Stock investors, whether they favor growth investing, value investing or income investing, all like to keep an eye on the factors that move the market, and the U.S. Federal Reserve Board and Fed chair Janet Yellen are high on that list.
For two days this week, Yellen reported to the House Financial Services Committee about the state of the U.S. economy and the Fed’s approach to keeping it on the right track. On Tuesday, Yellen made it clear that the Fed thought it would be “unwise” to hold off on interest rate increases as the U.S. economy continues to strengthen.
The news on Wednesday morning that the January consumer price index (CPI) came in at a higher-than-expected 0.6% (after a 0.3% gain in December) will only strengthen Yellen’s case for more rate increases. January retail sales also rose 0.4%. Altogether, the year-over-year increase in what Americans paid for goods and services in January was 2.5%. And the stronger inflation is, the stronger the Fed’s inclination to ratchet up interest rates will be.
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Economic wonks get paid to spend time unpacking the details of economic data releases, and the CPI gives them plenty to play with. They note, for instance, that a 7.8% jump in the price of gasoline was responsible for about half the increase in the January CPI. Clothing costs also rose, with men’s clothing surging higher by an all-time record amount.
But while you may share economic analysts’ enjoyment of drilling down into economic data, the stock investor in you should dial back your enthusiasm.
If you want to know what effect economic data has on the market, it’s always a better idea to look at the market than to obsess over the data. Here’s what the S&P 500 had to say about Wednesday’s numbers.
That breakout above 2,300 that began on February 8 now has five full days under its belt, with Wednesday’s partial-day results continuing the move toward the upside.
For growth investors, this means that large-cap stocks are continuing their uptrend, providing you with an opportunity to buy stocks with the momentum of the market on your side.
And if you want to see concrete evidence of how the good retail numbers are benefiting the sector, you can definitely see it in the chart of Shopify (SHOP), a company that’s helping small- and medium-sized companies move their retail business online. Shopify just reported excellent revenue and earnings numbers on Wednesday morning, and the combination of a good macro environment and good quarterly numbers is giving the stock a healthy boost. Here’s what SHOP looks like in a daily chart, including Wednesday’s pop higher.
For value investors, whose entire strategy is based on close analysis of valuation metrics and revenue and earnings projections, good economic news can be a mixed blessing. Good numbers can juice up future earnings, but they can also push stock prices higher, making it harder to find the relative bargains that will let you identify undervalued stocks that will track higher with lower risk.
For income investors, whose strategy is a mix of growth and value analysis, with an emphasis on capital preservation and increasing dividend yields, what the Fed does is almost an afterthought. The main number to watch is the headline inflation number, which is the target your investments must surpass to protect your income from a loss of buying power.
No matter what your style, we at Cabot Wealth think you should be looking beyond the indexes, whether that’s the CPI or the major stock indexes. Buying individual stocks and managing your portfolio with an eye on the charts will always serve you better than buying the Dow, the S&P or the Nasdaq. And Cabot has the advisories that growth investors, value investors and income investors need to prosper. Click here to find out about I write, which helps investors like you build their wealth in emerging markets growth stocks.