VIDEO: How the Latest Retail Sales Data Supports This Holding

In today’s Daily Rundown, Chris Versace explains what Fed Chair Powell said on Thursday and why it is leading the market to recalibrate rate cut expectations and focus on upcoming economic data. 

"Rather than being overly focused on December, I think we need to think about the Fed's larger move with policy," he says. "At its current level, the Fed feels that monetary policy feels restrictive."

Chris also discusses why we’re watching the dollar and breaks down Friday's October Retail Sales, explaining why it’s supportive for several of our holdings, especially Costco COST. 

Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here, Friday, November 15, closing out the week. And we're doing so very differently than we did last week. As coming into this week, we were concerned about what we might see in the October inflation data and Fed Chair Powell's comments in response, and the fact that they could potentially throw some cold water on the postmarket election rally. And that, my friends, is exactly what we saw Thursday afternoon after Powell's comments were had, and we're seeing it again this morning.

So what did Powell say? Very simply, the Fed is not in a hurry to cut interest rates. And he also shared that when looking at the economy, it says that there's no need for the Fed to be in a hurry.

Now, we're not surprised by that, given what we have been talking about with you when it comes to the economy, but also what we saw in the October CPI and October PPI data that came out Wednesday and Thursday morning. Both showed, at a minimum, inflation remains sticky, but it also showed that it's candidly not moving in the right direction relative to the Fed's 2% target. And while Powell's language during the presentation we would say was a little more cautious, he did, as we suspected, stick to the script. The Fed will remain data dependent. There is no predetermined path, and they will move policy over time.

Remember that despite what we saw in the October inflation data out this week, the expectations by the market for the Fed to continue to cut rates in December ticked a little bit higher. Obviously, now that we have Powell's comments in mind, those sobering comments, those expectations have faded. And that helps explain what we're seeing in the marketplace today.

Our thinking continues to be that we have a smattering of data coming, and we outline that in our October CPI comments. So once again, we are back in what we would call a familiar ground, assessing the incoming data. And as we do, we will revisit near term rate cut prospects and position, or in some cases, if we need to, reposition the portfolio as needed.

But as we step back, I think rather than being overly focused on December, I think we need to think about the Fed's larger move with policy, this recalibration, because as Powell pointed out yesterday and he said last week, at its current level, the Fed feels that monetary policy remains restrictive. So this really is going to boil down to what is the cadence of additional Fed rate cuts. We've been talking about this, and now, obviously, the fresh data says it might be a little slower than what people were thinking.

And that's kind of where we are. We do expect the Fed to move prudently but over the longer term, get policy out of restrictive status into more neutral footing. So this to us suggests that over the next several quarters, we will continue to see rate cuts, just not as fast as the market had been expecting them.

And again, as new information becomes available, whether it's the upcoming economic data that we laid out for you or we understand a little bit better what President-elect Trump's policies will be, especially now that it does appear he has a red sweep in hand, we'll have to revisit our expectations for those rate cuts. But it also means we'll be revisiting, as the market readjusts its expectations, we'll be revisiting our shopping list for the portfolio. And early next week, we will be sharing some updated thoughts in a nice table form for folks to look at.

But I will say this. We are watching a number of positions rather closely, including shares of Universal Display. If you missed our alert on Thursday afternoon, I would suggest that you take a look at it. You'll understand what our thinking is and what we're inclined to do with that position. I will say this, it is not exiting the position. If anything, given the dramatic drop and the fact that the shares are oversold, we are either going to be inclined to continue to hold or potentially pick up more. But again, far more is explained in that alert.

Moving on, as we think about the impact of slower rate cuts, we have seen the dollar move significantly higher since the start of the current quarter. And as we see that and we think about the second half of the quarter, it means that we might have to rethink some of our positions that have significant international exposure. Case in point, PepsiCo, which gets about 40% of its sales from outside the US. And the issue here is that given the move in the dollar, if it stays where it is, we could see some currency translation and pricing headwinds. So we're going to continue to watch the dollar and be mindful of what we hear about currency translation and other currency related headwinds when companies over the next couple of weeks, like Deere and others that have meaningful exposure outside the US.

I also want to talk quickly about retail sales. We got the October report this morning, and the headline figures were, yes, ahead of the market expectations, which tells us that consumers continue to spend, which is, of course, good for our position in Mastercard. But when we back out gas and auto, we did see more subdued spending compared to September, at least on a month over month basis.

But as you know, our preferred way of assessing the retail sales report is to look at on a year over year basis. And from that vantage point, retail and food service sales rose 2.8% year over year in October. That's a faster pace than what we saw over the preceding three months. That tells us that people are indeed spending more than they were in September, spending more than they did in August. And the same is true when we take a look at the pure retail figure. It was up 2.6% year over year in October versus 2% for the trailing three month period, again, on a year over year basis.

So where are folks spending? Well, nonstore retailers. No surprise. We talked about this with Amazon's Prime Big deal day in October and the competing efforts. That made the nonstore retail sales category one of the strongest in the report. But again, no major surprise.

Other areas that were strong, clothing, grocery stores, general merchandise, and food service all were stronger on a year over year basis compared to August and September. We see that as good for our shares of, obviously, Amazon, but PepsiCo as well. We talked about Mastercard, but of course, Costco. Remember, when Costco reported its adjusted September and October sales, it significantly outperformed what we saw in the September retail sales data. And here, again, in the October retail sales data simply confirms to us Costco continues to pick up incremental consumer wallet share. And that means we will be revisiting our Costco price target. We'll be doing that later today.

We will also later this morning, later today, have our thoughts on quarterly results and guidance from Applied Materials. So the shares are trading off. We're going to have some updated thoughts. Please be sure to look out for that alert as well. So coming up today, you already saw that we bumped up our Mastercard price target a little bit. We also explained why some of the price targets that have been reset earlier this week from others on Wall Street might be a little aggressive. But we will have comments on Costco and our price target, as well as thoughts on Applied Materials.

So please be sure to check your alerts throughout the day. And of course, we will have our weekly roundup out this afternoon, early evening. If you've got any questions, see you in the forum. Thanks for watching. Have a wonderful weekend. And we'll be back here with you on Monday.

At the time of publication, TheStreet Pro Portfolio was long COST.