US shares do not appear nervous about inflation

People walk along 5th Avenue in Manhattan, one of the main shopping streets in the country, on February 15, 2023 in New York City.

Spencer Platt | Getty Images

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What you need to know today

  • US retail sales rose 3% in January versus 1.9% expected. The figure flipped a 1.1% decline in December. Irrespective of this, industrial production remained stagnant in January. Analysts estimated a gain of 0.4%.
  • “BYD is so far ahead of Tesla in China … it’s almost ridiculous,” said Charlie Munger, vice chairman of Berkshire Hathaway. He called the Chinese electric vehicle maker his favorite stock of all time. However, Berkshire doesn’t seem to like TSMC that much anymore, selling nearly 86% of that stock between the third and fourth quarters of 2022.
  • PROFESSIONAL Investors “mock the Fed with crypto, meme stocks and unprofitable companies that respond best to the Fed’s communications,” said JPMorgan’s Marko Kolanovic, who correctly labeled the March 2020 bottom. He warned that “this divergence cannot go any further.”

The final result

It’s like investors no longer care about inflation and higher interest rates. The strength of the US economy – which would imply further interest rate hikes – has led to gains in the markets.

Yesterday I mentioned how sustained consumer spending could support the economy. In fact, the annual rise in retail sales in January – 6.4% – is in line with the annual increase in the CPI. It seems that the prospect of continued economic growth is also giving optimism to equities. The Dow Jones Industrial Average was up 0.11%, the S&P 500 was up 0.28% and the Nasdaq Composite was up 0.92%.

Recent economic activity and market movements are forcing economists and investors to reconsider the impact of interest rates. The higher cost of borrowing usually slows economic growth by restraining spending and increasing unemployment, which in turn weighs on stocks. But “monthly reports on industrial production, retail sales and jobs were generally better than expected and point to a rebound in economic activity in early 2023 after a soft spell in late 2022,” Comerica Bank chief economist Bill Adams noted.

This topsy-turvy relationship between higher interest rates and a pick-up in economic activity is leading some investors, like Santori Fund founder Dan Niles, to predict that the Federal Reserve could hike rates by more than 6%. And if the price for everything continues to rise? It’s hard to imagine what the Fed would do next.

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