Contrarian Investor Premium
Contrarian Investor Premium
PCE Deflator, More Volatility for Stocks
0:00
-9:49

PCE Deflator, More Volatility for Stocks

Futures are rebounding ahead of the Fed’s preferred inflation gauge…

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Friday, July 26. The Bottom Line segment of today’s podcast starts at (3:55) for listeners who want to skip ahead. Be sure to check out the new ‘Stocks on the Contrarian Radar’ segment at the bottom of this page and (6:17) on the podcast.

State of Play

Stocks got bounced around yesterday, with tech selling off anew. Small caps rallied however. All of this on no apparent news, though second-quarter GDP did exceed estimates, which briefly helped sentiment yesterday morning. Afternoon trading was a lot more bearish into the close.

As we look at our board of indicators for signs of direction at 0640, risk appetite appears to be back on for no apparent reason:

  • Stock index futures are pointing to gains, led by small caps. The Russell 2000 is up 1.6%. The Nasdaq is right behind it, up 1.1%. S&P 500 futures are 0.8% to the good;

  • Commodities are quiet. WTI crude oil is unchanged trading at $78/barrel. Copper is up 0.5%. First time all seek we’ve seen any green numbers out of copper IINM;

  • Cryptos are rebounding as well with Bitcoin up 5% to trade around $67,300;

  • Bonds are unchanged with the 2-year yielding 4.43% and the 10-year 2.24%.

Today’s Known Events

We have earnings coming in again:

  • 3M (MMM 0.00%↑) just beat on top- and bottom-line estimates and the stock is moving higher in the pre-market;

  • Colgate-Palmolve (CL 0.00%↑), Bristol-Myers Squibb (BMY 0.00%↑), and Newell Brands (NWL 0.00%↑) are also due out before the open at 0930.

Personal Consumption Expenditures, also known as the PCE Deflator, is out at 0830. This is the Fed’s preferred inflation gauge. Economists who were surveyed expect the headline PCE to print at 0.1% month-over-month, while Core PCE, which excludes food and energy, is expected at 0.2%. Both of these would be 0.1 percentage points worse than the previous month. They would leave annualized headline PCE at 2.4% after printing at 2.6% last month whilst annualized Core PCE would be 2.5% after 2.6% last month.

Worth mentioning that we’ve already had a Consumer Price Index release this month. To recap, the headline CPI dropped 0.1% MoM whilst the Core CPI was up 0.1%. So basically, negligible amounts. For all intents and purposes, inflation is no longer a real threat.

The Bottom Line©️

So would expect the PCE Deflator today to be a bit of a non-event. The Fed has already effectively declared victory over inflation and telegraphed that their next move will be a reduction in interest rates, probably at the September FOMC meeting.

Where that leaves stocks is anybody’s guess. These seem to be doing their own thing this week, whipsawing all over the place with no clear cause for their movement. Guess they call that volatility. Small caps have quietly held up — as have consumer staples stocks, as discussed yesterday — but tech has gotten beaten up. The Nasdaq is down 3% on the week.

The fact that small caps have held up tells us investors are still interested in taking on risk. You figure that could bode well for the suddenly-beleaguered tech sector…

Stocks on the Contrarian Radar

Have AI chip stocks gotten cheap yet? Nvidia (NVDA 0.00%↑) dropped another 1.7% yesterday. It’s still up more than 2x from the start of the year and trades at >40x forward earnings and 32x (!) forward sales. So no, that does not sound cheap. And as NVDA goes, so go other AI chip stocks.

None of this prevented The Contrarian from adding to his stake in Camtek (CAMT 0.00%↑) yesterday. That stock got pummeled even more than NVDA, down 7% on the day. Suffice it to say The Contrarian now regrets this move. It is thankfully a very small position and not one he will add to at any point in the foreseeable future.

Thing is, valuations ultimately matter little when it comes to these growth stocks. It’s all about the story. Do investors still buy the AI story? Talk of AI is still everywhere, even if the stocks are well off the peaks. We’ve had tech selloffs before this cycle. Is this another one of those temporary blips? Again, small caps seem to be telling us that it is. So far, at least…

Newell Brands (NWL 0.00%↑) is another stock The Contrarian regrets buying but it has finally started to rebound. The valuation here is pretty compelling: 12x forward (as in today’s) earnings, 0.34x forward sales, 0.85x book, and 4x forward cashflows. The position is too large for The Contrarian to add to it should today’s earnings usher in another round of selling. Unless that is, it gets really cheap…

Housekeeping

  • Obviously this is not investment advice (duh). Do your own research, make your own decisions.

  • This Substack chat tracks The Contrarian’s trades in (almost) real time. The full portfolio is available upon request.

  • If this daily thing is drowning your inbox and/or you CBF to bother with it and prefer to just get the guest feature or actionable highlights — you can control these settings on your account page.

  • Finally, if you enjoy this and want others to experience it, please gift a subscription to your friends (or even your enemies).

Discussion about this episode

User's avatar