With Fed Seeing Higher Inflation, Growth Stocks Could be In The Spotlight Today

It seems that the market debate about whether inflation is truly temporary or could be more lingering has heated up a bit.

The Fed added more fuel to that fire by raising its inflation expectations for this year but still saying it thinks inflation is “transitory.” This argument may also further another tussle that’s been going on in the market—growth versus value—with growth stocks perhaps continuing to be a little worse for wear amid worries about inflation eating away at future earnings prospects.

But really we’re still just in the follow-up mode to the Fed’s announcement, and the selling hasn’t been that bad. There certainly hasn’t been any panic. Chair Jerome Powell did say to take the dot plot with a “big grain of salt.” Also the central bank didn’t say when it would start tapering its bond purchases, with Powell calling this month’s meeting the “talking about talking about” one.

So all in all, a big takeaway was that the Fed may be engaging in one of those summer traditions of easing cautiously into cold water while still trying to keep its swimsuit dry. While the market wasn’t particularly warm to what the Fed had to say, it’s not like the bottom fell out.

In earnings news this morning, grocery giant Kroger KR rung up solid earnings, raised full-year guidance, and announced a billion-dollar stock buyback … and shares were near unchanged in premarket trading. As we’ve seen in recent days, retailers can have a hard time impressing investors in the post-Covid world. Shares of homebuilder Lennar LEN are pointing green after releasing better-than-expected earnings and offering up some positive words on the demand outlook. Remember: Homebuilders have had a tough time navigating the pandemic, with low-interest rates and high demand countered by soaring costs of labor, raw materials, and building supplies. 

Another stock in the green—literally and figuratively—is Ford F, which issued strong Q2 guidance ahead of the Deutsche Bank Auto Conference. Shares of F, which are up more than 70% this year, soared another 3% ahead of the open. F and rival U.S. automaker General Motors GM have grabbed the headlines in recent days amid plans to shift electric vehicle production into high gear.    

A (Somewhat) Jarring Jolt

Yesterday, stock indices quickly fell to session lows when the Fed issued projections showing much better chances of a rate hike next year. It also raised its inflation growth estimate for this year pretty sharply. 

These moves led to thoughts among analysts that a taper of the Fed’s $120 billion a month bond-buying program might start by late this year or early next, though the Fed is sticking by it for now. 

Seven members of the Federal Open Market Committee (FOMC) now expect at least one rate hike next year, up from four who did at the Fed’s March meeting. Also, 13 FOMC members expect rates to rise in 2023, up from seven in March. The meeting basically seems to indicate we can expect a rate hike possibly by late 2023, rather than the 2024 timing projected after the March meeting.

But stocks did recover somewhat yesterday, and the laggard Dow Jones Industrial Average ($DJI) was able to regain the 34,000 mark when all was said and done.

Is It Worth A Taper Tantrum?

Even though really-cheap-money may be coming to an end sooner than some had expected, it doesn’t seem like the present situation is anything to go too crazy over. It’s unclear if the Fed will really change course until we get a handle on employment and some of the government subsidies start to dry up. Last week’s Job Openings and Labor Turnover Survey report showed a historically high level of job openings. It’s hard to imagine the Fed getting too hawkish while all those jobs are left to be filled. 

The Fed’s actual press release didn’t change all that much from March. It did say the country is making progress on vaccinations, easing the crisis. There was no change in its asset purchase language and its aiming for inflation above 2% for some time. Even though the Fed raised its inflation projection, it continues to say inflation is “transitory.” 

Fed officials continue to cite short-term supply bottlenecks caused by sharp increases in demand as the economy reopens following the pandemic. The supply shortages, they say, will fade as the year continues. Let’s hope they’re right.

CHART OF THE DAY: IN TANDEM: The US dollar index ($DXY—purple line) and 10-Year Treasury Note Yield Index (TNX—candlestick) both popped nicely on the Fed news yesterday. It seems that the central bank may be a little more hawkish than many market participants were expecting at this juncture. Data source: Intercontinental Exchange, Cboe Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

ESG Debt Accelerating: It’s not your grandfather’s market. There is still a place in many investor portfolios for companies where the bottom line is, well, the bottom line. But investing in line with environmental, social, and governance goals has taken hold in the minds of many investors. This so-called ESG investing is not only associated with stock, but also bonds. Research company BloombergNEF this month reported that money borrowed for ESG purposes has surpassed $3 trillion.

That sustainable debt milestone “highlights the rapid growth this once-niche corner of investing has seen lately, with the most recent trillion dollars issued in just the last eight months,” the research company said. It took almost 12 years to reach the $1 trillion mark since sustainable debt labeling began and less than two years to reach the second trillion, according to BloombergNEF.

Charging Up: Continuing with the sustainability theme, it may seem that Tesla TSLA dominates the headlines for electric vehicles, but the company is facing increased competition from both electric vehicle upstarts like Kandi Technologies Group KNDI, Li Auto LI, and NIO NIO but also from traditional automakers like General Motors GM and Ford F. Indeed, BloombergNEF this month released its latest annual Electric Vehicle Outlook that says even with no additional policy measures global sales of zero-emission cars will rise from 4% of the market in 2020 to 70% by 2040, led by China, the United States and European economies.

Catching The Bus: But the electric vehicle push also offers investors opportunities beyond cars. The BloombergNEF EV outlook sees global sales of zero-emission buses rising to 83%, light commercial vehicles to 60%, and medium and heavy commercial vehicles to just over 30% of their respective markets by 2040. In recent related news, a California program that provides cash vouchers to reduce the purchase price for operators of electric commercial vehicles recently said enough funding has been requested to fund more than 900 vehicles, and more funds will be available in August. One company that could benefit is Lion Electric LEV. According to research from BMO Capital Markets, the West Coast state is the largest target market for the company’s electric school buses and trucks.

“We understand Lion has applied for a few vouchers for customers with results to be determined within weeks,” a BMO research note said. “These could represent some orders toward what Lion needs to secure over the next 18 months to achieve our 2022 sales projection for 2,475 vehicles.” Just as with the proliferation of electric car makers, there also are a growing number of companies involved in heavier electric vehicles, including LEV, Arrival ARVL, BYD Co. BYDDY, Nikola Corp. NKLA. And yes, lest we forget, TSLA has been working on an electric semi-truck for years.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image by NikolayFrolochkin from Pixabay