The CPI number for September in the US might not force the Federal Reserve to raise interest rates in November but it will keep markets on tenterhooks about whether more rate rises are coming. Last week’s market action underlined how Wall Street-dependent our overall stock market is, so guessing or knowing when the Fed will stop raising rates is critically important for how we play shares going forward.
The chart below shows how the S&P/ASX 200 (AXJO) has mirrored the moves of the S&P500, especially since July and the ups and downs have been a direct response to data that suggested inflation was either falling or not and what the Fed was likely to do.
Two weeks ago, data had the bond market pushing up yields and stocks fell. The last week it was the opposite until Thursday in the US when the CPI numbers said headline inflation was up 0.4% in September, taking the annual rise to 3.7%. That’s not bad and the money market is betting no rate rise in November, however, economists expected a 0.3% result, so it raised a few questions about inflation’s fall.
That said, the August CPI was 0.6%, so it was an improvement. But what about the core inflation data?
“Excluding volatile food and energy prices, the so-called core CPI increased 0.3% on the month and 4.1% on a 12-month basis, both exactly in line with expectations,” CNBC reported. “Policymakers place more weight on the core numbers as they tend to be better predictors of long-term trends. Core inflation also increased 0.3% in August, when it was up 4.3% from the previous 12 months.”
Importantly, bond yields didn’t spike significantly on the CPI report, which is a positive sign. However, if, like me, you want the December quarter to be the take-off time for stocks that have been left behind since interest rates started their aggressive rise, we do need the Fed to stop playing Superman.
This is the view of Bank of America’s Michael Hartnett, who sees stocks struggling. “Bond yields may go lower in 2024 but no secular bull market [happens] until Fed/governments stop playing Superman, put on their ‘seatbelts’ and express need for lower deficits,” he said in a note.
After reading this, I had two thoughts. First, I think he’s right — the Fed has to signal that their rate rise policy has worked, and inflation will slide to their 2% target soon enough. Second, Hartnett hasn’t given us a time that stocks will be negatively affected by the Superman habits of the Fed.
And while that’s important to stock players in the short run, provided we have patience, the end of rate rise messages to the market will be a boost for growth and tech stocks that I call catch-up plays.
Just as there could be seven big cap stocks and a few others that have pumped up the Nasdaq index since December last year, there are still a lot of smaller cap businesses that have been smashed by the market, that will eventually rebound. For example, Zoom at US$62.75 is down 18% for the past year and down 5.8% year-to-date. I reckon it will be a catch-up stock in 2024.
Zoom Video Communications
And I’m not alone, as this CNN report shows: “The 24 analysts offering 12-month price forecasts for Zoom Video Communications Inc have a median target of 79.00, with a high estimate of 105.00 and a low estimate of 66.00. The median estimate represents a +25.88% increase from the last price of 62.76.”
So, what are our catch-up growth stocks? Here are my best guesses, with the consensus calls on stock price rises from analysts.
If the consensus calls are on the money when the market plays catch-up, the average gain from holding these 10 stocks would be around 21%. And if the big call merchants are right, the approximate return would be a whopping 40%.
I can’t wait for the central banks to either stop raising rates or inferring that they have more rises in store.
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