U.S. major indexes gave back some of their gains on Thursday after a strong run up in the previous Wednesday session. S&P 500, NASDAQ and DJIA all tried to stay in the green but succumbed by the end of the trading session.
Big gainers included $Taiwan Semiconductor Manufacturing(TSM)$ , which led advancers on the stock market on Thursday as the chip titan announced solid quarterly revenue.
But stocks swayed between modest gains and losses on Thursday after economic data on Thursday indicated consumer spending remains strong, while the labor market is also on solid footing, giving the Fed room to maintain a slow pace in cutting interest rates this year.
Though the market has a pretty good sigh of relief on Wednesday (15 Jan), the latest consumer spending data seem to make January undecisive, though it is pointing to a slightly better footing.
This is why the market seem to frizzle out while investors eyed more data and some earnings to see how things is going to turn out.
Bank Earnings Strong Encouraging For the Market
We have seen the bank earnings coming out strong and there seem to form a steepening yield curve because of some earnings coming out of the banks.
The latest bank earnings seem to provide some encouraging sentiment for the market, so the market though down, but still manageable.
$Morgan Stanley(MS)$ shares gained after the financial firm reported results that beat forecasts as revenue from its equities trading unit soared and investors poured more money into initial public offerings (IPOs) underwritten by Morgan Stanley.
$Bank of America(BAC)$ reported robust fourth-quarter earnings, driven by increased profits from its consumer banking and wealth management segments. The bank issued strong guidance for 2025, with expectations of rising net interest income and operating leverage. BAC's positive outlook is supported by broad revenue growth across deposits and loans, setting a promising stage for the upcoming year.There is actually negative movement post earnings for BAC.
Inflation Under Control Prices Seem Manageable Hence Consumer Spending Went Up
I think the most important thing we should be looking at is household earnings meaning our wages, are our wages growing faster than the rate of inflation, if the answer is Yes, then we are regaining purchasing power.
That might explained why retail sales excluding automobiles, gasoline, building materials and food services surged 0.7% last month after an unrevised 0.4% gain in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
There have been people saying that groceries are still expensive and things are more expensive than they were in 2020 and 2021 but this is always the case when we are looking at inflation.
In 2020 to 2022, prices went up in a straight but we have normalized the pace of increases in pricing, we need to understand that this is the normal trajectory of inflation and we are never going to get those prices back.
If we were to look at getting back to the prices our parents paid for the price of their home, we need to ask ourselves how much does groceries cost in the 1990s. It is normal that prices increase over time that is by definition the result of inflation.
What we are more concerned is to avoid a runaway inflation.
Earning Purchasing Power Back Inflation Is Not Back After All
Inflation is more under control although we will probably never going to see prices we have in 2020-2021 for our groceries but at least our earning purchasing power is rising due to the rises in wages.
It is up 3.9% year-over-year which is 1% above the rate of inflation at 2.9. This is very good for now.
Core Components Still Below Inflation Rate
The stickiest components on the list is auto insurance but this is going to go away as that was for a repricing for one-year event, though auto insurance still very much lead in the category.
Next is airfare which is still up 7.8% followed by rent 4.3% but these should be coming down. We would like to see these housing indicators to go below our average hourly earnings growth when we measured the shelter cost at the graph right below.
Now we moved further down to few more significant components, Education is at 4%, restaurant meals at 3.6 is still a little bit high but far off its peaks right now,
As we can see from the food away from home chart below, it was a lot higher denote by the green line but now we are seeing it normalizing back down to the mid 3% range.
Now we are looking at the sectors that are below the overall rate of inflation. Medical Care and household energy these are all very important components to the consumer.
Hotel rooms and college tuition are also very important for most people. Personal care, pets and pet care which was a big one up here but now it is all the way down there over the past year.
Gasoline, transportation, alcohol, clothing are at 1.2. These are below the year-over-year Fed's target rate of 2%. Gasoline, transportation, alcohol, clothing and recreation are another big one for everybody and not forgetting prescription drugs.
Now we look at the goods that are in deflationary territory these are actually cheaper than they were a year ago. New vehicles, furniture, used vehicles and groceries which is a big item are actually down year-over-year.
All the big components like Appliance and Electronics are things that people use every day but people do not buy them every day, so this show that a lot of things are coming down. Tops and rental cars are also things that people do not buy them every day.
So this is where inflation is and is not, hope these data shed some light on why the inflation report was decent and we are actually heading in the right direction of the inflation.
Summary
So by analysing the data we have so far, we could be seeing that inflation is moving in the right direction, though concerns of consumer spending signalling a stronger economy might not be a bad thing after all.
So what I personally think is stay invested in the market as there might be some opportunities presenting itself for longer term gains later.
Appreciate if you could share your thoughts in the comment section whether you think market will get over the concerns of sticky inflation fear and less rate cut.
@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.
Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.
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