U.S. stocks don’t seem concerned about inflation

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• U.S. retail sales in January jumped 3%, versus an expected 1.9%. The figure handily beat a decline of 1.1% in December. Separately, industrial production was flat in January. Analysts were estimating a 0.4% gain.

• “BYD is so much ahead of Tesla in China … it’s almost ridiculous,” said Charlie Munger, Berkshire Hathaway’s vice chairman. He called the Chinese electric vehicle maker his favorite stock ever. Berkshire doesn’t seem to like TSMC so much anymore, however, dumping almost 86% of those shares between the third and fourth quarter of 2022.

• PRO Investors are “taunting the Fed with crypto, meme stocks, and unprofitable companies responding best to Fed communications,” said JPMorgan’s Marko Kolanovic, who correctly called the March 2020 bottom. He warned that “this divergence cannot go further.”

It’s as if investors aren’t concerned about inflation and higher interest rates anymore. Strength in the U.S. economy — which would imply further rate hikes — has been translating into gains in the markets.

Yesterday I mentioned how sustained consumer spending might be propping up the economy. Indeed, the year-over-year increase in January’s retail sales — 6.4% — is exactly the same number as the year-on-year rise in the consumer price index. It appears that the prospect of sustained economic growth is injecting optimism into stocks too. The Dow Jones Industrial Average edged up 0.11%, the S&P 500 added 0.28% and the Nasdaq Composite rose 0.92%.

Recent economic activity and market movement are forcing economists and investors to reconsider the effect of interest rates. The higher cost of borrowing typically slows economic growth by curtailing spending and increasing unemployment which, in turn, depress stocks. Yet “the monthly reports on industrial production, retail sales, and jobs were generally better than expected and point to a pickup in economic activity in early 2023 after a soft patch in late 2022,” as Bill Adams, chief economist for Comerica Bank, put it.

This topsy-turvy relationship between higher interest rates and a pickup in economic activity is causing some investors, such as the founder of Satori Fund, Dan Niles, to predict that the Federal Reserve might raise rates higher than 6%. And if the price of everything keeps rising even then? It’s hard to imagine what the Fed would do next.

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Correction: This report has been updated to give the correct spelling of Dan Niles’ fund.