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Welcome to the first theme change in the market for 2024.
For the sake of argument, let's call it: great reality check.
The Great Reality Check has two components that lead investors to one conclusion.
Factor 1 is that inflation will continue, at least through the first half of this year. That was confirmed by this week's Consumer Price Index (CPI) and Producer Price Index (PPI), both of which beat Wall Street expectations (particularly the “core” measures).
As long as we do our daily due diligence, it's also confirmed by Corporate America.
A significant number of companies, including beverage giants PepsiCo (PEP) and Coca-Cola (KO), told the investing public this earnings cycle that their margins are still being hurt by high levels of inflation.
The second factor is that the U.S. economy is slowing. It's not like we're going to fall off a cliff, but a surprise turnaround seems unlikely in the short term.
Although Wall Street downplayed the soft retail sales report this week, I would suggest that consumers and businesses are becoming more cautious.
Apparel discretionary companies VF Corp (VFC) and Levi's (LEVI) have posted gains over the past two weeks.
Expedia (EXPE) CEO Peter Kahn told Yahoo Finance Live that a slowdown in travel demand in the first quarter partially led to the company's weaker-than-expected results last week. Ta. We heard similar language from Airbnb (ABNB) in its earnings release and first-quarter guidance this week.
Cisco (CSCO) said Thursday it will cut 5% of its workforce as customers such as telecommunications companies slow new orders.
Elevator and escalator maker Otis Worldwide (OTIS) told investors Thursday at a New York Stock Exchange meeting that it expects new equipment sales to be “flat to low single digits over the medium term.” He said he was doing it. (Note that Otis had a good investor day as it outlined its new $8 billion capital return plan. For more information, please visit Otis Chairman and CEO Judy Marks (Explained in detail in the interview above.)
Overall conclusion: Economic growth is trending down, inflation is still trending upward, and Fed policy is mired in an inability to cut interest rates to support faster growth.
It was just January 1, 2024, when many on the street thought there could be six rate cuts this year, with the first of them coming in March. I want you to remember that.
And then there's the change in your theme and why investors reacted so harshly to the inflation numbers. The combination of persistent inflation, slowing economic growth, and uncertain Fed policy will increase volatility in both stock and bond markets.
“A strong economy should continue to support earnings growth, but rising interest rates are also likely to limit valuation expansion,” Keith Lerner, co-chief investment officer at Trust, said in a client note.
Some basic questions to ask now:
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Is this the beginning of a market correction?
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If so, how should you prepare your investment portfolio?
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Is this an exaggeration and shouldn't you make major changes to your portfolio?
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How can you build a diversified portfolio that can withstand the inevitable market fluctuations of 2024?
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Are we getting a sample of how the market will react as Election Day approaches?
Of course, Nvidia (NVDA) could surprise everyone when it releases its earnings next week, sending the broader market higher. Meanwhile, the data shows that things have changed, and that should be respected.
Brian Sozzi I'm the executive editor of Yahoo Finance. Follow Sozzi on Twitter/X @BrianSozzi And even more linkedin. Have a tip about a deal, merger, activist situation, or more? Email brian.sozzi@yahoofinance.com.
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