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Here’s a summary of this week’s tough market and what lies ahead

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Here’s a summary of this week’s tough market and what lies ahead

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Jim Cramer on CNBC’s Halftime Report.

Scott Mlyn | CNBC

Markets ended the week lower as investors tried to ‘seize’ (find an appropriate level of valuation in the face of higher rates) the potential for four Federal Reserve interest rate hikes by the end of the week. of the year.

Last week we discussed what this means for investors using discounted cash flow models – arguably the most diligent way to determine a company’s intrinsic value – so this week let’s look at multiples of valuation, which are also used to determine the “terminal value” in a discounted cash flow (DCF) model.

Generally, investors looking more at the short to medium term (6-18 months) will be looking at a company’s price versus earnings, with the multiple being placed on a company’s short-term earnings. For example, Apple (AAPL) is expected to earn $5.76 per share this fiscal year. So, at a price of $172, the shares are trading at just under 30 times earnings.

However, similar to revaluing the discount rate in a DCF model when rates rise, investors must also revalue valuation multiples. That’s exactly what we’ve seen unfold this week, particularly among top performers and especially among names that don’t even have profits and are therefore trading on sell-based multiples.

This is what you mean when investors mention the “multiple contraction”, when interest rates rise (or are expected to rise), investors value companies using a lower valuation multiple. This is also crucial to understand because when a revaluation occurs, we often cannot look back to recent highs, especially in the high flyers, as the environment has changed and the market may simply not want to retrace the highs. multiples applied in the lower ones. pricing environment. This is also why value (lower multiple names) tends to be favored as rates rise. Value stocks usually already have low multiples, which makes the risk of a contraction less of a problem.

Finally, another term you will often hear in this market is GARP or growth at a reasonable price. This is the term used for names that offer a good mix of growth and value and can therefore hold up better when the sell-off hits the highs, while providing exposure to the underlying business growth.

With that in mind, although we certainly like GARP-like names, and indeed mega-cap tech names such as Microsoft (MSFT), Google-parent Alphabet (GOOGL), and Facebook-parent Meta Platforms (FB) arguably all fall into this category given their multiple price/earnings from mid-twenties to early thirties combined with high expected growth rates from teenage to 20%, we reiterate once again that we want above all stocks of companies that “make things and do things” because in that market earnings and cash flow are the most attractive attributes of any business, not sales growth as was the case in 2020 and in early 2021, when the Fed was as dovish as possible.

Here’s a quick look at some of the broader market metrics we like to keep an eye on: The US Dollar Index retreated slightly to just above the 95 level. Gold was roughly flat on the week , trading around the $1,800 level. WTI crude prices firmed in the low $80 per barrel zone. The yield on the 10-year Treasury bill was holding at around 1.76%.

Within the portfolio, we received earnings from Wells Fargo (WFC) on Friday before the opening bell. In addition to earnings, we received several key macro updates this week.

Wednesday

  • Consumer Price Index for December (headline MoM CPI: +0.5% vs. +0.4% estimate; Core CPI YoY: +5.5% vs. 5.4% estimate)

Thusday

  • Initial weekly jobless claims: 230,000 against 200,000 estimate; four-week moving average for complaints: 210,750 (+6,250 from the previous week)
  • Producer Price Index for December (Overall MoM PPI: +0.2% vs. +0.4% estimate; Core PPI YoY: +6.9% vs. 6.9% estimate)

Friday

  • December retail sales (overall MoM sales: -1.9% vs -0.1% estimate; retail sales excluding Auto & Gas MoM: -2.5% vs -0.2% estimate)
  • Industrial production and capacity utilization for December (MoM production: -0.1% vs. +0.2% estimate; capacity: MoM 76.5% vs. 77.0% estimate

What we look ahead

Fourth-quarter earnings resume next week. Within the portfolio, we will hear Morgan Stanley (MS) on Wednesday before the opening bell, and Union Pacific (UNP) on Thursday before the opening bell. As a reminder, we will provide our full analysis of each report on the results of the companies held in the portfolio. Here are some other reports we’ll be watching. The stock market is closed on Mondays for Martin Luther King Jr. Day.

Tuesday

  • Open: Goldman Sachs (GS), Truist (TFC), PNC (PNC), Charles Schwab (SCHW), BNY Mellon (BK), Signature Bank (SBNY), Old National Bancorp (ONB), Silvergate Capital (SI)
  • Close: JB Hunt (JBHT), Interactive Brokers (IBKR), Pinnacle Finl (PNFP), Hancock Whitney (HWC), Fulton Fincl (FULT)

Wednesday

  • Open: United Health (UNH), Bank of America (BAC), Proctor & Gamble (PG), US Bancorp (USB), ASML (ASML), State Street (STT), Citizens Financial Group (CFG), Fastenal (FAST) , Prologis (PLD), Comerica (CMA)
  • Close: United Airlines (UAL), Kinder Morgan (KMI), Alcoa (AA), Discover Financial (DFS), HB Fuller (FUL), Wintrust Fin (WTFC)

Thusday

  • Open: American Airlines (AAL), Travelers (TRV), Baker Hughes (BKR), Fifth Third (FITB), KeyCorp (KEY), Northern Turst (NTRS), Regions Fincl (RF), M&T Bank (MTB), First Horizon (NHF)
  • Close: Netflix (NFLX), PPG Industries (PPG), CSX (CSX), Intuitive Surgical (ISRG), SVB Financial Group (SIVB), Bank OZK (OZK)

Friday

  • Open: Schlumberger (SLB), Ally Financial (ALLY), Huntington Banc (HBAN), HIS Markit (INFO), First Hawaiian (FHB)

On the macro side, we’ll be keeping an eye on the geopolitical sphere as well as for upcoming releases (all-time ET).

Tuesday

  • 8:30 a.m. Empire State Index
  • 10 a.m. NAHB Housing Market Index

Wednesday

  • 8:30 a.m. Start of housing
  • 8:30 a.m. Building permit

Thusday

  • 8:30 a.m. Weekly jobless claims
  • 8:30 a.m. Philadelphia Fed Index
  • 10 a.m. Existing home sales

Friday

  • 10:00 a.m. Leading indicators

The CNBC Investing Club is now the official seat of my Charitable Trust. It’s where you can see every move we make for the portfolio and get my view of the market before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

As a CNBC Investing Club Subscriber with Jim Cramer, you will receive a Trade Alert before Jim completes 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 mentioned a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for investment disclaimer.

(Jim Cramer’s Charitable Trust is long AAPL, MSFT, GOOGL, FB and WFC.)

Here’s a summary of this week’s tough market and what lies ahead

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