Markets remained incredibly volatile to close out the week as investors attempted to determine appropriate valuation multiples to place on shares ahead of more interest rate hikes from the Federal Reserve.
While it may be tempting to trade the action, very few can do it successfully and even fewer can do it successfully and consistently over time. Remember, the more moves you make, the more times you have to be right and there are no called strikes in this game. You can let some trades go.
High quality, profitable companies
Instead, we want to focus on the high-quality companies that may get bruised in this market, but can be relied upon to come out strong on the other side—something Jim Cramer spoke to earlier this week on "Mad Money." Working off of Cramer's commentary, we want members to not only think about the companies they own in this market but also how they should view this bout of volatility more broadly.
- Some use the terms risk and volatility interchangeably and if you're playing the options market or using margin debt (where a sharp declines can cause your options to expire worthless or the broker to sell the position out from under you in a "margin call") then it probably is appropriate to see volatility as being akin to risk.
- In fact, many of the measures we have to calculate risk-adjusted returns, such as the "Sharpe ratio" use volatility as a proxy for risk. However, that's not necessarily because volatility is risk, it's because for the most part, there is no universal quantitative way to measure real business risk. How do you measure the risk that a new competitor pops up or that consumer preferences change? That's why investing is as much an art as a science. Sure, we can list risks; but to actually quantify them in dollar or stock reaction terms is another story.
Given that, if you are a longer-term investor and focused, as we advise, on owning the stocks of the highest quality companies around—those that do things, make stuff and generate real cash-backed profits that they then return to you via dividends and buybacks—then you should not be likening volatility to risk but rather to opportunity. These are the markets in which longer-term opportunities arise.
- Risk in this framework—where stock selection is heavily based on the real underlying fundamentals and cash/earnings based valuations, not stories of maybe one day generating profits and momentum—is more about the permanent loss of capital than it is some more-than-likely temporary decline in the stock price.
- Remember, while the market may be freaking out about signals from the Fed for multiple rate hikes to try to tame inflation in 2022, starting as soon as March, the one constant we are hearing across earnings calls is that the consumer balance sheet is strong and demand is booming. Supply is the problem right now, not demand; supply is why portfolio name Apple (AAPL) didn't sell the record number of iPads the Street was looking for, not demand.
The best buys are not made when the stock price reflects the strength of a great business, they're made when the stock price and the underlying business become disconnected—like we saw with Club holding Microsoft (MSFT) on the earnings release before the call started—or with Apple, before the company blew investors away with record sales and an installed base of 1.8 billion devices.
So, as we navigate this volatile market, don't liken the volatility to risk but to opportunity, the opportunity to pick up the shares of high-quality companies while they are disconnected from the fundamentals.
- Here's a quick look at some of the broader market measures we like to keep watch: The U.S. dollar index was advanced to above the 97 level. Gold pulled back to the upper-$1,700s region. WTI crude prices were holding in the mid-$80s per barrel. The yield on the 10-year Treasury has increased to the 1.78% level, though it did break above 1.8% at one point during the week.
Earnings and the economy
We also got a few key macroeconomic updates to consider later in the week.
- New Home Sales: 811,000 vs 760,000 expected
- FOMC Meeting
- 4Q21 Gross Domestic Product (GDP): 6.5% annualized vs. 5.5% expected
- Weekly initial jobless claims: 260,000 vs. 265,000 estimate; four-week moving average for claims: 247,000 (+15,000 vs. prior week)
- Pending Home Sales MoM: -3.8% vs. -0.4% expected
- Personal Spending MoM: -0.6% vs. -0.6% expected
- Personal Income MoM: 0.3% vs. 0.5% expected
- Core PCE Price Index YoY: +4.9% vs +4.8% expected
What we're watching ahead
Fourth-quarter earnings continue next week. Within the portfolio, we will hear from United Parcel Service (UPS) on Tuesday, before the open; from Google-parent Alphabet (GOOGL), PayPal (PYPL) and Advanced Micro Devices (AMD) on Tuesday, after the close; from AbbVie (ABBV) on Wednesday, before the open; from Facebook-parent Meta Platforms (FB) and Wynn Resorts (WYNN) on Wednesday, after the close; from Eli Lilly (LLY) and Honeywell (HON) on Thursday, before the open; and from Amazon (AMZN), Ford (F) and NortonLifeLock (NLOK) on Thursday, after the close. As a reminder, we will provide our full analysis of every earnings report for the companies held in the portfolio.
Here are some other reports we will be watching.
- Open: Otis Worldwide (OTIS), Trane (TT), Atkore International (ATKR)
- Close: NXP Semi (NXPI), Sanmina (SANM), Kemper (KMPR), Axalta Coating Systems (AXTA), Cabot (CBT), Woodward (WWD), Fabrinet (FN), Cirrus Logic (CRUS),
- Open: Exxon (XOM), Imperial Oil (IMO), Enterprise Products (EPD), UBS (UBS), Manpower (MAN), Stanley Black & Decker (SWK), Sensata (ST), Pentair (PNR), PulteGroup (PHM)
- Close: Amcor (AMCR), Amdocs (DOX), General Motors (GM), MicroStrategy (MSTR), PerkinElmer (PKI), Starbucks (SBUX),
- Open: AmerisourceBergen (ABC), Marathon Petroleum (MPC), Humana (HUM), Novartis (NVS), Thermo Fisher (TMO), DR Horton (DHI), Emerson (EMR), Waste Management (WM), Capri Holdings (CPRI), Ferrari (RACE)
- Close: McKesson (MCK), T-Mobile (TMUS), MetLife (LET), Qualcomm (QCOM), Spotify (SPOT)
- Open: Shell (RDS), Cardinal Health (CAH), Cigna (CI), ConocoPhillips (COP), Merck (MRK), Arrow Electric (ARW), ABB (ABB), Nokia (NOK), Estee Lauder (EL), WestRock (WRK), Illinois Tool (ITW)
- Close: Activision Blizzard (ATVI), Apollo (AINV), Avantor (AVTR), Unity (U), SkyWorks, SWK), Clorox (CLX), Pinterest (PINS), Snap (SNAP)
- Open: Bristol-Myers (BMY), Sanofi (SNY), Eaton (ETN), Regeneron (REGN), Air Products (APD), Twist Bio (TWST)
On the macroeconomic front, we'll be keeping an eye on the geopolitical sphere as well as for the following releases (all times ET).
- 9:45 Chicago PMI
- 9:45 Markit PMI Manufacturing
- 10:00 Construction Spending
- 10:00 ISM Manufacturing
- 10:00 JOLTS — Job Openings and Labor Turnover Survey
- 8:15 ADP Employment Survey
- 8:30 Initial Claims
- 8:30 Unit Labor Costs
- 8:30 Productivity
- 9:45 PMI Composite
- 9:45 Markit PMI Services
- 10:00 Durable Orders
- 10:00 ISM Non-Manufacturing
- 8:30 Nonfarm Payrolls
(Jim Cramer's Charitable Trust is long AAPL, MSFT, BA, ABT, MA, NUE, DHR, CVX, UPS, GOOGL, AMD, ABBV, FB, WYNN, LLY, HON, AMZN, F and NLOK. 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.