Broader markets surged on Thursday after October’s consumer price index showed the inflation rate may finally be easing. In response to the CPI print, US Treasury yields have plunged on anticipation and hope that the Federal Reserve will no longer need to be so aggressive with its interest rate hike policy. When rates fall, stock valuations tend to rise, longer-duration stocks – those that promise earnings in the future but limited earnings capacity in the near term – tend to rally the most. The massive moves we’re seeing in the tech-heavy Nasdaq, which was crushed this year, raise the question of whether you’re trying to chase strength in the hope that the elusive bottom is to be found, or whether you’re taking advantage of these intraday gains and reduce on problematic positions? The Nasdaq climbed more than 6% in Thursday trading. In Thursday’s outsized moves higher — which also sent the Dow Jones Industrial Average up about 3% and the S&P 500 more than 4.5% — we think it would be prudent to trim some of our high-flying tech stocks which are rallying on multiple expansions, but still carry significant earnings uncertainty. Even though the green onscreen is a welcome relief and tech valuations benefit when rates fall and the US dollar weakens, fundamentals still ultimately matter. Companies with weaker outlooks in a slowing economy that also have inflated spending bases will still struggle to hit their numbers in coming quarters, and earnings shortfalls will push inventories down. Additionally, we’re encouraged to see a colder than expected CPI, but we can’t let our emotions get the better of us as a month’s reading doesn’t mean the Fed is done with raising rates. Of course, we expect inflation to decline, but food and housing costs remain stubbornly high, and it will likely take several consecutive months of inflation stabilizing or falling for the Fed to finish tightening. We are restricted from trading nearly all of the tech stocks in the portfolio on Thursday, so unfortunately there is not much we can do for the Club portfolio at this time. However, we will always tell you what we would do if we weren’t limited. Our approach on Thursday would be to pick one or two of our tech stocks that are up significantly and only down slightly. We say lightly because there is certainly potential for the massive rally to have a fallout as silver rolls off the sidelines and back into the market due to widespread underinvestment. But to do nothing and sit on your hands when the Nasdaq roars like that seems foolish. If the Nasdaq was down 6% on Thursday, you bet we’d say pick a stock or two and buy. Our nature is to always look to buy on weakness and sell on strength. Two stocks we own that we would have cut on Thursday would have been Salesforce (CRM) and Microsoft (MSFT). We are, however, lowering our ratings on both stocks to 2 . This is because both companies are currently experiencing significant headwinds due to the strong dollar. Salesforce may see the schedule for large deals pushed back due to lengthened sales cycles. We hear of almost every enterprise software company. At Microsoft, its earnings were impacted by a decline in Azure due to moderating cloud consumption growth and a declining PC market. (Jim Cramer’s Charitable Trust is long CRM and MSFT. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, November 10, 2022.
Brendan McDermid | Reuters
Broader markets surged on Thursday after October’s consumer price index showed the inflation rate may finally be easing.
- In response to the CPI print, US Treasury yields have plunged on anticipation and hope that the Federal Reserve will no longer need to be so aggressive with its interest rate hike policy.
- When rates fall, stock valuations tend to rise, longer-duration stocks – those that promise earnings in the future but limited earnings capacity in the near term – tend to rally the most.
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