Let’s Accept It: The Fed’s Rate Hikes Did Little to Slow this Roaring Economy

Article originally posted on HERE on February 19, 2024

Can’t stop won’t stop? OK, you will never confuse me for a rapper, but those are the four words that describe this economy right now. And as we walk into retail earnings hell — a period where too many retailers report all at once and the comparisons become odiously confusing, starting with Walmart and Home Depot before the bell on Tuesday — I have to marvel that there is no discernible let-up in spending across most areas. There are a couple of ways to measure things. First, we can just look at some of the companies that reported late this past week: Applied Materials, DraftKings, DoorDash, Toast, and The Trade Desk. Second, we can examine the cacophony of 52-week highs that stick out like a dazzling neon shouting “Gangbusters.” So let’s do both. Let’s start with Toast , a remarkable company with a client roster of 106,000 restaurants, up 34% from a year ago, almost all providing annual recurring revenue. The cloud-based restaurant management software company is going after the big chains, like Caribou Coffee, and winning.

It is also winning small- and medium-sized businesses — perhaps more than 30% of that market, although having been in this business I have no idea how that share is calculated. I have not been a fan of this company because of its losses and its inability to pivot to profit. Restaurants can also switch to a competitor pretty easily. But the company announced on Thursday that it will lay off 10% of its workforce, so the pivot is now here. Most surprising, however, is the strength of restaurant formation right now, which makes the ascent of Toast so obvious. When an economy is in full-blown retreat, this is a segment that gets decked. Now it’s easy to get a read-through when you consider the earnings progression of companies that support restaurants like Ecolab , Cintas , and Sysco (Cintas CEO Todd Schneider joined me on “Mad Money” in late December, while Sysco CEO Kevin Hourican was on in late January). Their results can tell you how much growth there has been across a vast panoply of operations. But Toast is discretionary, and therefore a sight to be seen. I know people panned the DoorDash quarter, but from the point of view of revenues (27% growth) and not profits it shows me that people are willing to spend even more money to not go out.

You have to add the DoorDash numbers to the Toast numbers to see the strength of the go-out and go-in parts of the economy. The numbers are so daunting that it’s hard to see them slowing down. The Trade Desk plies its technology in the trillion-dollar ad market and its 23% sales growth in the fourth quarter demonstrates that companies are accelerating their marketing spend, something that they almost always cut back on if they are hurting. As a result, The Trade Desk can be viewed as both a barometer of e-commerce and the temperature of connected TV, which can only be described as boiling. It’s not easy to read into the 64% growth in revenue from DraftKings as there are always fresh states and fresh markets for online gambling. Suffice it to say that gambling may be the most excessive spending imaginable unless, of course, you bet against the Philadelphia Eagles for the last six games of this NFL season — a painful annuity stream. Perhaps the most absurdly positive numbers came from Applied Materials , which makes the machines that make DRAM and NAND flash chips used for tons of devices not necessary if you are cutting back. The company’s better-than-expected fiscal first-quarter results and strong second-quarter numbers signal that the inventory glut that came from excess personal computers and other Best Buy kinds of consumer tech items is now history.

Talk about things you do not need. When I say not need, I am not saying that we have become profligate, although with “buy now, pay later” we have discovered a hidden sense of profligacy. I am just saying that the Federal Reserve does not have a handle on how overheated this economy has become. A random walk down the new 52-week-high list confirms this, with 53 stocks in the S & P 500 hitting that milestone on Friday alone. That included Simon Property Group , the national mall company with barely any vacancies and at full-price leases, and Ralph Lauren , which jumped 30 points on an earnings surprise. That was some quarter from Ralph, but in truth so were the last two quarters — this one was just better received on the Street. Costco hit a new high last week, too: That’s been the juggernaut in retail the whole way. As did Walmart. There aren’t a lot of individual retailers on the new high list. We may see Rite Aid in bankruptcy. We may wonder about the liquidity of Big Lots . But neither of these chains is in a Simon Property indoor mall, where the occupancy rate is 96%-98%. But Children’s Place ? It was in trouble for about a day and then Reuters reported that a Saudi family scooped in and bought 54% and that was that. The financing is now there. It wouldn’t be if we were at the murderous portion of a tightening cycle. New fintech is flagging, but old fintech is zooming. We can tell this from the incredible performances of Mastercard and American Express , the latter finally silencing all doubters with its multiple-year double-digit projections. The credit card company was always capable of making those rosy forecasts but had been reluctant to do so. The fact that it did now says it all. Remember the drivers of American Express were two-fold: solvency and spending, with the latter heavily geared to dining out. Travel was almost as strong. In case you thought that Applied Materials was alone, KLA and Lam Research once again hit new highs. You need these companies for all sorts of semiconductor chips and Lam has some very good technology that goes with Nvidia’s supercomputer. That group seems unstoppable. Waste Management makes the list and people may not realize this, but the biggest source of waste comes from construction, particularly home construction. The company had an excellent quarter, which means people believe we are still going to be in growth mode for new planned unit developments. We have so many scaremongers out there when it comes to commercial real estate — I keep thinking of the imprudent comments by Starwood Capital Group CEO Barry Sternlicht about $1 trillion of losses on office properties — but then how in the heck is the stock of elevator company Otis on the list. Sure, a big part of the company’s business is service. There’s also a China component.

However, we already know that China’s construction has crashed. Instead, it’s a sign that smaller buildings may be using Otis. The fact is that buildings are being built, and while commercial real estate may be a danger zone, it’s not for lack of demand, it may be for lack of useable supply. Meanwhile, just in case you were concerned that the trillions of dollars earmarked by the U.S. government for infrastructure are running out, you see Eaton , Emerson , Dover , Cummins, and the ubiquitous Parker-Hannifin all made new highs last week too. Over the many years working in this business, I was schooled and taught to trust the aggregate data. Here’s what I learned: following the aggregate data is like being a fan. Studying the actual numbers is what a professional can do. All of the new companies make being a pro harder, so you have to work even more — even when it’s a drag to monitor Toast sign-ups, Uber rides, or DoorDash deliveries. When you look at the mosaic from the bottom up, it shows that we have an economy that has not been dented by higher interest rates. That’s not because auto sales haven’t slowed down. They have. It’s not because housing hasn’t slowed down. It has. It’s not because spending on goods hasn’t slowed down. It has. But nothing has slowed down enough to make a difference when it comes to inflation. A home price plus a mortgage is about where it’s been the whole time. Dining out, traveling, hotels — none of it has come down and some prices are still going up. Very few salaries have kept up with inflation and now we have anywhere from eight to ten million immigrants that are either part of the labor force or receiving government assistance.

The former keeps wages down and the latter keeps inflation up, as housed immigrants drive up rent rates, which are in the consumer price index. So let’s just cut to the chase. There is only one way to keep inflation lower and that’s through layoffs. There are all sorts of stories about tech layoffs. Those are almost all one-off though and you aren’t going to see those people on breadlines. We know that there have been some fintech layoffs but amazingly we have not seen large-scale shutdowns. Private companies that want to go public will be able to or will be kept on life support until they can. It’s why I like Morgan Stanley now as much as I like Wells Fargo , if not more. Morgan Stanley stands to gain once the IPO market picks up. Still, so many people delude themselves into thinking about a June rate cut, as they once believed there would be a cut in March or May. I have been adamant that this economy isn’t too strong, but it also isn’t slowing. And if slowing is what it takes to bring rate cuts, then you know the only thing that will slow it is higher, if not much higher, unemployment. The obvious issue is the lack of any sort of rigor or even homework to justify why rate cuts should occur.

What would they do other than cause inflation to flood right back in? I sure wish that the Fed had never made its statement it was done raising rates for now — even though it precipitated one heck of a rally. For now a simple “let’s wait and see” from the central bank without mentioning cuts this year would be a better state of play than the current one. Hanging on every cutting word from the Fed is a noose for this market. I will change my mind when a company like Children’s Place has no suitors and the lots of homes are empty. Until then we have to accept that the reason why earnings season has been so bountiful is that we have an amazingly robust — not just resilient — economy and rate hikes have done next to nothing to change things. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade.