The broader markets surged Thursday after October’s consumer price index showed that the rate of inflation may finally be slowing. In response to the CPI print, U.S. Treasury yields plunged in anticipation and hope that the Federal Reserve will no longer need to be as aggressive with its interest rate hiking policy. When rates fall , equity valuations tend to raise, with longer duration stocks — ones with a promise of earnings in the future but limited earnings power in the near-term — tend to rally the most. The massive moves we are seeing in the tech-heavy Nasdaq , which has been crushed this year raises the question of do you try to chase strength in hopes that the elusive bottom is in, or do you take advantage of these intraday gains and lighten up on problem positions? The Nasdaq soared more than 6% in Thursday’s trading. Into Thursday’s outsized moves higher — which also carried the Dow Jones Industrial Average up roughly 3% and the S & P 500 up more than 4.5% — we believe it would be prudent to lightly trim some of our high-flying tech stocks that are rallying on multiple expansions but still carry significant earnings uncertainty. As much as the green on the screen is a welcome relief and tech valuations benefit when rates fall and the U.S. dollar weakens, fundamentals still matter at the end of the day. Companies with declining prospects in a softening economy that also have bloated expense bases will still struggle to hit their numbers in future quarters, and profit shortfalls will take stocks down. In addition, we are encouraged to see a cooler-than-expected CPI, but we cannot let our emotions get the best of us because one month’s reading does not mean the Fed is done raising rates. Of course, we are rooting for inflation to come down, but food and shelter costs remain stubbornly high, and it will likely take multiple months in a row of either stabilization or a downward trajectory in inflation readings for the Fed to be finished tightening. We are restricted from trading nearly every tech stock in the portfolio Thursday so unfortunately there’s not a lot we can do right now for the Club portfolio. However, we will always tell you what we would do if we were not restricted. Our approach Thursday would be to pick one or two of our tech stocks that are up significantly and only lightly trim. We say lightly because it is certainly possible that the massive rally might have some legs to it as money comes off the sidelines and back into the market due to widespread underinvestment. But to do nothing and sit on your hands when the Nasdaq roars like this seems foolish. If the Nasdaq were down 6% on Thursday, you bet we would be saying to pick one or two stocks and buy. Our nature is to always look to buy on weakness and sell into strength. Two stocks we own that we would have pared back Thursday would have been Salesforce (CRM) and Microsoft (MSFT). We are, however, downgrading our ratings on both stocks to a 2 . That’s because both companies are seeing significant headwinds from the strong dollar right now. Salesforce could see the timing of big deals pushed out due to the elongated sales cycles. We are hearing nearly every enterprise software company talk about. On Microsoft, its earnings have been impacted by a downtick in Azure due to moderation in cloud consumption growth and a declining PC market. (Jim Cramer’s Charitable Trust is long CRM and MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, November 10, 2022.
Brendan McDermid | Reuters
The broader markets surged Thursday after October’s consumer price index showed that the rate of inflation may finally be slowing.
- In response to the CPI print, U.S. Treasury yields plunged in anticipation and hope that the Federal Reserve will no longer need to be as aggressive with its interest rate hiking policy.
- When rates fall, equity valuations tend to raise, with longer duration stocks — ones with a promise of earnings in the future but limited earnings power in the near-term — tend to rally the most.
