocks. That are working. There are. Other. Industries that are working. Utilities are working. In fact, I think the best performing stock in the S&P five, the S&P 500 right now is actually a utility stock. So there's a lot of good news in these in these numbers here. And we're going to have to start thinking outside our comfort. Zone as to where to put capital. Markets hit an all time high. Nothing changes. Sentiment like price doesn't mean everything's hunky dory. We still have a lot of challenges. We have an election. Coming. Up that's the most divisive in a generation. I suspect we're going to see lawyers with parachutes diving into counties looking for votes. We have geopolitical chaos on two. Sides of. The planet. Every corner. Is a. Hot spot. So we have issues not to mention the fact that, you know, this market is pretty expensive. And if rates climb much higher from here. Stocks aren't going to like it. But all in you have to respect the. Price action there. There are things out there that to buy. And don't forget, we're still you know, we're still in a market, you know, running on an investment theme that's maybe the most powerful in a generation. And that's, of course, artificial intelligence. And we're just starting to see the beginnings of that translate from the tech sector where, of course, started. To other. Sectors of the economy that are going to be the beneficiaries of this very exciting technology. All right. That's it for this week. Don't forget to visit my substack site. DCNelson123@substack.com. I have a lot of. Extras there, including charts. From this podcast you'll be able to access. I post there. I also post my network interviews there. And you can. Communicate with me. They are put in your email address and I'll try to keep in touch. Thanks for joining. I'm David Nelson. And this is. The Money Runner.