REPORT: Prices Rose 0.4% in October, Faster Than Expected. Inflation May Be Sticking, and a December Rate Hike Got More Likely. Buy Schwab, Avoid Goldman Sachs BDC.
|
Key Takeaways
|
 |
| By Al Qureiyeh Reviewed by: Leo Tavolaro |
If you hoped inflation would cool enough to keep the Federal Reserve (Fed) from raising rates, Tuesday's report says not yet. That matters for your cash and for anything you own that borrows.
Consumer prices rose 0.4% in October, faster than economists expected, according to the Labor Department.
Core prices, which leave out food and energy, rose 0.3%, also above forecasts.
That was the third straight month at that pace.
A December rate hike now looks even more likely. We'd own a company that earns more on cash and avoid a lender whose borrowers are already struggling.
What Happened
Economists had expected 0.2% for core prices.
There were no revisions to earlier months.
Before the government's usual adjustment for normal seasonal swings, prices rose less, so part of the surprise came from that adjustment.
The government also could not publish most yearly inflation rates, because it never collected October 2025 prices during last year's shutdown.
So, we judge this report on the monthly numbers alone.
Markets took the number at face value: short-term Treasury yields jumped more than long-term ones.
Traders now see a December hike as very likely, and some bet on a half-point move.
That reading comes from the CME Group's FedWatch tool, which reads futures prices.
The 10-year Treasury yield also rose, so some investors worry inflation is sticking, not just that the Fed will act.
Our scorecard, through Monday's close, is measured against the S&P 500, the index of America's largest companies.
If you bought SPDR Gold Shares (GLD), Ross Stores (ROST) or Microsoft (MSFT) on our advice, you are ahead of the index.
The same goes for Morgan Stanley (MS), Coca-Cola (KO) and our Nov. 3 pick, JPMorgan Chase (JPM).
It also goes for our insurance exchange-traded fund (ETF), the SPDR S&P Insurance ETF (KIE).
If you skipped Zscaler (ZS) on our Oct. 30 advice, you avoided a steep drop.
We are behind on Valero (VLO), Cisco (CSCO) and Phillips 66 (PSX).
We are also slightly behind on Visa (V) and on our Nov. 6 calls on JPMorgan and gold.
Why the Rate Worriers Are Only Half Right
The crowd is gloomy about the Fed: most commentary we tracked expects a bigger hike to hurt stocks.
First, they are right that stocks dipped Tuesday morning.
Second, they are right that a December hike was already mostly expected before this report.
But a hike does not hurt every company the same way. It helps some, like Schwab, and squeezes others, like Goldman Sachs BDC.
What Weiss Is Saying
Weiss rates Charles Schwab (SCHW) B, a BUY.
Ares Capital (ARCC), a business development company, a type of fund that lends to midsize firms, is C, a HOLD.
The Nov. 6 Weiss piece was "Why the Hot October Jobs Report Points Savers to the Two-Year Treasury Note."
It told savers to lock in that note rather than keep rolling cash.
We agree, and Tuesday's report strengthens that case for savers.
The Nov. 6 Weiss piece "AI Is Competing with the U.S. Government for Your Money" warned about heavy borrowing by AI builders.
It said that borrowing raises the risk of replacing debt at higher rates.
We agree, and the same risk applies to any borrower whose loan rate resets higher.
Our own Nov. 6 report made the case that a December hike was likely, and Tuesday's report supports it.
Then there's Goldman Sachs BDC (GSBD), a lender to midsize companies. Weiss rates it D+, a SELL.
Avoid Goldman Sachs BDC (GSBD), rated D+, a SELL; it closed Monday at $8.58.
Related story: Why the Hot October Jobs Report Points Savers to the Two-Year Treasury Note
Related story: AI Is Competing with the U.S. Government for Your Money
One Hike, Two Sides of the Ledger
The chart shows the two-year yield, which tracks expected Fed moves, falling from its late-September high before Tuesday's jump.
When short-term rates rise, a broker earns more on the cash its clients leave idle.
When short-term rates rise, a borrower with a floating-rate loan pays more interest as its loan rate resets.
Goldman Sachs BDC says loans not paying interest rose to 7.3% of its portfolio's cost in the third quarter.
Its net asset value, what its holdings are worth per share after its debts, also fell.
In our own back-tests, we looked at every report since 2022 where core prices beat forecasts by a clear margin.
Schwab beat the S&P 500 in the three months after seven of the nine we could fully measure.
Goldman Sachs BDC lagged the index after five of them.
The record is evidence, not proof, and each period had its own story.
Buy the Broker That Earns on Idle Cash
Buy Charles Schwab (SCHW), rated B, a BUY, at the next close; it closed Monday at $92.73.
Schwab earns the gap between what client cash earns and what it pays clients, and that gap widened in the third quarter.
Its net interest revenue, mostly that cash income, grew about 14% from a year earlier.
Its Risk sub-grade is C+, lower than its Reward grade of B.
What could work against it: traders now see a December hike as very likely, and Schwab's filing says fast hikes push clients into higher-paying funds.
Monday's close is about $24 below the average analyst target tracked by StockAnalysis as of Nov. 10. That is a potential gain of about 26%.
Schwab pays $0.32 a share each quarter while you wait. At Monday's close, the current payout works out to a yield of about 1.4% a year.
Our time frame is within a year, with the first check at its next monthly client report.
Why We Would Avoid Goldman Sachs BDC
Avoid Goldman Sachs BDC (GSBD), rated D+, a SELL.
Its shares trade far below that per-share value, which can look like a bargain.
We read it differently: its loans not paying interest run about three times Ares Capital's rate.
What could work against avoiding it: higher rates also lift what its floating-rate loans earn while borrowers keep paying.
What We're Watching
First, Schwab's next monthly client report. If the idle client cash Schwab earns on falls, we would rethink the call and say so.
Second, the Fed's Dec. 9 decision. If the Fed holds, Schwab's lift from higher rates would shrink.
Third, private lenders such as Ares Capital. If their loans not paying interest climb, we would expect more pain for these funds.
If Goldman Sachs BDC's loans not paying interest fall back, we would rethink the Avoid and tell you.
Bottom Line
October's hot inflation report made a December hike more likely, which helps businesses that earn on cash and costs floating-rate borrowers more. Avoid Goldman Sachs BDC (GSBD), rated D+, a SELL; it closed Monday at $8.58.
So, prices did not cool enough to keep the Fed from raising rates. Buy Charles Schwab (SCHW), rated B, a BUY, which closed Monday at $92.73, at the next close.
Take care,
AL Qureiyeh
