Inflation is starting to be noticed by everyone everywhere. We will not discuss the price of fuel which we expect will be north of $5.00 a gallon in California in the next few weeks. However, we do want to share a recent local “dining” experience. We were out to lunch the other day at a local Mexican restaurant that we have gone to for more than two decades, and we noticed the temporary copied paper menus on the table had replaced the regular menus. I always order the same thing at this place, and over the last decade, my favorite Fajitas were $14.95. However, with the new menus, I saw they were now charging $27.90 for my favorite Fajitas. With that type of price increase, I wondered what changed. Was there more meat? Did that add new sides? Did my meal come with a complimentary drink? When I received the meal, what I saw was disappointing. They reduced the amount of meat on the plate, added more of the lower cost vegetables, and included nothing new.
As Valentine’s day approaches, pay attention to the cost of the meal you order in your favorite restaurant and think about what it looked like a couple of years ago. A $53.00 prime steak is now $65.00 to $71.00, and in many restaurants, it is hard to get out of the meal for under $200.00 without drinks. Prices are up everywhere and although the average consumer’s disposable income is up 4% versus February 2021, the current rate of inflation makes it hard to notice.
Inflation remains a significant concern. The prices paid measure of the ISM manufacturing index, from still-elevated levels, ticked higher in Jan. WTI oil has risen to $92 and the 10-year Treasury is at 1.91%. Central banks have pivoted to a more hawkish position (eg, BoE hike, ECB opening the door for later this year). Interest rate hikes are coming but will it be too little too late? How high can the Fed raise interest rates with the national debt north of $30 Trillion before the interest payments on that debt become painful? There are a lot of unanswered questions because we are in unchartered waters, so we are keeping an eye on Leading Economic Indicators because we must remain nimble so we can make changes as the data unfolds.
Marginal Improvement In Earnings & Sales After A Big Reporting Week
Both sales and earnings growth saw marginal improvements after last week, in which about ¼ of the S&P 500 reported earnings. Revenue growth improved to 14.2% from 13.4% at the end of the prior week, and earnings improved to 27.2% from 25.2%. The surprise factor has normalized for earnings at 4.8%, and however, the percent of companies beating estimates is still above the long-term average but below the last several quarters.
NTM EPS Progression Still Rising
On the bright side for investors is the fact that the NTM EPS progression continues to grind higher, although the pace has slowed. The largest increase in previous quarters was during heavy reporting weeks. This past week was one of the heaviest, but we did not see any noticeable increases even with the largest earnings contributors reporting. So, for now, watch for a turn lower in the progression.
Growth In Costs Continues To Accelerate
Over the next year, costs should be a major focus for investors. The recent economic data shows that growth is beginning to slow, which is never good when costs are growing at the fastest pace in 15 years. So while margins have been able to hang in there, for now, it’s only a matter of time before they begin to roll over if nothing else changes.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
