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Inflation Comes in Lighter than Expected

The stock market rallied for the second day in a row, although it was a modest gain (+0.10). The S&P 500 is still a little below its 50-day moving average. Growth stocks had another good day today. Apple was up over 3%.

Transportation stocks continue to do very well. Shares of FedEx hit a new 52-week high. Amazon snapped a nine-day losing streak today. Over that time, the company lost $450 billion in market value.

In 2020, the stock market peaked on February 19th. That’s when Covid hit. In a little over one month, the S&P 500 lost one-third of its value. Last year, the market peaked again on February 19th. This time the S&P 500 lost 19% in just seven weeks.

I don’t know what to expect on this February 19, but I’ll note that Walmart is scheduled to report its earnings on the morning of February 19. In my opinion, WMT’s earnings report is probably a better gauge of consumer spending than a handful of government reports. The company averages about $1.3 million in revenue every minute of every day 24/7.

This morning, shares of Walmart hit a new 52-week high, but the shares later pulled back. By the closing bell, WMT was down 3.8% for the day. For this earnings report, Wall Street expects earnings of 73 cents per share. That’s up from 66 cents per share one year ago.

On Friday, the government released a very encouraging inflation report. According to the report, inflation in January was less than expected.

Over the last year, headline inflation increased by only 2.4%. That’s down 0.3% from the prior report. It’s also the lowest 12-month inflation number since last May. For the month, consumer prices rose by 0.3%. That was 0.1% less than expected.

Here’s a look at the recent 12-month inflation data:

If we exclude food and energy, then the core rate of inflation is running at 2.5% over the last 12 months. That’s the lowest 12-month core rate in nearly five years. For the month of January, core inflation was 0.3% which was in line with expectations.

We have moderating shelter costs to thank for most of the good inflation news.

Though the category accounted for much of the CPI gain, shelter costs rose just 0.2% for the month, bringing the annual increase down to 3%. Shelter makes up more than one-third of the CPI.

Elsewhere, food prices increased 0.2% as five of the six major grocery group categories posted gains. Energy fell 1.5% while vehicle prices also were muted, with new vehicles up just 0.1% and used cars and trucks falling 1.8%. Airline fares jumped 6.5% while egg prices fell 7% and are now down 34% over the past year after a meteoric surge.

What does this mean for the Fed and interest rates? In the short-term, probably nothing. Traders see a very small likelihood that the Fed will lower rates in March or April. After that, there seems to be a growing consensus that the Fed will start cutting again at the June meeting. Of course, this would be after Jerome Powell heads out of town.

The Fed’s job is to aim for low inflation and full employment. The first part doesn’t concern me so much, but the second part does. Last week’s jobs report wasn’t bad, but we can’t escape the fact that the economy has only averaged a gain of 15,000 new jobs per month. That’s not going to cut it.

Let me add a few cautionary notes to this data. The partial government shutdown may have impacted some of the recent data. We also haven’t seen the full impact of the tariffs just yet. We also haven’t seen the inflation that many economists had expected but that could be waiting for us in a few months. Also, used car prices were a big drag on headline prices. Additionally, prices for services like airline tickets remain high.

On Friday, we’re finally going to get the Q4 GDP report, and some folks are expecting good news. The report had been delayed for several months. The GDP report, along with other reports, is creating a “data deluge” that markets are watching closely.

The consensus on Wall Street is for Q4 GDP growth of 2.8% to 3%. Please note that that’s the annualized inflation-adjusted figure. For Q3, the economy grew by 4.4%.

The New York Fed’s Staff Nowcast pegs Q4 growth at 2.7%, with a 50% chance of it coming in between 1.6% and 4.0%. The Atlanta Fed’s GDPNow model currently expects Q4 GDP growth of 3.7%.

One of the big questions I have is how strong was consumer spending. I sense that consumer spending slowed down some as we headed into the holiday shopping season.

We’re starting to head towards the back end of earnings season, and overall, this has been a very good earnings season for Wall Street. So far, 74% of companies have reported earnings, and of those, 74% have topped Wall Street’s earnings forecasts.

That “beat rate” largely aligns with the average beat rate of 76% over the last 10 years. Earlier in the earnings season, the beat rate was running a little higher.

The year-over-year earnings growth rate is currently running between 13.2% and 13.6% which is quite good. Another 57 companies are due to report this week, so these numbers are subject to chance. The important takeaway is that Corporate America is still profitable despite issues like tariffs and the government shutdown.

For Q1, Wall Street currently expects earnings growth of 11.1%, and revenue growth of 8.7%. If there are any cracks in the economy, businesses aren’t showing it.

Stock Focus: Church & Dwight

One stock I love to follow is Church & Dwight (CHD). Sure, it’s a little boring, but you really can’t go wrong with condoms and baking soda. The company owns several household products brands.

CHD is one of those stocks that’s rarely mentioned even though it’s been a massive winner over the years. Since 1996, CHD is up about 85-fold. That’s an average of 16% per year, and it’s lapped the S&P 500 (in green) several times.

Again, there’s nothing fancy here. These are the folks who make OxiClean.

Lately, however, CHD hasn’t been that great of a stock. Today it trades about 10% above its 2020 peak (cleaning product companies rallied strongly during the earlier days of Covid). Last year, was not a good one for CHD. The stock lost about 25% from its March high to its October low. To be fair, a lot of defensive stocks did not do well.

Since the start of this year, Church & Dwight has been in rally mode. The shares are already up 20% this year. CHD went from being a stock that could do nothing right to one that could do nothing wrong.

In January, CHD reported Q4 earnings of 86 cents per share. That beat estimates by two cents per share. For the year, CHD made $3.53 per share. The stock rallied 6% over two days following the report.

CHD also bumped up its dividend by 4%. This is the 30th year in a row that CHD has increased its dividend.

The company also said it expects to see earnings growth for 2026 of 5% to 8%. That works out to earnings of $3.71 to $3.81 per share. Assuming that’s accurate, that gives the stock an earnings multiple of 26 to 27.

As much as I like Church & Dwight, I’d prefer to see it at a better price. Say $85 to $90. Still, this is one to keep an eye on.

That’s all for now. We still have lots more earnings this week. The Q4 GDP report will finally be out on Friday. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

On Friday, the Dow Jones Industrial Average closed above 50,000 for the first time in its history. This comes almost 70 years to the day from when the Dow first breeched 500. In other words, the Dow has risen 100-fold in nearly 70 years. That works out to an average gain of 6.8% per year, or 1% every eight weeks, and that doesn’t include dividends.

As impressive as that sounds, the Dow has actually been the laggard in recent years. The Dow’s holding of mega-cap tech isn’t quite as hefty as the overall market’s weighting. The Dow currently holds Amazon, Nvidia, Microsoft and Apple.

An important fact here is that the Dow is price-weighted which means the index is calculated by adding up the prices of the 30 stocks and adjusting by a divisor. Roughly speaking, each dollar move in a Dow stock is worth about 6.16 points in the Dow. How large the company is doesn’t matter. Of the four mega-cap stocks I just mentioned, only Microsoft is ranked among the top 12 in the Dow going by price weighting.

In the chart below, you can really see how badly the Dow (in blue) has lagged the S&P 500 (red). If the Dow had merely kept pace with the S&P 500 over the last eight years, the index would be around 63,000 today instead of 50,000.

Right about the time the Dow was breaking 500, the index made its first change in 17 years. In 1956, International Paper was added and Loews Theaters was dropped. Before that, we’d have to go back to 1939 when Nash Motors and IBM were dropped.

The dropping of IBM was a huge mistake, and it completely altered the Dow’s history. All the major milestones would have come years earlier. IBM was added back to the Dow in 1979. Over those 40 years, shares of IBM soared 22,000%.

The Market’s Inflation-Adjusted Peak

Speaking of Wall Street history, yesterday was an important, and largely overlooked, anniversary for Wall Street. Yesterday marked the 60th anniversary of the stock market’s inflation-adjusted peak.

Some explanation is needed. On February 9, 1966, the S&P 500 closed at 94.06. Going by nominal terms, the S&P 500 passed that high as early as 1967. By 1968, the S&P 500 traded over 100, but after adjusting for inflation, the market was in a tailspin that lasted for several years.

Here’s a look at the inflation-adjusted S&P for nearly the entire 20th century. I got this data from Robert Shiller’s data library. To make it easier to read, I set February 1966 to 100.

By 1982, the S&P 500 was down more than 60% from its peak sixteen years prior. Think about that! As late as October 1992, the market was still trading below its inflation-adjusted peak from 26 years before.

The key lesson from this data is how dangerous inflation is to the stock market. Inflation is a tax on capital. When inflation appears, bonds quickly lose value, and stocks fall as well to keep pace with fixed-income investments. From 1966 to 1982, inflation in the United States tripled. That took a huge toll on financial markets.

Inflation was finally cured by the Fed in the 1980s, but it took a brutal recession to slay the beast. Once that was out of the way, the stock market soared. From a long-term perspective, stocks weren’t really climbing as much as they were making back a lot of lost ground.

Here’s a chart looking at stocks and inflation from the early part of this decade. Notice that a sharp rise in inflation (the red line, left scale) sparked a big loss in stocks (the blue line, right scale). Again, stocks hate inflation.

IES Teaches Us a Good Investing Lesson

One of the lessons I stress to investors, especially newer investors, is how irrational the stock market can be. Warren Buffett once said, “If markets were rational, I’d be waiting tables for a living.”

From a distance, the stock market can appear to be rational. It has all these numbers, and all these experts giving their expertise on all sorts of things. But in the short-term, it’s pure chaos. No one likes to admit that, but it’s true.

We got a good lesson in the market’s behavior recently with one of our Buy List stocks.

On January 30, IES Holdings, Inc. (IESC) released its fiscal-Q1 earnings report. This was for the three months ending in December. IES has been a great stock for us. I added it to the Buy List last year, and it gained over 90% for us in 2025. I especially like IES because it’s virtually unfollowed by any Wall Street analysts.

I decided to keep the stock on the 2026 Buy List as well. IES is having another solid year for us. By January 30, IES was a 22% winner for us. That’s not bad for less than one month’s work.

According to the earnings report, IES’s quarterly revenues rose 16% to $871 million, and operating income was up 31% to $97.7 million. Diluted adjusted EPS attributable to common stockholders was up 40% to $3.71. With so little analyst coverage, there’s no real consensus to speak of.

At the end of the quarter, IES had a backlog of $2.6 billion. The company ended the quarter with $88.8 million in cash, no debt, and $169.9 million in marketable securities.

IESC has four reporting segments. Communications’ revenue grew 51% to $351 million. Residential was down 11% to $284 million. Infrastructure Solutions had 30% revenue growth to $140 million. Commercial & Industrial was up 7% to $95 million.

You would think this was good news. Not so. Once trading opened on Friday, January 30, shares of IES got absolutely clobbered. Whatever the expectations were, IES quite obviously didn’t meet them. By the end of trading, shares of IES were down 20% on the day. Ouch!

I thought the drop was extreme, but it’s hard to argue with a mob. Did they even look at the earnings report? It said nothing that should have been a surprise.

Now here’s the odd part. Since IES reached its low, the stock has been in a blistering rally. Over the last seven trading days, IESC has gained more than 31%. It’s made up everything it lost and then some. IESC is now a 28% winner on the year. The stock reached another new all-time high in today’s trading.

I don’t get it. We made a tidy profit, and we didn’t do anything except not panic. This is a good reminder of why it pays to ignore the market’s short-term bumps and bruises.

Tomorrow’s Jobs Report

Earlier today we got the delayed retail sales report for December. The Commerce Department said that retail sales were flat during the month of December. Economists had expected an increase of 0.4%. Excluding autos, sales also were unchanged compared to the estimate for a 0.3% increase. That comes on top of a 0.6% increase for November.

We’re getting several excuses for the poor report including inflation, tariffs and the weather. For the year, retail sales were up by 2.4%. That’s a little bit below the rate of inflation. Not including autos, sales were up 3.3% over the last 12 months.

Miscellaneous retailers and furniture stores posted declines of 0.9%, while clothing and accessories stores were off 0.7%, and electronics and appliances saw a drop of 0.4%. Online outlets sales rose just 0.1%, while building materials and garden centers saw the strongest gain, up 1.2%.

I need to apologize for an error. In last week’s issue, I said the January jobs report was coming out on Friday. That was incorrect. The report is due out tomorrow. My apologies. In my defense, the government shutdown screwed up many of these reporting dates.

For tomorrow, Wall Street expects to see a gain of 55,000 new jobs for January. The last few reports haven’t been that strong. I think a disappointing report could upset the market. Wall Street expects the unemployment rate to stay at 4.4%.

My biggest concern is average hourly earnings. For January, Wall Street expects to see a gain of 0.3%. Wage growth is running ahead of inflation but not by much.

A big question for tomorrow’s jobs report is that the annual revisions are also due out. There’s a good chance that the numbers will show that the labor market is doing a lot worse than originally thought.

As it looks right now, the Fed under Jerome Powell won’t touch interest rates again. We may have to wait until June, and a new Fed chair, for the central bank to cut rates again.

That’s all for now. Expect more earnings news this week. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

Trump Selects Kevin Warsh to Lead the Fed

One week ago, the S&P 500 closed at a new all-time high. Since then, the index broke above 7,000, but it hasn’t been able to close above that level.

In last week’s issue, I mentioned the big bull market in silver. Well, that came to an abrupt end on Friday as the price of silver plunged on world markets.

By the end of Friday’s trading, silver had lost 27%. That was the white metal’s biggest one-day loss in 45 years. Silver dropped again on Monday. Last week, silver got as high as $120 an ounce, then as low as $71 an ounce. Gold dropped sharply as well.

So what caused gold and silver to fall off a cliff? On Friday, President Trump nominated Kevin Warsh to be the next chairman of the Federal Reserve. He’s seen as a more “hawkish” candidate than what had been expected. Gold and silver love lower interest rates, but higher rates are their kryptonite.

In many ways, the selection of Warsh is both a conventional choice and a very unconventional choice. Warsh is largely within the mainstream of economic thought. Plus, he’s already served on the Federal Reserve board. In fact, he was the youngest member in the Fed’s history, and he helped shape the Fed’s response to the financial crisis. Warsh is currently a senior fellow at the Hoover Institution at Stanford.

Warsh still needs to be confirmed by the Senate but that shouldn’t be a major obstacle, and the betting markets appear to agree. If confirmed, Warsh would be leading a Fed that’s at an important juncture. Jerome Powell has been harshly criticized by President Trump who wants to see much lower interest rates. While inflation has subsided in recent months, it’s still above the Fed’s target of 2%. Jerome Powell’s term ends in May.

Warsh will likely face some doubts from members of Congress as to his independence from political pressure. Historically, the Fed has tried to distance itself from political pressures, but these efforts have not always been successful.

Of course, the Fed is also facing an investigation by the Justice Department for actions surrounding the Fed’s new building. I suspect this won’t get far. Thom Tillis, a Republican senator of North Carolina, said he wouldn’t support any nominee until the DOJ’s investigation has concluded.

For much of his career, Warsh was been seen as an inflation hawk, meaning someone who has favored higher interest rates. That probably helped cause the big drop in gold and silver. Only recently has Warsh been critical of higher rates. He has also said that tariffs will not lead to higher inflation.

On Truth Social, President Trump said of Warsh, “He will go down as one of the GREAT Fed Chairmen, maybe the best.” Bear in mind that we don’t get new Fed Chairs very often. In the last 75 years, there have only been eight Fed chairs.

President Trump has often said that he wanted to fire Jerome Powell, but that’s a tricky area legally. The president probably can’t fire a Fed chair over a simple policy dispute. In fact, the Supreme Court is currently looking at the case of Lisa Cook, a Fed governor, whom Trump wanted to fire from the Fed. The Supreme Court appears to be leaning against Trump’s decision.

We should also remember that the Federal Reserve isn’t just one person. The Federal Open Market Committee, which sets interest rate policy, is a 19-member committee. Even with that, only 12 members are voting members. The 12 are composed of the seven Federal Reserve board members plus five regional bank presidents. The head of the New York Fed is a permanent member, and the four other seats rotate.

The Fed recently voted to keep interest rates between 3.5% and 3.75%. Two members dissented. They wanted lower rates immediately. Futures traders currently expect the Fed to cut rates two more times this year.

Mr. Warsh has been very critical of the Fed in recent years. In particular, he blames the Fed for missing the surge in inflation during Covid. He was also against the Fed’s quantitative easing policies.

Now here’s where things get interesting. Warsh’s father-in-law is Ronald Lauder who is an heir to the Estee Lauder fortune. Lauder is estimated to be worth $5 billion. He’s been a big supporter of President Trump and a major financial backer of Republican candidates. In 1989, he ran for mayor of New York City but lost in the primary to Rudy Giuliani. It’s been reported that he encouraged Donald Trump to buy Greenland. Obviously, Warsh can’t be assumed to share his father-in-law’s views, but I’m sure Congress will ask him.

I expect Warsh to be confirmed by the Senate and he will generally try to steer the Fed toward lowering interest rates, but Warsh may not always get his way. Historically, reality has an odd way of interfering with the bold plans of money politics.

Speaking of which, my friend Gary Alexander notes that this time of year has been notable for several important events in the history of gold, silver and money. Here’s a sample:

At 9:30 on February 5, 1894, J.P. Morgan stormed into President Cleveland’s White House office and demanded an audience. After cooling his heels while Cleveland called the Treasury for details on what this invasion might mean, Morgan was ushered in. By now, the U.S. only had $9-million in gold to meet claims, and there were $12-million in current drafts against a shrinking supply, so President Cleveland sheepishly asked Morgan, “Well, sir, what would you suggest?” This comment passed the power of the purse from the White House to Morgan and Wall Street. In short order, Morgan saved the Treasury with an infusion of gold from London. From 1895 to his death in 1913, Morgan served as America’s central banker – and he did a better job than the Federal Reserve did in its first 20-years, from 1913 to 1933.

This Friday, the government will release the January jobs report. The last few job reports haven’t been that good. In its last policy statement, the Fed noted that “job gains have remained low, and the unemployment rate has shown some signs of stabilization.”

The ADP payroll report is due out tomorrow. For that report, Wall Street expects to see a gain of 45,000 jobs. For Friday, economists estimate that the economy created 60,000 net new jobs in January. They’re also pegging the unemployment rate at 4.4%.

For hourly average earnings, economists expect to see a gain of 0.3% for last month, and a 3.7% gain for the last 12 months. This is an important stat. Wage growth has a way of quickly becoming business revenue and that becomes a profit. If employment continues to be weak, that may help the interest rate doves on the FOMC.

This continues to be a good earnings season for Wall Street. The S&P 500 is on pace to post earnings growth of 11.9% for Q4. If this holds up, it will be the fifth quarter in a row that the index has delivered a double-digit increase in profits. The last time it reported five straight quarters of 10% or more earnings growth was in 2017 and 2018. Analysts currently expect the S&P 500 to have double-digit earnings growth for all four quarters of 2026.

Analysts have been busy raising their Q4 earnings estimates. At the end of Q3, Wall Street had been expecting earnings growth for Q4 of just 7.2%. By the end of Q4, that forecast was raised to 8.34%. Now it’s at 11.9%. For the tech sector, Q4 earnings growth is tracking at 29.8%.

The overall net profit margin is currently running at 13.2%. That’s very high. If it holds, it will stand as the highest profit margin since FactSet started tracking this data in 2009. The current record is 13.1% which happened last quarter.

Technology has increased its profit margin from 26.8% last year to 29.0% this year. Industrials are up to 12.5% from 10.7% last year. Wall Street expects to see profit margins get even higher. By Q3, analysts expect profits to be over 14%.

That’s all for now. Expect more earnings news this week. We also have the big jobs report on Friday. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. From S&P Global Intelligence: Over the past 59 years, the median combined final score of the Super Bowl has been 47 points. When the two teams score 47 or more points, the S&P 500 posts an average return of +17.8%. When the combined score is less than 47 points, the average return is only +6.6%.

Go offense!