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How bad will China’s Covid disaster be for stocks? The likely answer is very bad–sell Volkswagen and MGM
After swiftly abandoning its 0-Covid lockdown policy–without replacing it with anything resembling a national Covid protocol–China is facing a Covid disaster that could see more than 1 million deaths from the coronavirus in 2023. That would put China’s death toll from the Pandemic on par with that of the United States, which has seen 1.1 million people die from Covid19 since the pandemic began. The magnitude of the disaster is actually understated by that comparison since China’s comparable death toll would be condensed into a much shorter period than that in the United States. We don’t know with any degree of precision what a pandemic outbreak like this would do to the economies of China and the world. But we can make some reasonable guesses.
China has become a Covid policy disaster–watch for the economic fallout
Overnight China has gone from having the world’s most restrictive Covid policy–0-Covid citywide lockdowns at the slightest sign of the virus–to no Covid policy at all. And the predictable result is a wave of infection that virus models predict could produce at least 1 million Covid deaths in 2023.
Please Watch My New YouTube Video: Christmas? Bah Humbug!
This week’s Trend of the Week: Christmas? Bah Humbug! Harris recently did a poll for Bloomberg that showed 60% of the people polled said they would be buying fewer gifts for fewer people this year due to inflation. That same poll said that 60% of respondents said they’d be cutting back on holiday travel, and 33% said they were skipping gift-giving completely. We’ll skip the discussion about the spirit of Christmas, and look at how this is going to affect retail and airline earnings in January. Retailers like Costco, Wal-Mart, and Kohl’s have already warned Wall Street that sales will not be great for Christmas, but even with that warning, retailers could surprise investors with lower-than-expected numbers. Costco announced its fiscal first-quarter earnings on December 10 with sales going up 6%. Although they were warned that margins were going to be soft, Wall Street was expecting 6.9% same-store growth and punished the shares accordingly with a huge drop in the stock. Costco is a great retailer for this moment, with affordable pricing on a wide range of goods and gas sales bringing in traffic. If Costco’s trending this way, I think we can expect the same from companies like Walmart and Kohl’s. It’s likely the airlines will take a hit as well, with the drop in holiday travel. For now, drink your wassail and try not to think about impending January earnings!
What’s next for this stock market? How about more earnings estimate cuts? Nvidia is a good example of why stocks aren’t as cheap as they seem
Wall Street analysts had begun to cut earnings estimates for 2023 even before this week’s Federal Reserve meeting. The Fed’s signal that it would raise interest rates higher and for longer than anticipated–and Fed chair Jerome Powell’s very tepid support for the belief that there wouldn’t be a recession in 2023, is leading Wall Street analysts to cut forecasts again. I mean how great will revenue and earnings growth be in 2023 if the economy grows at the Fed’s projected 0.5%? And a big chunk of that thinking on Wall Street is asking now if that projection isn’t the optimistic end of a range that on the downside would put the U.S. economy into an actual recession. Which puts downward pressure on stock prices and makes it very difficult right now to put a fair value on any stock. The Standard & Poor’s 500 closed down another 1.11% today, December 16. The Dow Jone Industrial Average was off 0.85%. The NASDAQ Composite closed lower by 0.97%. And the NASDAQ 100 ended down 0.63%. Take a look at how this works for a stock such as Nvidia (NVDA).
Powell refused to rule out recession yesterday and today markets sell off
Yesterday, Fed chair Jerome Powell in his post-Fed-meeting press conference said that a recession in 2023 isn’t inevitable. Growth will stay positive next year, he continued, although “it’s not going to feel like a boom.” How much isn’t it going to feel like a boom? The Fed’s Dot Plot projections, updated for this meeting, predict 0.5% growth in U.S. GDP for 2023. That’s down from the 1.2% growth projected in the September Dot Plot. In 2024, the Fed said, growth will speed up to 1.6%, still not exactly a boom. In September the Fed projected 1.7% growth for 2024. And it will feel like a recession to many people.
Fed raises rates by slower 50 basis points but signals higher, longer cycle–stocks slide
The Federal Reserve raised interest rates by 50 basis points today, December 14. That was a significant step down from the series of 75 basis point increases that the Fed has imposed this year. But in its Dot Plot projection and in Fed chair Jerome Powell’s comments after the rate announcement, the central bank signaled that it will raise interest rates to a higher peak and keep them at that level for longer than the financial markets had hoped. Stocks slipped on the combination of small rate increase and higher projected peak.
Listen carefully to Jerome Powell at 2:30: Will he try to talk the market out of a belief in an immediate Fed pivot?
If as expected the Federal Reserve raises interest rates today by just 50 basis points, many investors–and perhaps the entire stock market–will see that as a sign that the Federal Reserve is poised to begin a pivot from its policy of aggressive interest rate increases. And that it will pause those interest rate increases relatively soon. Perhaps after another two 25 basis point increases in February and March. Will Fed chair Jerome Powell try to talk the market out of this belief?
Please Watch My New YouTube Video: Where Do We Go From Here?
Today I posted my two-hundred-and-seventeenth YouTube video: Where Do We Go From Here?
Today’s topic: Where Do We Go From Here? We got better-than-expected CPI inflation numbers yesterday. Economists were expecting a 7.3% headline annual rate and we got 7.1%. For the core rate, expectations were at 6.1% and we got 6.0%. In the hour following the CPI report, the S&P 500 jumped about 1.6%. If the Fed announces the expected 50 basis point rate hike and doesn’t shock the market with unexpected bad news, we’ll likely see a traditional Santa Claus rally. The question of the Fed’s Dot Plot projections remains my long-term concern–as we try to understand how long the Fed will continue to raise rates and when we are likely to hit the Fed’s goal of a 2% inflation rate. We’re currently at about 7% and I expect getting down to 5% or so will be pretty painless. Beyond that, How we go from 4-5% to 2%? could be the crucial question for 2023. Until that 2% is in view for the Fed, I don’t think the central bank will back off completely. We’ll see if this Santa Claus rally can stay convincingly above 4,000 in the S&P 500. If we do move above that level, I think we can expect the rally to continue until about February or maybe even early March. And then we’re likely to see a drop in stocks because of a lower growth rate for corporate earnings and continued inflation fighting from the Fed.
CPI inflation falls more than expected today–market moves higher but not too high ahead of the Fed tomorrow
Today the Bureau of Labor Statistics reported that headline CPI inflation in November climbed at a 7.1% annual rate. Month-to-month inflation rose by just 0.1% from October. Core inflation, that is inflation without energy or food prices, rose at a 6.0% annual rate with a 0.2% increase in November from October. Both the headline and core inflation numbers were better than economists had projected before this morning’s data release. Economists surveyed by Bloomberg had projected that headline Cpi inflation would climb by a 7.3% annual rate and 0.3% month over month. Core inflation was projected to move higher by 0.3%. The news certainly shows inflation on the decline. And that was good news for stocks ahead of tomorrow’s meeting of the Federal Reserve’s interest rate-setting body the Open Market Committee.
I’m making Pilbara Minerals Penny Stock Pick #9 in My Special Report “Own the Future for Pennies”
On December 8 I made Australia’s Pilbara Minerals (PILBF) my Quick Pick Video. Today I’m adding it to my Special Report: “Own the Future for Pennies with These 10 Penny Stock Picks as Pick #9. And tomorrow I’m adding it to my Millenial Portfolio: For Investors with More Time Than Money.
Please Watch My New YouTube Video: Trend of the Week Nattering Nabobs of Negativity
Today I posted my two-hundred-and-fifteenth YouTube video: Trend of the Week Nattering Nabobs of Negativity. This week’s Trend of the Week: Nattering Nabobs of Negativity. Spiro Agnew’s alliterative expression comes to mind as I listen to institutional Wall Street and big banks discussing the idea that we have not yet seen the bottom of this market and we could hit another big downturn in the first half of 2023. In the long term–February that is=–I agree. But I think we’re currently in a very short-term period where investors decide to ignore the long-term warnings and look to window dress portfolios (and maybe pick up some gains) before the end of the year. This short window of time will likely begin after the December 14 Fed meeting and run to the end of the year. As January and the new year rolls around, investors may finally come to grips with the warnings from banks and I’d bet that, true to form, they’ll try to beat the crowd to an exit. Pay attention very carefully to how you’re positioned over the next month.
China’s change of tack on Covid is off to a rocky start
Just days after China’s government unwound its 0-Covid policy and eased lockdowns much earlier than expected, the country is seeing a surge of infection that already threatens to overwhelm hospitals. “The speed of changes on the ground has surprised many, including us,” Goldman Sachs Group Inc.’s chief China economist Hui Shan wrote in a note Sunday. “Not even a month ago, official outlets were still emphasizing that ‘20 measures’ were about optimizing the implementation of dynamic zero-Covid policy, rather than abandoning it. A few short weeks later, many controls are removed, and the virus seems to be spreading quickly among the population.” It’s unclear how quickly new cases are climbing
New CPI inflation report tomorrow–lower but still very hot
Tomorrow, Tuesday, December 13, the Bureau of Labor Statistics will report November CPI inflation. Economists surveyed by Bloomberg estimate headline CPI to increase by 0.3% for the second consecutive month, with year-over-year CPI falling from 7.7% to 7.3%. Core CPI inflation, which excludes food and energy prices, is projected to climb at a 0.3% monthly rate or 6.1% year over year. (I would note that economists have underestimated the inflation rate in five of the last seven months.) Yes, inflation is slowing and it looks like we have seen a peak in the inflation rate. But, and it’s a big BUT, inflation is falling at a very slow rate.
Saturday Night Quarterback says, For the week ahead expect…
... investors and the stock market to behave as if Wednesday's meeting of the Federal Reserve has settled the important questions of how high (will the Fed take its benchmark Fed Funds interest rate) and how long (will the Fed continue to raise interest rates.) In...
Please Watch My New YouTube Video: Quick Pick Pilbara Minerals
Today I posted my two-hundred-and-fifteenth YouTube video: Quick Pick Pilbara Minerals. Pilbara is an Australian hard rock lithium producer. Hard rock lithium comes from mining spodumene deposits as opposed to getting lithium from brine. Turning lithium from brine into the Form of lithium that can be used in a battery requires more processing steps. That can make spodumene a lower-cost source if the deposit is rich enough. Currently, just about all lithium has to be processed in China before going to battery makers. American companies like Tesla hope to open processing plants of their own, and Pilbara has plans to build a test processing facility in Australia. The company will decide in early 2023 if it will go ahead with that plan. The stock is up about 26% for 2022. Pilbara recently released its fiscal first quarter 2023 results with gross sales reaching $1.04 billion, a number that’s nearly equivalent to the total revenue for all of the 2022 fiscal year. Clearly, the company is in the early stages of a growth ramp. I’m adding this stock to my Special Report: “Buy the Future for Pennies with These 10 Penny Stock Picks” on my subscription JubakAM.com investing site (as the # 9 Pick.) I’ll also be adding it to my Millennial Portfolio on that site on Friday, December 10.
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