Inflation is rising at the fastest pace in over 30 years.
And Federal Reserve Chairman Jerome Powell just told us to expect high inflation in the future.
Normally, that’s bad news for the stock market. But inflation actually helps certain tech stocks.
In today’s video, I explain what inflation means for the market, and why this is a good time to add to some of your favorite tech positions.
(If you’d prefer to read a transcript, click here.)
Hey everyone. Steve Fernandez here with your Winning Investor Daily update.
Today I’m going to be talking to you solo. My colleague Ian King, who I usually do these videos with, is on vacation for a couple of weeks. So, I’m going to take this opportunity to talk to you about a very important topic.
I ask that you stay with me. It can be a boring topic for some, but it’s very important for the markets, for your portfolio and even for your everyday life. You may have guessed it: This topic is inflation.
Now, I don’t want to talk too much about the mechanics of inflation. I have a background in economics, so I can get carried away there sometimes. More importantly, I want to talk to you about inflation and what this means for the market. And why I think this is an opportunity to really dip your toe in or add to some of your good positions that you plan on holding over the longer term.
Before we touch on that, before we get started, I ask that you please like our content if you like what I have to say. And if you haven’t already, or if you’re new to the channel, definitely subscribe. You don’t want to miss anything that we post every week. I’d like to think that our viewers have gained a lot of value from these videos, so go ahead and subscribe.
So, let’s go ahead and get started.
Is Inflation Transitory?
You probably heard, if you follow the markets a little bit, that Federal Reserve Chairman Jerome Powell came out and said, you know, he changed his course. He said that inflation isn’t really transitory anymore. He asked that we “retire” the word, implicitly suggesting that he sees inflation persisting at a higher level for longer than he initially expected.
I think that this could be a net positive for certain stocks, and I’ll touch on that in a second. But I don’t think that the market is too surprised about this news. Yeah, we’ve seen some volatility pick up in the broad market. For example, the S&P 500 has been relatively volatile over the past week. But if you look at the divergence in stocks over the last six months, you can see that the only stocks that were doing well were the mega caps.
If you look at this chart here, you can see that the S&P 500 has done relatively well over the last six months versus the Russell 2000, the smaller-cap stocks in the U.S. market, which have actually lost about 5% over the last six months.
To me, that suggests the people that are driving this market knew that inflation was probably not transitory. And really, the only stocks that were doing well were the mega caps. So, you can see this as a flight to safety, if you will. That’s what I would call it.
In the past, flights to safety have been moving to lower-risk currencies or lower-risk debt, like bonds. But now that means flooding into these mega-cap tech stocks like Google, Facebook, Amazon, Apple. These are companies that some people perceive as being too big to fail. So, I don’t think that this is a surprise.
Now, we’ve seen, like I said, that move lower recently here. I think a lot of that is just the financial professionals that are, unfortunately, running this market and are kind of conditioned to sell on these inflation fears.
And higher interest rates, which are generally a product of inflation, impact valuation. When rates go up, valuations of stocks typically go down. So, we’re kind of trained as a market to price these stocks lower just because that’s how we were conditioned or taught.
That’s actually kind of interesting if you’re in companies that A) don’t really have negative impacts from inflation, or B) don’t need to go issue debt at a higher rate to get capital to grow their businesses. They can just sell stock in the market.
Now, as a whole, I think that we’ll see some volatility here. We got kind of accustomed to seeing a slow, steady price increase over the last couple of months. And that’s really not how the market typically trades. Generally, we’re going to have some pullbacks as we have here. At least looking at the large caps, it’s really just a pullback. I think we’re about 4% or 5% off all-time highs. To me, that just implies people are taking a little bit of risk-off, which makes sense when you look at the chart here. You can see that the S&P 500 has really been climbing nonstop for a while now.
What Is The Difference Between A Company and a Stock?
So, one thing that I want to look at, as I mentioned earlier, is that I think some companies will do well in a high-inflation environment. And you have to keep in mind the difference between a company and a stock. Like I said, we’re kind of trained to price stocks lower when inflation goes up or when we see higher rates. But that doesn’t mean that the companies themselves are struggling. In fact, some companies may actually see a boost to their business from inflation.
Now you’ve probably heard about the commodity-based businesses where they’re producing commodities. Obviously, that’s been priced in. We’ve seen those stocks do really well and outperform the market for almost a year now. But I think you may overlook growth stocks, specifically companies that have a big portion of their costs in labor.
For example, you know, a software company doesn’t really have to buy goods to produce a product or service. They just need software developers or talent, and marketing to really push their product out there. So, their input costs aren’t really rising that much with inflation. Maybe just the labor will be the cost that rises, and they can pass off some of that cost to their customers.
They’re really going to keep churning out bottom-line growth as long as their revenue keeps growing. So, that’s an interesting place: software companies, or companies that have really low input costs.
Another thing to consider is when inflation occurs and we see higher prices in things like oil and gas like we’re seeing now. Well, that adds value to alternative goods and services — in this case. electric vehicles (EVs).
We all know that vehicle prices are going up, in part due to the semiconductor shortage that we’re seeing because of the influx of demand for EVs. But keep in mind that part of the calculation people are running through on their next car is how much it’s going to cost them versus, you know, a traditional internal combustion engine car. And when oil prices are higher, gas is higher, and, obviously, EVs become more attractive on an economic level.
Also, you know, powering your home. Ian King and I are really bullish on EVs, but also on renewable energy. Solar is probably the best play on that end. People don’t have to deal with higher natural gas prices — they can just put solar panels on the roof and, in most cases, get paid by the government to do so in the form of subsidies or tax credits.
Also, another group of stocks that I think benefits here is companies that provide alternative solutions to manufacturing, or alternative materials.
So, for those companies that do have high input costs, they need to figure out how they can, you know, basically offset some of that cost. And in a lot of cases, it’s things like 3D printing because 3D printing requires less materials in the sense that it wastes less materials. And also, 3D printing allows companies to build their prototypes fast and efficiently. 3D printing becomes more attractive when the materials that they’re using get more costly, and they really just need to cut costs somehow.
So, those are three areas of the market that I like. I said software stocks. I said alternative goods — in this case, EVs or renewable energy. And, also, I like alternative manufacturing such as 3D printing.
Now, as I said, I do see some volatility in the markets moving forward. I don’t think that we’re in a temporary drawdown here. That doesn’t mean that we’re not going to see a rise either. But I think we might have some volatility here over the next one to three months.
That means when the market reprices some of these stocks lower, it’s a good time to buy the companies I just described, or really just any companies that are here to stay over the long run. Even if stock prices are affected a little bit by inflation, it’s really their stock that’s getting hit right now, not the company. The company will continue doing well. The lower stock price is an opportunity to either start an initial position or add to an existing position.
A lot of these opportunities I see long-term are in growth stocks. But I think that you should take this as a buying opportunity in general.
I’m going to leave it here. Thanks for tuning in. Ian will be back in a couple of weeks, so you should have the back-and-forth conversation again then. But tune in next week. I’ll talk to you soon.
Regards,
Research Analyst, Strategic Fortunes
Morning Movers
From open till noon Eastern time.
Marvell Technology Inc. (Nasdaq: MRVL) designs analog, mixed-signal, digital signal processing and embedded and standalone integrated circuits. It is up 17% this morning on receiving a series of analyst upgrades after reporting results for Q3 showing strength across all segments.
Krispy Kreme Inc. (Nasdaq: DNUT), the doughnut shop franchise, is up 11% this morning on a rebound. Investors saw a buying opportunity after the stock slumped on a Goldman Sachs downgrade citing the company’s challenges with inflation.
Zillow Group Inc. (Nasdaq: Z), the digital real estate company, is up 8% this morning. The move came after the company announced a stock buyback plan and that it was raising its Q4 revenue guidance from $1.9 million to $2.6 million.
Smartsheet Inc. (NYSE: SMAR) enables teams and organizations to plan, capture, manage, automate and report on work through a cloud-based platform. It is up 7% after reporting better-than-expected results for Q3 that sets it up for strong growth in the future.
Sendas Distribuidora S.A. (NYSE: ASAI) engages in the retail and wholesale sale of food products, bazaar items and other products in Brazil. It has no company-specific news to report; rather, it is up 6% as part of an uptrend in consumer staples stocks today.
Huaneng Power International Inc. (NYSE: HNP) is a Chinese electrical utility company. It is up 6% on the news that the Chinese authorities plan on raising the benchmark price for long-term coal contracts in 2022. This would translate into higher electricity prices for industrial and residential customers.
Kosé Corp. (OTC: KSRYY) is a Japanese company that manufactures and sells cosmetics primarily in Asia and the United States. It is up 5% this morning but has no significant news tied to the move.
Hong Kong Exchanges and Clearing Ltd. (OTC: HKXCY) owns and operates stock exchanges, futures exchanges and related clearing houses in Hong Kong, mainland China and the U.K. It is up 5% on the news that a former executive and consultant was acquitted of corruption charges in a bribery trial.
Evolution AB (OTC: EVVTY) develops, markets and licenses live casino and slots solutions to gaming operators primarily in Europe and the U.S. It is up 5% after the company announced a buyback plan of $226 million worth of shares.
Tandem Diabetes Care Inc. (Nasdaq: TNDM) is a medical device company that designs and commercializes various products for people with insulin-dependent diabetes. It is up 5% on the news that it is expanding its senior leadership team with new positions designed to help with its longer-term product pipeline strategy.
