VIDEO: Why We're Playing Chess, Not Checkers This Week

The Daily Rundown video returns with Chris Versace discussing the forces that pulled together late last week to erase the market’s February gains and to share a look at this week’s roadmap. 

As Chris explains, knowing the data and earnings reports to come, we’ll want to play chess, not checkers. And that means recognizing that the market will be facing data points about the impact of tariffs and sticky inflation. That also means uncertainty will remain in the air, and Chris explains why that means we will continue to tread carefully ahead of next week’s wave of February data and retailer earnings.

Transcript

CHRIS VERSACE: Hey everyone, Chris Versace here-- Monday, February 24th. First, right off the bat, thank you so much everyone for all the well wishes. As you can see, I am finally on the mend. Let's get to today's video.

On Mondays videos, we'd like to talk about our roadmap for the week, but it's important this time around that we discuss kind of what happened at the end of last week. We had a couple of factors that really weighed on the market. It started with Walmart soft guidance that served as a fresh warning about consumers. But remember, too, that the company said it didn't really bake in a lot of incremental impact for potential tariffs, tariff increases. So that was kind of a warning light.

Granted, I would argue that the comments, we heard from Booking.com-- good for our position in American Express-- kind of counterbalance that they had double-digit booking gains. But as I see it, it's just a reminder that folks continue to remain selective, pulling back where they can, spending on what they want. From our perspective, still keeps us very bullish long-term on Costco, Amazon, and, of course, American Express.

But there were some other data points that we got that sent other warning flags out. I'm talking specifically about the flash February PMI that showed a tumble in the service sector. Manufacturing improved. But remember, the service sector is 80%, 85% of GDP. So when we see that slowing and new order growth in that slowing, that kind of tells us the economy is slowing down.

And when we pierced that report, we did see concerns about inflation. We did see concerns about the potential impact of tariffs, companies kind of pulling back, retrenching a little bit. My comment was this is a little bit of a warning sign. We're going to want to see more on the follow-through. And I'll talk about that, and what we'll be looking for in a couple of moments.

But the other report that came out was the consumer inflation expectations report for February that jumped considerably higher compared to January, both on a near-term front but also on a longer-term outlook for inflation expectations. Not something the market wants to see, not something the Fed wants to see. So that three-fold combination really weighed on the market. As we saw, it started on Thursday and really accelerated on Friday as those other data points came, effectively wiping out gains that the market registered earlier this month.

Now, we've got a couple days to go. We've got a lot of data coming. My message to you is that, yes, as we sit here today following what happened Thursday, Friday, the market does look like it's going to rebound. Of course, it would, right? This is what we tend to see. It tries to find its footing.

But the question we have to ask ourselves, is it a pronounced sustainable rebound? Or is it a dead cat bounce? My concern is that we do have a number of factors still in play. I mean, as we think about it, the tariffs that we've seen and the tariff language, questions around the scope, the timing and the overall impact, those factors still remain. Last week, we only started to really see the potential impact in some of the data and the comments. So I do think that we're going to be getting more of that.

Remember, too, that as we move into next week, we're going to start to see a wide swath of retailers report. Odds are we're going to hear much more about the impact of China's reciprocal tariffs on their business and, of course, more comments about the consumer. I think that, two, thing we have to think about here is we don't want to react as best we can day-to-day with the market because the market can do that as it tries to find its footing, especially when there's a lot of uncertainty in the air.

My suggestion is let us consider-- instead of playing checkers where most people are thinking one move ahead, let's try to stick to the game of chess and figure out, OK, what's coming? What do we need to see? What do we want to pay attention to? What's the potential impact? How might the market react to this so we can position ourselves on much better footing?

Do I think that we will get some opportunities as the market digests some of the things that are coming at it? I do. But as I said, there's a lot of uncertainty in the air, and we're going to want to be careful. Let us tread carefully.

We will look for opportunities. And I do think we'll get some. But let's not just do something, as they say, to do something. Let's be smart about what we're going to do.

And with that, I want to discuss the things that are coming at us this week that we'll be paying attention to that could influence not only the market but could influence some of what we may do. So in terms of economic data, this week, we will get the February consumer confidence figures. We are going to want to see any impact about consumers, what they're thinking about inflation and tariffs-- kind of a follow-up to some of the data we saw last week.

We'll also get the January durable orders-- arguably, at this point, a little backward-looking. We will also get the January personal income and spending data. That's going to give us another look at wages, which have been trending higher but also a more detailed look at spending.

I suspect that this granular look is going to reaffirm the notion that folks are cutting back where they can, but spending where they want to. Again, more of this careful, cautious consumer. But I will also say, just remember, out of the gate, that the January retail sales report did disappoint. And the consumer credit debt levels that we're seeing are at higher levels. So I wouldn't be surprised if some of the data that we see in the January spending report, personal spending report, is a little concerning for, let's say, mainstream retailers.

Also later in the week, we get the January PCE price index. We will, of course be focusing in on the core figure. And here's the deal-- following a string of January data points that pointed to little progress on inflation and last week's flash February PMI that showed more of the same. Yeah, the market is still going to be looking for a modest tick lower in the Fed's favorite inflation indicator. It's looking for a modest dip from the 2.8% that it's been hovering around for the last three months.

But again, when we look back at the data Yeah the market might be expecting it. But I would suspect that the probability of us actually getting a lower year over year figure, that's going to be a little bit lower. But again, given where we are in the data cycle, that's January data. And we're on the cusp of getting a lot of fresh February data, especially next week.

What do I mean? Well, we'll get the final February PMIs. That's going to give us a lot more insight about the trajectory of the economy, job creation, and, of course, inflation pressures. Next week is also going to bring the ADP February employment report, as well as the February employment report.

So I would argue that a lot of the data that we've gotten about January is already kind of baked into expectations. It's the Fed coming February data that is going to matter much, much more. If that data next week shows or confirms, I should say, what we saw in the February PMI report of a slowing economy, sticky inflation, well, my friends, that is a recipe for market indigestion. So we'll want to make sure that we're carefully positioned for those for that ahead of time-- reading the tea leaves.

Now, we also have a bunch of earnings reports coming out this week from the market's perspective, some big ones. And one that is very big for us as well-- yes, I'm talking about NVIDIA. That comes after the close on Wednesday. We will have some setup comments ahead of that.

Thursday, we have elastic. But also some other reports we'll be focusing in on-- Home Depot, Bullpen Resident, Axon, which has pulled back rather considerably-- we'll have some thoughts on that-- Salesforce and what are they saying about AI adoption. We have Dell. We have HP as well.

From our perspective, we're going to want to be paying very close attention to what they say about the AI PC market, the number of models they'll be bringing to market over the coming months. That of course, all ties back to our position in Qualcomm.

There are a couple of other items of note happening this week. Apple on Tuesday will have its annual meeting, so we'll be looking to see if there's anything noteworthy out of that. Wednesday, Amazon has a product event. And they're widely expected to infuse an updated set of AI into some of their products, really improving their Alexa service. And then there are a couple of different investor days this week-- PayPal, 3M

So all in all, maybe not a lot of fresh data on the economic front, but there will be some important earnings for us and for the market as well as some other events. So it's going to be a busy week with that.

I would just say a couple of things. One, please be sure to check your emails, your alerts. We want to make sure you're getting our latest thoughts. And if we make any moves with the portfolio, as you know, we want you right there with us. I'd also share that coming up today, we are going to share a refreshed shopping list and an updated table of consensus, earnings expectations, and potential pickup points for existing portfolio positions. So again, be sure to check your emails, your alerts.

Thanks for watching. We've got a big week. We'll tackle it together.