5 questions investors should be asking themselves after a major theme shift in markets

Feb 18, 2024

Brian Sozzi

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Welcome to the first theme change in markets for 2024.

Let’s call it, for argument’s sake, the Great Reality Check.

The Great Reality Check has two components that lead to one conclusion for investors.

Component one is that we are stuck with sticky inflation at least through the first half of the year. That was confirmed in this week’s Consumer Price Index (CPI) and Producer Price Index (PPI), both coming in above Wall Street estimates (notably the “core” readings).

It has also been confirmed by Corporate America, provided you are doing your daily due diligence.

So many companies have told the investing masses this earnings cycle that margins are still being hurt by high levels of inflation, including beverage giants PepsiCo (PEP) and Coca-Cola (KO), among others.

The second component is that the US economy is slowing down. Not falling off a cliff, but looking unlikely to spring a surprise upside in the near term.

While Wall Street played down the soft retail sales report this week, I would push back and suggest consumers and businesses are growing more cautious.

Discretionary apparel companies VF Corp (VFC) and Levi’s (LEVI) have laid eggs on earnings within the past two weeks.

Expedia (EXPE) CEO Peter Kern told us on Yahoo Finance Live that travel demand in the first quarter has slowed, partially leading to his company’s below-expected guidance last week. We got similar language from Airbnb (ABNB) on its earnings call this week and with its first quarter guidance.

Cisco (CSCO) said Thursday it would slash 5% of its workforce as it’s seeing clients — such as telecom firms — delay new orders.

Elevator and escalator maker Otis Worldwide (OTIS) told investors at a gathering at the New York Stock Exchange on Thursday that it projects new equipment sales to be flat to up low single digits in the “medium term.” (I will note Otis had a good investor day, outlining a new $8 billion capital return plan — more on that in my interview above with Otis chair and CEO Judy Marks.)

In terms of the macro environment, we are seeing a greater degree of caution and scrutiny of deals given the high level of uncertainty... It's leading us to be more cautious with our forecast and expectations.

In terms of the macro environment, we are seeing a greater degree of caution and scrutiny of deals given the high level of uncertainty… It’s leading us to be more cautious with our forecast and expectations.

Overall conclusion: Inflation is still on an upswing while economic growth is on a downswing, and Fed policy is caught in a vortex of being unable to cut rates to support growth acceleration.

Remember it was just Jan. 1, 2024, when many on the Street thought March would bring the first of potentially six rate cuts this year.

And there is your theme change, and why investors have reacted harshly to the inflation numbers. The mix of sticky inflation, slowing economic growth, and uncertain Fed policy will add volatility to both equities and fixed income markets.

“A solid economy should continue to support earnings growth, but higher rates will likely also serve to cap valuation expansion,” Truist co-chief investment officer Keith Lerner said in a client note.

Some basics questions to be asking right now:

  1. Is this the start of a market correction?

  2. If so, how should I be preparing my portfolio of investments?

  3. Is this all overblown and I should not make any drastic changes to my portfolio?

  4. How can I develop a diversified portfolio that withstands the inevitable market volatility in 2024?

  5. Are we getting a sampling of how the market will be reacting as Election Day gets closer?

Of course, Nvidia (NVDA) could come out next week with earnings and blow everyone away, sending broader markets higher. In the meantime, the data is telling us things have changed — and it should be respected.

Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.

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