Investors Bought the Dip. Now What?

Stocks opened slightly lower this morning (Dow -120 pts; SPX -.4%). It’s as if, having fully recovered from September’s -6% correction, the stock market is at a loss for what to do next. Over the past 30 days the VIX fear gauge has fallen to 16 from 25. Gold is about even with where is was, so there’s no palpable fear among investors. And yet, interest rates are moving convincingly higher. The 10-year Treasury Note yield is up around 1.66%, the highest in five months. Inflation expectations are moving higher as well. The Treasury Inflation Protected Securities (TIPS) market shows that investors believe inflation over the next two years will average 3.1% and the 10-year average will hover around 2.6%. While I don’t think anyone expects the type of inflation experienced during the 1970s and early 1980s, price growth is definitely expected to sustainably surpass the Federal Reserve’s 2% long-run target. And that is precisely why we expect the Fed to begin tapering its monetary stimulus measures within the next month. In addition, the Fed may begin raising its policy interest rate by mid-2022.

Money manager and CNBC Contributor Josh Brown says he’s “not really listening” to the “hysterical commentary” about runaway inflation. The media and Wall Street are talking about inflation “as though it’s a negative thing,” but remember that prior to Covid the Fed spent the previous 10 years struggling to get inflation up to an acceptable level. Commodities especially saw weak capital returns and low investment levels. Covid, however, acted as an accelerator to commodity prices, courtesy of global supply chain constraints. So yes, inflation will be higher than average for a while, but those supply problems will work themselves out as they always do.

Danaher (DHR) reported excellent third quarter results, but the stock is down 2% in early trading. Both total revenue (up 23% year-over-year) and profits (up 39%) beat Wall Street analysts’ expectations. All three major product divisions posted solid growth, and management raised full-year 2021 revenue guidance. That Danaher is very well managed and growing rapidly is well understood by investors—the stock has been rewarded with a 39% year-to-date gain. So in a way the stock is a victim of its own success. Goldman Sachs says the company has a “high bar for expectations.” So while results were very good, some are focusing on the fact that life-sciences product sales were stronger in the second quarter than in the third quarter.

PayPal (PYPL) is reportedly in negotiations to acquire Pinterest (PINS), although neither company has announced anything. Bloomberg News says the deal could “expand PayPal’s role in online shopping and advertising.” But investors aren’t necessarily buying it. PYPL is down nearly 10% after the headline surfaced. PINS new user growth has slowed recently, and PYPL would be valuing PINS based on the number of active users rather than its sales or profits.

Chevron (CVX) fell 1% today despite a positive research note published by Morgan Stanley. The firm says Chevron stock is cheap and should be bought. Yes, rising oil prices have boosted oil stocks, but the stock hasn’t risen near as much as oil. Also, there has been a “strategic shift toward FCF & returns.” In other words, management is paying much more attention to profitability and cashflow than it used to. The firm expects a “catch-up trade” in Chevron.