The Week Ahead
February 5, 2024
We start the week off with a bang as the market digests Fed Chair Powell’s 60 Minutes interview on Sunday night. Powell largely reiterated his comments last week following the Fed policy meeting that a rate cut at the Fed’s March meeting is unlikely. With the economy continuing to surprise to the upside, something we saw in last week’s January Employment Report, Powell shared the central bank remains on guard in case inflation becomes “more persistent”. Heading into last Friday the stronger-than-expected job creation and wage gains found in last Friday’s jobs report, the Atlanta Fed’s GDPNow Model was already at 4.2% for the current quarter.
Odds are that forecast will be revised, but we’ll have a much better sense of how much once Monday’s ISM Non-Manufacturing Services PMI report is published. With a barrage of Fed speakers returning to the stage this week, we would expect them to largely reiterate Powell’s message that the Fed needs to take a prudent approach in dialing back monetary policy but also remind everyone that it’s only a matter of time before they start. Market watchers will be looking for clues in those comments for more color on how much more confirmation the Fed is looking for to begin its long-telegraphed rate-cutting process.
Economic Data
The two key pieces of economic data this week are the back-to-back January Services PMIs on Monday from S&P Global and ISM and December Consumer Credit. Up until very recently, the Service sector has been carrying the U.S. economy, and continued strength in the data will help confirm we are on the path to a soft landing. Last week's comments by Powell and the upturn in average hourly earnings found in the January Employment Report will have us scanning the report closely for what it says about inflation trends compared to the last few months.
Turning to the December Consumer Credit Report, should it show a dramatic month-over-month increase in revolving credit, it will tell us just how much consumers leaned into credit cards for their holiday shopping season. Based on comments from Visa (V), Mastercard (MA), and American Express (AXP), this was likely the case. Should findings in the December Consumer Credit report raise some eyebrows, it could signal slower consumer spending ahead even though consumers are benefitting from real wage gains.
This week also brings us the latest Federal Reserve Senior Loan Officer Survey, better known as the SLOOS report, on Monday. Over the last several weeks, credit conditions have loosened as evidenced by the decline in the 10-year Treasury yield as well as mortgage rates. The SLOOS should tell us what the response to those declines has been, a likely harbinger of economic activity.
A full calendar can be found at the bottom of this newsletter.
Earnings
We have another barn burner of a week for corporate earnings with more than 700 companies reporting, including 104 S&P 500 constituents and four Dow 30 stocks. Following last week’s wave of Big Tech earnings from Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL), Meta (META), and Amazon (AMZN), Tech will continue to be a force as investors contend with earnings from NXP Semiconductor (NXPI) and Arm Holdings (ARM). Cybersecurity will be another area of focus as Check Point Software (CHKP), Fortinet (FTNT), Radware (RDWR), CyberArk (CYBR), and Cloudflare (NET) report. Comments and guidance from Motorola Solutions (MSI) will give a view on demand from another aspect of the security market, public safety.
We will also start to get a clearer picture of the consumer through results from Estee Lauder (EL), Hilton (HLT), Ralph Lauren (RL), VF Corp. (VFC), elf Beauty (ELFT), and Affirm (AFRM). Those comments will be juxtaposed against those from Hershey Foods (HSY), PepsiCo (PEP), McDonald’s (MCD), Chipotle (CMG), Yum Brands (YUM), and Cava (CAVA) as market watchers brace for additional price hikes either from higher input costs or the forthcoming boost to California’s fast food worker minimum wage to $20 per hour starting April 1.
Quarterly results and guidance from Caterpillar (CAT) and Construction Partners (ROAD) will showcase construction activity in the US and their guidance should reinforce the positive impact on the economy coming from Washington's stimulus spending on infrastructure.
For more, be sure to read our Daily Markets column published each day by Nasdaq.
Model Musings
Cloud Computing
“For the last several quarters we’ve seen a lull in the expansion of the cloud infrastructure market, with lower growth numbers than we’ve been accustomed to seeing in the past. That changed this quarter thanks in large part to interest in generative AI. The new revenue wave began just last year, driven by the ChatGPT hype cycle, but has already pushed cloud infra revenue in the fourth quarter of 2023 to $74 billion, up $12 billion over last year at this time and $5.6 billion over Q3, the largest quarter-over-quarter increase the cloud market has experienced, per Synergy Research.” Read more here
Guilty Pleasures
“Ultra-processed snacks and meals are highly profitable. Major packaged food companies including Kraft Heinz, General Mills and Nestlé made an average operating margin of 17% over the past five years, according to FactSet data. Sellers of basic foodstuffs, like meat giants Tyson Foods and Pilgrim’s Pride, averaged 6% over the same period. Packaged foods with trademarked recipes and branding give companies more power to raise prices than foods that haven’t been tinkered with, such as fresh produce or meat.” Read more here
Space Economy
“Chinese automaker Geely Holding Group said on Saturday it has launched 11 low-earth orbit satellites, its second dispatch, as it expands its capacity to provide more accurate navigation for autonomous vehicles.” Read more here
The strategies behind our Thematic Models:
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The strategies behind our Dividend Income Models:
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.