Inflation Again Dominates the Headlines: Jarvis Weekly Update

Inflation threw everything into flux on Wall Street this week. We cover that and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO, Nolan Langford. Nolan, welcome to the program.

Hi, Brian. Excited to be here on this upcoming long weekend.

Absolutely. I think we're all looking forward to it. Before we get started, just a couple of announcements for all of you. Again, we have the Jarvis newsletter, comes out to your inbox every Saturday morning. So, uh, click the link in the description below to make sure you're on the mailing list. We have our subscription service, Left Brain Investment Research, and the basic subscription will net you 8 to 10 long-form stock reports per month, as well as The Chosen, our favorite stock and bond pick for each month. And then finally, we have the Left Brain Thinking podcast. We're back with a new format, starting to bring guests to the program. So check that out as well. The links below. Make sure you subscribe on iTunes and give us a nice rating. With that, that will jump into our market recap. We're, we're taping on Thursday morning this time in anticipation of the long weekend. So we're cutting everything off by Wednesday's close. So indexes were mixed. S&P was down around 1%, uh, NASDAQ down a little under 2%. And, uh, this has kind of gone against trend the last couple weeks, but the Russell outperformed, up nearly 1% for the last week. Oil's back on the rise. It had fallen down below $100. Now we had about a $10 move up in the last 2 days, back above $100. 10-year yield continues to be an issue that we're all watching. Yesterday it looked like it had topped out around 2.8, but it's back around there again. What's old is new again. The dynamic of rates and stocks— when rates go higher, stocks tend to struggle and vice versa— that's back in place. So with all that in mind, Nolan, what are your kind of general thoughts on this week's trading?

On the one hand, it's kind of more of the same. We've been talking about this dynamic for the last however many weeks. That the market environment's really choppy. And I think the market's continuing to try to find the natural level for prices in general and trying to get a sense for where the economy's headed. And we're getting all this sort of murky tailwinds versus headwinds dynamic. And, um, so the general thoughts is kind of more of the same, but very interesting as earnings roll in. I think that will be a defining moment for us. So very interesting to see earnings, because next week we get a full slate of earnings, and then more importantly, how investors react to those earnings. So still very much a mixed picture. As the market sort of settles down, I am starting to get a lot more optimistic about buying sort of, sort of these world-class winners, these businesses that we know over the next 3 to 5 years should be very dominant, should produce very attractive cash returns, high growth rates. It just looks like we're going to be able to buy them at a much lower price, which just means in the future we'll have more powerful returns.

Excellent. Now we'll just go right into our topics. So topic 1 I've got down here is eye-popping inflation data. Uh, Nolan, over the last couple of days we got the Consumer Price Index that came in at 8.5%. That's a high. PPI came in at 11.2%. That's the Producer Price Index. That was way above expectations. But I also have here the core on the CPI, which is stripping out the food and energy costs, came in at 0.3% month over month. That was lower than expectations. So a little bit of a mixed picture there. I think it's obvious to everyone that the Federal Reserve is going to be more aggressive, uh, given the inflation data that we're getting on a monthly basis. But obviously it's a fragile recovery that the market is dealing with, so obviously tough there. And again, we've got oil back above $100 and natural gas not showing any signs of slowing. That's now above $7. That's a 14-year high. With all that in mind, what's your take on inflation and kind of how that fits into your view of the markets?

So I think the markets are right to be concerned about inflation, clearly, and it's been a dominant theme this year, uh, inflation and then interest rates to tame inflation. And because interest rates are higher, market multiples are lower, and then you're starting to get this peak earnings talk. I know the market's sort of pricing in some businesses at a premium, particularly those that are able to pass on these higher costs to consumers and maintain their margins. So I, my general view is I think the market's right to be concerned about inflation, and it looks to me like inflation may be around a while. I know we had the, uh, sort of the clouds part a little bit a couple days ago where we got that and people were thinking, well, maybe this is a, you know, a silver lining. You know, on the street level, Main Street view, I have a hard time with that at this point. My general sense, Brian, is we're going to be in this inflationary environment for a while. And that may not be good news because that may mean the Fed may need to be more aggressive on interest rates. And I think that's the thing that is really giving investors skittishness at this point.

I think that's right. And I also thought it was interesting how the market moved after the inflation data. Stock market was strong on Tuesday, Wednesday kind of mixed. But I think what that means to me is that people were positioned for hot inflation data. And, you know, the old adage of buy the rumor and sell the news, you know, we seem to see that time and time again. And we may still have inflation, but doesn't mean, uh, it's complete gloom and doom for everything.

I agree completely.

All right, well, with that, we'll move to topic 2. So topic 2 is earnings. Earnings, as you know if you followed us for any period of time, is our favorite time of year. We, uh, getting— we're getting out of the part of the year where, you know, we tend to move on macro news and things along those lines, and we're moving into earnings season where markets are going to start moving more on the fundamentals of businesses. And as fundamental investors and active investors, we find that more attractive and appealing. So, um, earnings season started this year again, or this quarter again, with financials. On Wednesday, we heard from JPMorgan. Very disappointing results there. And what they told us was there was a slowdown in deal activity, M&A and otherwise. Also Thursday morning, we heard from Wells Fargo. Wells Fargo, WFC, they also disappointed. They missed on revenue. Um, so money center banks, it hasn't looked so good so far. But we also heard from Goldman Sachs, GS, and Morgan Stanley, MS. Both of them beat expectations. But again, taking a look at their earnings compared to the same period in 2021, they're down significantly. And, uh, yesterday we saw a lot of positivity, but financials and utilities were the only sectors down. So, um, Nolan, what is your takeaway from these early financial releases? Is it a slowing economy or something specific to their business?

It was interesting in the note when JPMorgan announced earnings that they took a pretty big provision for upcoming credit losses, thinking, hey, you know, I think diamonds In his letter, he mentioned that the economy is strong now, but we could be headed for tougher economic conditions. And that's the biggest bank in the US, probably in the world. And so we have to pay attention to that. I think for money center banks, you know, earlier in the year, they were flying off the shelf, the shares were, thinking, hey, interest rates are going to go up. That is very helpful for them because it adds a lot of money to their bottom line. When interest rates go up, they get paid more on that cash that they're holding. But the offset of that is, you know, that's not the only sort of revenue that they get. The other thing is loans and the consumer and the other areas of their business has been more difficult, you know, trading, IPO business, mergers and acquisitions. So I think the market is looking at that and saying, hey, you you know, there's other places to put money to work. Now, we talk a lot about interest rates because we have to. We talk a lot about the Fed because we have to, and inflation, but those are macro inputs, and we pay attention to the micro. And the bottom line is who stands to make more money in the future than they are today. And, um, those are what we're interested in, in seeing upcoming. So I know for me, this earnings season, healthcare is an area that's starting to turn the corner. So I'm really interested in how healthcare will do. And again, this is a business, and depending on the area of healthcare that you're looking at, healthcare is a really big area, but it's one of the areas that were hurt by COVID as people, you know, use the hospital beds for COVID treatment. Now that COVID's on the wane, all of that pent-up demand for healthcare services should return. And so healthcare should have accelerating fundamentals coming out. Also, in a tougher economic environment, they tend to have pricing power. Margin, margins should be pretty good. We got a glimpse of that today when UnitedHealthcare announced earnings and, uh, boosted the projections. So healthcare is an area that I'm interested in more so than banks. And if we have to talk financials, another area of strength that we notice is the insurance business— not only health insurance but also property and casualty. So that's an area that I know we're focused on for our investors more so than the money center banks. I think it's an area of financials that'll continue to work and do well in general. And NASDAQ There is an area of strength that I'm really looking to continue strong, and that's the cybersecurity area. We know all of the issues the White House tells us about to be on alert because of the Russian hackers in the Russian-Ukraine war. But outside of that, we know CIOs are expanding their budgets for cybersecurity spend. It's going to be a mandate no matter what industry that you're in. You're going to have to protect your computer systems and your data, which is your livelihood. So that's an area, no matter what's happening in the background with inflation or interest rates, I think we'll continue to see those shares on the move.

I'm glad you mentioned insurance, Nolan. I was getting ready to tee you up for that one, but you anticipated, and, uh, that's great. Yeah, we definitely like insurance. It's a good way to take advantage of these interest rates going higher without having that credit exposure. So with that, we'll move to topic 3. So topic 3 is what's working, what's not working. This is a weekly feature we have in our newsletter Thought I'd bring it over for the video this week. So I was taking a look at the 52-week high list yesterday on Wednesday and the 52-week low list. And I thought there was some interesting stuff on there. Of course, on 52-week high, there was a lot that you wouldn't be surprised to see. AMLP, which is a pipeline ETF, XME, a mining ETF, XOP, which is for exploration and production of petroleum. UNG, natural gas, as we alluded to earlier, is at a 14-year high. Raytheon. So defense has been strong and the dollar Dollar Tree. Nolan's a big proponent of the dollar stores as an investment case. So that was the 52-week high list. And then I thought the 52-week low list was also really interesting. We had JP Morgan after earnings. We had Rocket Mortgage. So the mortgage business is pretty, um, is pretty challenged. And given the, the way that mortgage rates are moving, uh, the euro versus the US dollar and the yen versus the US dollar hit a 52-week low. And then this one I thought was really interesting, and especially in terms of folks who are looking for income investments. HYD, which is the muni ETF, uh, was at a 52-week low. And we saw probably, oh, a handful of different muni ETFs on that list. Um, Nolan, anything stand out?

You know, a lot more surprises maybe on the 52-week low than the 52-week high. Um, we sort of see this widespread weakness. A couple things stand out to me, um, where you've had these winners, these recent winners, that have sort of rolled over. One that you didn't mention is like the auto business. And, um, I know autos last summer was all the rage, shortness of supply, margins, uh, expanding. We've seen a report earlier this week from CarMax, um, that was, that showed more weakness as well. I think the mortgage thing makes sense. You know, interest rates are up. And so you'd imagine, you know, mortgage applications being down somewhat. I think the refi business is certainly off the table, and that's a tailwind for the banks and the mortgage companies. The 52-week high list didn't surprise me that much either. I mean, we know we've been talking about the strength in energy and materials for a very long time. I was surprised to see actually Turkey on the list of movers, and, um, Turkey ETF's up 24% this year. That sort of surprised me a little bit. I think when we get further in the year, I think those names that are leaderboards, I think are going to continue to lead. I think a lot of people are underinvested in metals and mining. We know they're underinvested in energy, and I think people are expecting those to roll over, but valuations are still very reasonable. They haven't been stretched. If you go back 10 years, 15 years, valuations haven't moved up. It's just the E part— the earnings have gone up a lot. I think a lot of people think, oh, that's, you know, oil's $100 and that's temporary. As soon as oil falls back, these stocks are going to fall back. And I'm not so sure that's the case.

Yeah, Nolan, our research, we've got a number of these metals and mining companies that are still trading in multiples of 10 price-to-earnings or less. Um, these are companies we'd be happy to speak with you about and share with you. Set a meeting with us, we'll put a link in the description below. Be happy to look over your portfolio and, uh, discuss whether you're exposed enough to those areas. So with that, thanks again everyone for being with us. Thank you, Nolan. Again, we'll remind you to check out the Jarvis newsletter and the Left Brain Thinking podcast. Please like, share, and subscribe to the video. Leave a comment below, that helps the algorithm get the video to more investors. And we'll wish you a happy long weekend and happy Easter. Nolan, any last words?

Yeah, enjoy the NBA playoffs. They start this weekend, so spend your time off, enjoy some sports, and definitely refer our podcast. Um, we're looking to get our numbers up, and so please share and like and subscribe.