Market Note – September 19, 2022

By Hightower Great Lakes on September 19, 2022

Hot CPI Report and Tight Labor Market

Tuesday’s market selloff was a reaction to the highly anticipated CPI report, which came in hotter than expected. CPI increased +0.1% m/m vs. -0.1% expectations, and Core CPI (excluding food and energy) increased +0.6% m/m vs. +0.35% expectations.

On a year-over-year basis, CPI was up 8.3%, which was above consensus expectations of 8.1%.

The 10% decline in gasoline on a month-over-month basis was a welcome development but was more than offset by an acceleration across nearly every other category, including food, shelter, education and medical care.

Themes like rising rents, groceries, utilities and medical care could cause problems for the Fed, as these represent essential costs for consumers and places where the Fed has little control of demand.

In addition to CPI, weekly initial claims data showed another decline; the 4-week moving average is down 8,000 to near 1.4 million.

The strong employment figures remain near record levels and give the Federal Reserve the “cover” to continue raising rates. The Fed’s dual mandate is to maintain maximum employment and price stability.

As jobs data continues to portray a tight labor market, the Fed will have confidence to aggressively raise rates. The Fed FOMC meeting is Wednesday, September 21, and Bloomberg projects a 100% chance for at least a 75 bps rate hike.

Chart 1: Persistent Inflation and Tight Labor Market¹

Market Is Beaten Down

We continue to believe that the Fed is behind the curve and that they should have been more hawkish a year ago, when it was clear that inflation was not transitory.

While the S&P 500 has returned -19% year-to-date, growth has underperformed value as higher interest rates hurt longer-duration assets.

The Russell 1000 Growth index has contracted -25% year-to-date, compared to the Russell 1000 Value index, down -11% year-to-date.

Today’s environment is very different from the growth rally that we’ve seen over the past 5 years.

For one, many growth companies aren’t growing or not growing as fast as they have been post-COVID levels. They are issuing warnings and cutting everything from guidance to employees.

They also tend to be more exposed, relative to many value securities, to the dollar strength and wage inflation. Lastly, many companies jumped on speculative opportunities, spurred by the stay-at-home themes, that proved short-term and high cost.

While the environment continues to be challenging, we continue to look for opportunities in attractively valued stocks that have secular tailwinds, better management and shareholder-friendly yield programs.

FedEx Pre-Announcement Spooks the Stock Market

FedEx (FDX) stock fell 21.4% on Friday after the company pre-announced their fiscal quarter 1 earnings.

The shipping giant also withdrew its full-year guidance and announced significant cost-cutting measures. FQ1 EPS is now
expected to be 33% lower than the street’s prior projections, and FQ2 expectations were adjusted lower by more than 50%.

While FedEx blamed China and Europe slowness for the poor performance, we believe it was a combination of higher costs and company-specific execution issues.

That said, it’s worth paying attention when a bellwether such as FedEx sees challenges.

Adobe Spends Big on Acquisition, Stock Penalized

Another noteworthy company that guided lower was Adobe (ADBE). ADBE also announced its largest acquisition ever, purchasing design
software maker Figma for $20 billion.

While we applaud the acquisition from a strategic point of view, the price was a bit of a shock – at 55x ARR (annualized recurring revenue).

As a result, the stock fell -17% and suffered its worst day since 2010. We continue to believe that earnings are at risk going forward – one of the reasons the stock market is down -19% year-to-date.

Freight Labor Strike Averted

Labor unions and rail companies reached a tentative agreement
to avoid a massive strike, which would have impacted rail traffic and supply chains.

The final impasse on the deal was non-monetary, but rather dealt with working conditions and sick time. Within the agreement, new contracts would include a 24% increase in wages in the five years
2020-2024 – another signal of inflation.

Yield Curve Movement: Inverted Curve and Spread Widening

The 2s/10s spread inverted an additional 20 bps on the week, reacting to the CPI print, and finished at -42 bps. The 1-year Treasury overtook the 2-year as the highest-yielding maturity, finishing at 3.94% after starting the year yielding 0.38%.

Investment Grade spreads remained unchanged through Friday’s close while High Yield spreads widened 30 bps, finishing at +493 bps.

Municipal yields rose 11-12 bps across the curve except for 3- and 6-month yields, which fell 13 and 6 bps respectively.

The Week Ahead

Earnings – Monday: AZO. Wednesday: GIS. Thursday: LEN, COST, DRI.
Economics – Tuesday: Building Permits and Housing Starts (August). Wednesday: FOMC Meeting.

Return for Selected Indices²

Click here to read last week’s Market Note (9/12).

SOURCES

¹ Source: FactSet (chart)

² Bloomberg

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.