This week, RFA’s Director – Financial Planning, Gabe Adams, CFP®️, MSPFP, covers the latest inflation news, provides indications of possible improvement in the supply chain, and shares first-quarter earnings from RFA Core Portfolio holdings JP Morgan Chase and Taiwan Semiconductor Manufacturing.

Transcript

Hi, I’m Gabe Adams here at Reilly Financial Advisors with your Weekly Market Update. First quarter earnings season kicked off this week, and we heard from both Taiwan Semiconductor Manufacturing and JP Morgan Chase, the nation’s largest bank. But the main headlines this week were concerned with the topic of inflation, so let’s start there. 

U.S. inflation hit its fastest pace in nearly four decades last year as pandemic related supply and demand imbalances, along with stimulus intended to shore up the economy, pushed prices up at a 7% annual rate, as we can see in this first chart. The Labor Department reported Wednesday the Consumer Price Index rose 7% in December from the same month a year earlier, up from 6.8% in November. That was the fastest since 1982 and marked the third straight month in which inflation exceeded 6%. The core price index, which excludes the volatile categories of food and energy, climbed 5.5% in December from a year earlier, as we can see in the second chart. That was a bigger increase than November’s 4.9% rise, and the highest rate since 1991. The last time consumer prices rose at such an annual increase was in June of 1982, but the circumstances were very different from today.  Today, the COVID-19 pandemic has caused supply chain disruptions, and a shortage of goods and materials coupled with strong demand from consumers flush with the benefits of government stimulus are behind the inflation surge. Economists and the Federal Reserve expect inflation to ease this year as supply bottlenecks clear and demand normalizes, but the Omicron variant has renewed uncertainty about the economic outlook as the pandemic continues. Despite disruptions from Omicron, there are some indications of improvement in supply chain woes.  And consumers weren’t the only ones feeling the pain of inflation. On Thursday, the Bureau of Labor Statistics reported that the Producer Price Index in December increased by 9.7% from one year ago, as we see in this next chart, but the monthly increase was the lowest in over a year, a possible sign of easing inflationary pressures in the U.S. supply chain. Core PPI, eliminating the volatile food and energy sectors, increased by 8.3% since last year, still an eye-popping number, as we see in this final chart. It is no wonder that Fed chair Jay Powell and Vice Chair Lael Brainard both emphasized the importance of bringing inflation under control in their Senate confirmation hearings this week. 

Before the market opened on Thursday, Taiwan Semiconductor Manufacturing, a holding in the Core Portfolio, reported earnings of $1.15, beating analyst estimates by four cents, on revenue of $15.7 billion, which rose 24% from a year ago.  Investors sent the stock soaring on the news. The chipmaker said it was adding production capacity, as demand for chips for smartphones, electric vehicles and other high end computing devices are likely to keep Taiwan Semi’s capacity utilized at a high rate. The company said it would spend between $40 billion and $44 billion on capital expenditures, as demand for semiconductors continues to surge, a problem exacerbated by the ongoing pandemic and supply chain crunch.  As an added bonus for our Core Portfolio, Lam Research, a maker of semiconductor equipment, rose in sympathy.  Semiconductor companies spent $146 billion in 2021 for new production and developing new technologies, and they are all planning on expanding their capacity. 

On Friday morning, JPMorgan Chase reported results that beat estimates on both the top and bottom lines with fourth quarter earnings per share of $3.33 and revenue of $29.3 billion. However, JP Morgan said it took a $1.8 billion net benefit from releasing reserves for loan losses that never materialized. Without that benefit earnings would have been $2.86 per share, missing expectations of $3.00.  Earnings were also helped by elevated capital markets activity and a pickup in lending. Chairman and CEO Jamie Dimon said that “The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks.”  Earlier, he had proclaimed that the American consumer is in the best financial shape since the Great Depression. We also heard from First Republic Bank, another holding in the Core Portfolio, which also reported results that beat on both the top and bottom lines. Earnings of $2.02 beat estimates by 10 cents while revenues of $1.4 billion increased 26% from one year ago. 

So, what does it all mean? Currently we are seeing inflation numbers that we haven’t seen in many decades. But there are signs that inflation may be peaking and the Federal Reserve has made bringing down inflation their top priority. They have already begun to taper their latest round of Quantitative Easing and may begin raising short term interest rates as early as March. In the meantime, your companies continue to post impressive earnings. First quarter earning season is just kicking off, so we will really get into the thick of it in the next few weeks. We will stay on top of the latest developments and report back to you. So please, sit back, relax, have a great weekend and join us again for the next Weekly Market Update. 

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