Beth Hammack 5.0 14 ideas

Beth Hammack expects the Federal Reserve to keep interest rates on hold for a considerable period, citing balanced risks between inflation and employment, with inflation persistently above target but labor market in balance, requiring patience as data evolves.

Hammack notes that "PPI is significantly higher than CPI," meaning producer input costs are rising faster than the prices they charge consumers. She explicitly states businesses are "buffering" these costs and it is "eating into their margins." When input costs rise but companies are "nervous to pass on more" price hikes due to demand fears, earnings per share (EPS) will contract. Retailers and consumer discretionary firms with low pricing power are the most vulnerable to this margin squeeze. Short Retail (XRT) and Consumer Discretionary (XLY) to capitalize on impending earnings misses driven by margin compression. A sudden resurgence in consumer spending power allowing companies to raise prices without killing demand.

Hammack identifies "insurance costs" as a specific, persistent driver of pricing pressure that she hears about "very regularly" from businesses. One company's "cost pressure" is another company's "revenue growth." If businesses are complaining about high premiums, it confirms that Property & Casualty (P&C) insurers possess strong pricing power and are successfully raising rates in an inflationary environment. Long P&C Insurers (Progressive, Chubb, Travelers) as beneficiaries of the sticky service inflation mentioned. Catastrophic weather events increasing payout ratios significantly.

In the Cleveland district, the primary complaint is that "it's hard to find skilled laborers and tradesmen" and this shortage is a "real barrier to growth." When human labor is scarce or too expensive, industrial companies are forced to invest in capital expenditures (Capex) focused on automation and efficiency to maintain output. This directly benefits industrial automation and motion control firms, particularly those with strong Midwest industrial ties. Long Industrial Automation (Rockwell, Eaton, Parker-Hannifin) as the solution to the structural labor shortage. A recession causing a total freeze in industrial Capex.

Hammack highlights "two-sided risks" regarding oil, noting that energy costs are already elevating pricing pressures and that geopolitical conflict (war) poses a risk for further spikes. Energy is identified as a key input cost that is not abating. The Fed's "wait and see" approach to supply shocks suggests they will not immediately hike rates to crush oil demand, allowing energy prices to run if geopolitical tension escalates. Long Oil (USO) or Energy Producers (XLE) as a hedge against the sticky inflation/geopolitical risk described. Demand destruction from a slowing economy causing oil prices to collapse despite supply risks.

"I think we could be on hold for quite some time... Inflation has been above our target for five years. We've made virtually no progress over the past two years. We're still right around 3%." The bond market often prices in rate cuts at the first sign of labor weakness. However, Hammack explicitly prioritizes the sticky 3% inflation over the "stabilizing" labor market. If the Fed holds rates flat to fight sticky inflation, long-duration yields will remain elevated (or rise), causing bond prices to fall. Shorting long-duration treasuries (TLT) aligns with a "higher for longer" reality where 3% inflation prevents the Fed from easing. A sudden, severe collapse in the labor market could force the Fed to cut rates regardless of inflation, causing bonds to rally.

"The banks that I've talked to in the district see that their loan growth is improving... business leaders... they're still willing to make investments. They're taking out loans." Regional bank valuations are often depressed by fears of a credit crunch or a recession-induced lending freeze. Hammack's proprietary district data suggests the opposite: loan demand is robust and growing. If loan books are expanding despite current rates, regional banks are healthier than the macro narrative suggests. Long Regional Banks (KRE) to capture the disconnect between "recession fear" and the reality of improving loan growth. Commercial Real Estate (CRE) defaults could outweigh new loan growth, damaging bank balance sheets.

"When I'm out in the district talking with businesses... they're looking to make more investments in their businesses and they think demand is going to be reasonably robust." When businesses "make investments," they spend on Capital Expenditures (CapEx)—machinery, facilities, and automation. This spending flows directly to the top line of Industrial companies. A "healthy" economy with business optimism signals a cycle of re-investment. Long Industrials (XLI) captures the upside of corporate CapEx spending. If the "disappointment" in the jobs report accelerates into a broader recession, businesses will cut CapEx immediately.