Good morning. Phil Rosen here, reporting from New York City.
Economic data out Monday told us Americans are spending less on big-ticket items, with durable goods orders declining 4.5% in January from the prior month.
It marked a bigger drop than expected, but it does little to change that the American consumer is off to a strong start this year.
But remember, a strong consumer means high demand, which helps inflation stick around. That's the opposite of what the Federal Reserve wants.
As a result, Wall Street strategists are warning of more pain to come for investors.
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1. Higher-for-longer rate hikes don't bode well for the stock market. But odds are the Fed's going to be forced to keep pushing rates up, given the robust consumer demand to kick off 2023, according to Bank of America.
More rate hikes will ultimately stamp out an overly-enthusiastic consumer, and likely tip the economy into a recession. But if policymakers are serious about their 2% inflation target, that's what has to happen, the bank's analysts wrote on Monday.
"The strength in the January activity and inflation data suggests that the Fed might have to hike considerably further to find the point of pain for the consumer," BofA said. "Right-tail risks to the terminal rate are growing."
As consumers start to feel pain from tighter policy, it'll put downward pressure on equities too. In JPMorgan's view, the stock market has yet to come to terms with that possibility.
"The bond market has been increasingly pricing-in a more hawkish scenario, but the equity market less so, with relative equity valuation at the high end of the historical range," JPMorgan strategists said Monday.
In any case, Barclays said Monday that stocks still look too expensive right now even as the 2023 rally slows and stocks come off their highs for the year.
In a recent note, the bank pointed out that 40% of stocks in the S&P 500 are still trading above their 10-year median price.
Looking ahead, markets are expecting the Fed Funds rate to surge another 100 basis points to about 5.4% by the end of the year.
(It's worth noting that just a couple months ago, markets were expecting interest rate cuts by late 2023.)
JPMorgan broke down four reasons why stocks could get burned from higher interest rates:
- Demand destruction
- Lower margins
- Higher interest costs
- Asset write-downs and credit losses
"Even though equities appear to be less concerned about the current restrictive policy environment, we believe the systematic risk is rising with every rate hike especially after ~15 years of global zero-rate policies," the strategists said.
What are the biggest risks you see this year to your portfolio? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
In other news:
2. US stock futures edge lower early Tuesday, shaping up to log a monthly loss on the final day of February trading as investors continue to brace for interest rates to run higher for longer. Meanwhile, movie theater operator AMC's stock surged 23% Monday — a day before reporting earnings. Here are the latest market moves.
3. Earnings on deck: Target, AMC, and more, all reporting.
4. The manager of a $17 billion fund recommended buying these seven stocks right now. John Linehan of T. Rowe Price warned of "economic purgatory" and is eyeing a specific batch of value stocks. See the list of names that can boost your portfolio this year.
5. Some traders say ChatGPT gives them out-of-date information. Big bank employees have been turning to the language bot to lighten their workload, per Bloomberg. But speed bumps are popping up and staffers are wasting time with fact-checking.
6. "Big Short" investor Steve Eisman said tech stocks are no longer the key to outperforming markets. The Fed's hawkishness is making growth names less appealing, in Eisman's view — and the tide is turning in favor of green energy and infrastructure companies.
7. The stock market bubble has burst and those betting on a rebound are in denial, according to Richard Bernstein Advisors. Buying into the current rally means ignoring changing market conditions, the firm warned. These strategists say it's time to acknowledge the speculative era in stocks is over.
8. The chief investment officer of a $9 billion real-estate investing firm isn't expecting a 2008-sized crash. Many rapidly growing cities have seen major home-price corrections — which means it's a good time to buy in places like Austin, Texas.
9. Meet a freelance writer earning six-figures who uses ChatGPT to make his job easier. He believes it's important to learn how to work with the tool instead of fearing it. He shared example questions he asks ChatGPT to boost his productivity.
10. A top energy trader said oil demand could hit record highs later this year. That could push prices back above $100 per barrel, especially with crude inventories likely to tighten further, Vitol CEO Russell Hardy explained. Here's what to know.
Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.