Earnings Season Kicks Off

Stocks rallied hard today in the wake of an inflation report as well a couple of earnings announcements. I’ll address these two catalysts below. The Dow is up over 600 pts, the S&P 500 is up 1.5% and the Nasdaq is up 2% at the moment. Bond are rallying as well, with intermediate corporates up about 1% and long-term Treasuries surging 1.5%. These are outsized moves.

Traders cheered today’s inflation report from the Bureau of Labor Statistics. The Consumer Price Index (CPI) ticked up .4% in December vs. the prior month. That’s as expected. But the core rate of price growth—excluding food & energy—slowed to just .2%, and that’s what traders are focused on this morning. The major takeaway is that inflation remains under control. As Bloomberg News puts it, this report “keeps alive the idea that disinflation is still progressing.” As an aside, the year-over-year rate of Core CPI also edged down to 3.2% vs. 3.3% expected. Inflation is still above the Federal Reserve’s long-term target,

You may be forgiven for thinking, “So what? The numbers didn’t move much. And how could this one report be responsible for such huge moves in both stock and bond markets?” Nevertheless, here we are. The reason is that bond traders had been positioning to bet against any further Federal Reserve interest rate cuts this year based on the expectation that economic growth and sticky inflation would prevent rates from moving lower. This has become a familiar pattern: trying to guess at the next inflation report and extrapolating how the Fed will react. It’s a pattern that belies the old adage that bond traders are more level-headed than stock traders. Anyway, over the past couple of years their guesswork has been consistently incorrect.

In our view, this is unnecessarily myopic, missing the forest for the trees. And since interest rate expectations have a significant impact on stock trading, it unfortunately creates volatility for all of us. Rather than focusing on how many interest rate cuts we get this year, or whether the next CPI report will rise or fall by one-tenth of a percent, we’re paying more attention to earnings season, which kicked off today with some financial services companies.

Wells Fargo (WFC) delivered a sizable profit beat compared with Wall Street expectations and the stock is up nearly 6%. Profits climbed 10% from the year-ago quarter—the strongest showing in 6 quarters. Net interest income—the difference between interest collected and paid out—improved nicely. Further, investment banking fees rose 59% from year-ago levels. The bank’s CFO said borrower credit quality remains strong. “The economy is doing well, people have jobs, they’re paying their bills” and commercial buyers are “quite prudent” with the debt they’re taking on. Banks are finding it easier to make money in the current economic & interest rate environment.

Blackrock (BLK) reported 23% growth for both revenue and earnings during the fourth quarter. But the stock is up nearly 5% this morning because the report offered confirmation that Blackrock continues to attract client assets. During the quarter clients moved $281 billion into Blackrock investments, which was far higher than Wall Street projections.