This week, CIO Tom Weary, CFA®️, covers the latest inflation news before reporting on August’s unexpected retail sales numbers. He also shares the latest earnings reports from RFA portfolio holdings Oracle and Microsoft.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  This week we got the latest readings on inflation and retail sales, and even heard from a couple of our tech companies.  So, let’s get started and jump right in.

Well, inflation has been a hot topic recently, so Tuesday’s latest reading on the Consumer Price Index was highly anticipated.  The Labor Department reported that August’s monthly increase was only 0.3%, the lowest figure in 7 months, down from 0.5% in July and a whopping 0.9% in June.  This was clearly less than what investors were expecting.  The year over year increase was 5.3%, which still sounds like a big number, but the Core CPI, stripping out volatile Food and Energy prices, came in at a 4% annual rate.  And how did the bond market react to inflation at double the Fed’s 2% target?  The yield on the benchmark 10-year Treasury bond actually dropped 5 basis points to 1.27%.  Bond investors clearly are not worried about inflation raging out of control.  And naturally, the lower inflation number was driven by the very things that had bumped it up earlier such as used car prices and travel costs.  This inflation data point supports the Fed’s thesis that inflationary pressures are elevated at the moment but transitory, and bond investors seem to agree.

Retail sales rose unexpectedly in August, a welcome sign for investors, as Covid-19 cases have been ticking up and product shortages have weighed on American consumers.  Overall sales rose 0.7% month over month, an improvement from July’s revised 1.8% drop and beating the forecast for a 0.7% fall. Excluding automotive, sales climbed 2% in August, crushing expectations for a 0.1% decline. On a year-over-year basis, total retail sales rose 15.1%.  The two largest monthly increases were seen in non-store retail, or e-commerce, and furniture and home stores, up 5.3% and 3.7%, respectively.  But the automotive sector continued to suffer, with sales falling almost 4% month-over-month in August. The global semiconductor shortage has limited auto production, leading to higher prices and low inventories both for new and used cars. The chip shortage is seen persisting for the rest of this year, and some analysts have warned it will remain an issue in 2022 .  Also, the data could potentially quell concerns that higher inflation could slow consumer demand. The consumer-price index has been running at above 5% year-over-year of late, outpacing wage growth of almost 4%.  In past economic cycles, consumer demand has typically fallen when prices rise faster than wages. At least for August, consumer demand was relatively robust, even with product shortages forcing costs up for companies, prompting some to raise prices.  The American consumer comes to the rescue once again!

This week we heard from Oracle, a holding in the Defensive Portfolio.  Oracle‘s slowly evolving growth story continues to be a source of frustration for investors.  For the last few quarters, the enterprise-software giant has been showing promising growth in its cloud-based application and database business. With an annualized run rate of $10 billion, it now accounts for about a quarter of total revenues.  That has buoyed the stock, which was up 39% for the year through Monday, but overall growth remains modest, leaving the Street thirsting for more.  After the close on Monday, the company reported financial results for its fiscal first quarter, ended August 31st, that generally met or beat expectations. Oracle posted revenue of $9.7 billion, up 4% from the year-earlier quarter.  That was in line with the company’s guidance, which had called for growth of 3% to 5%.  Profits were $1.03 a share, ahead of the 94 to 98 cents a share management had told investors to expect.  Oracle now is forecasting revenue growth of between 3% and 5% for the November quarter, with profits of between $1.09 and $1.13 a share, a little above the previous Street consensus forecast of $1.08 a share.  The company sees a full-year growth rate in the mid-single digits.  CEO Safra Catz told analysts that the company’s cloud service and license support business, which is about three-quarters of the total, should grow at better than 5% in the November quarter, with even better growth to follow.  But many analysts found the results a little disappointing and the stock price fell.

Expanding its program for returning capital to shareholders, Microsoft late Tuesday said its board voted to both boost its quarterly dividend and adopt a new share repurchase program.  Microsoft raised its quarterly dividend rate by 11%, to 62 cents from 56 cents. It was the 12th straight year that the company has boosted its quarterly payout following its September board meeting.  The hike follows increases of 10% last year and 11% in 2019.  The company also announced a new $60 billion stock repurchase program.  The good news for investors is that it looks as if companies have barely begun to return capital to shareholders after the recent explosion in profits.

So, what does it all mean?  While current readings on inflation are elevated, upward pressure on inflation appears to be diminishing.  It still looks to me more like a case of dislocation in supply chains than widespread systemic inflation.  This week’s number was a win for the transitory inflation camp.  And retail sales last month were unexpectedly strong even in the face of a COVID surge driven by the Delta variant.  The American consumer will not be denied.  We still have to see how Labor Day weekend travel and get togethers and school re-openings impact COVID cases numbers, but the economy appears to be hanging in there at this point.  We’ll stay on top of the latest developments on your behalf.  So, please, sit back, relax and join us again next time for the RFA Weekly Market Update.

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