Stock Portfolio Updates: Relentless Inflation Swells Fed Rate Uncertainty By: Christopher Mistal | February 10, 2022 | Email | Print

Just when it was beginning to look like the market was finding some support and extending its rally off of its January low, today’s headline CPI and comments from Federal Reserve Bank of St. Louis President James Bullard quickly derailed it. CPI came in at a hot 7.5% year-over-year versus expectations of 7.2%. Bullard was quick to share his view that the Fed should move quickly with a big response. The resulting surge in bond yields sent stocks tumbling and the CBOE VIX index jumped around 20%. This is the volatility that we have been discussing and anticipating during this midterm election year.

 

 

Our familiar chart of various midterm year scenarios that are currently applicable has been updated with 2022 performance through today’s close. S&P 500 remains well below its historical average performance for this time of the year and aside from a modest gain in “All Midterm Years,” the historical patterns suggest continued tough trading through the balance of February. It is not until early March that all the historical patterns suggest any meaningful market improvement. This midterm year we may be forced to wait until the Fed meets again on March 15-16 before we get a clearer picture of the course the Fed intends to take to combat persistently hot inflation.

 

 

In the face of broad market declines and no January Effect from small-caps stocks, Free Lunch stocks selected back in December were largely duds this year. Of the four positions that remained open in the last update, three more have been stopped out. LE, MTRX and UPLD were all closed not long after last month’s January 20 update. Core Laboratories (CLB) is the only remaining position still held. CLB did manage to buck today’s broader trend with a modest 0.12% gain today. With mid-February nearly here and the market still struggling, Sell CLB. For tracking purposes it will be closed out of the portfolio using its average price on February 11.

 

 

Over the last three weeks since last update through yesterday’s close, S&P 500 advanced 1.2% while Russell 2000 climbed 1.0% higher. Over the same time period the entire portfolio slipped 1.6% lower, excluding dividends and any fees. Mid-Cap positions, on average, were the worst performing off 2.3% as three positions were stopped out. Large-Caps were second worst, off 2.0% with one position recently stopped out. Small-Caps declined 1.4% on average with one position closing below its stop loss. In total, across all segments five positions were stopped in late January and early February.

 

Bank, energy and utility positions held up reasonably well, but did weaken modestly. Higher interest rates are generally viewed as a positive for banks as long as the yield curve is steepening or is anticipated to steepen. Utility positions typically falter as rates climb higher but considering many of the positions are still offering dividend yields that are better than Treasury yields, they have held up. Being viewed as generally defensive in nature has also likely aided utilities. Crude oil was making a run toward $100 per barrel, but it appears to be pausing and doing a bit of back filling around the $90 level currently. Some stability in the energy market would be welcomed by consumers and inflation hawks, but that does not appear all that likely given the current political climate.

 

Constellation Energy (CEG) has joined the Large-Cap portfolio since last update. This was not a new trade idea; the position is the result of a spin off from Exelon Corp (EXC). For every three shares of EXC held one share of CEG was received. The spinoff resulted in an adjustment to EXC’s Presented Price approximately equal to the value of CEG shares received. CEG opened for trading at $38 and that is the price that will be used to track its performance. Both EXC and CEG are on Hold.

 

After rebounding off its low, AT&T (T) has weakened again. T is the sole open position that was in the red on the close on February 9. T has struggled due to uncertainty with its dividend and its media properties. There is now some clarity on both fronts as T announced that it intends to spin off Warner Media and merge it with Discovery Inc. while its dividend will be cut to $1.11 per share. When the spin off completes T shareholders will receive 0.24 shares of Warner Bros. Discovery for each share of T held. Hold shares of T as the spin off does appear it may be beneficial to both T and the new media company.

 

All other positions are on Hold. Please see the table below for updated stop losses and current advice for positions not covered above.