It’s in the cards

Stocks had a wonderful... morning as hopes of great gains were dashed by the hawkish words of Fed Head Powell. Stocks reversed earlier gains after Powell confirmed what we all knew: rates are going up, probably in March.

Mind games.  Ok, this may sound like a repeat, but I must, in order to make my point. Are you aware that we have inflation here in the US? Did you know that the Federal Reserve is in charge of keeping that in check, so it is going to have to raise interest rates in the coming months? Of course, you did. Regarding inflation, you didn’t need me to tell you that, you are feeling it. In some cases, it is stark and noticeable in an instant, like at the gas pump. I know you are paying a lot more to fill your car up. Speaking of cars, if you have been in the market for one…well you probably know. How about housing? If you own a home, I am sure your curiosity about the value of your home may have landed you on Zillow.com… just to look of course. You probably thought, “wow, now that is how you make a profit.” Then you thought “if I sell my house at these inflated levels, I could possibly move into a nicer one,” until you realized that the nicer homes went up in value also…by some +18% since last year, according to economic numbers out earlier this week. Not as blunt, but quite evident are the price rises in the butcher case at your grocery store. This is one that even I have noticed, without a timely reminder by my mother-in-law who can tell you the price per pound of just about anything at any grocery store within 100 miles. What do you think it would take to make those prices go down, or at least stop increasing so quickly? The obvious answer is for sellers to simply lower their prices. What would be their incentive to lower prices when higher prices mean greater revenues? Do you think that the Fed raising the Fed Funds rate will do the trick?  Remember, the Fed Funds rate is the overnight lending rate between the banks; I can guarantee you that your local bank will not lend you anything at those exclusive rates. What if the Fed were to sell some of its bonds in the open market, pushing treasury and mortgage-backed notes to fall, thus raising longer tenor yields? Would that cause a wave of price cuts by manufacturers and retailers? Of course, not! There is only one sure-shot way to cause prices to go down, and that is to simply stop buying stuff. Why would you do that? The economy is growing, and consumers have saved money in the past few years, but if we knew that things were going to suddenly take a turn for the worse in the economy, perhaps we might forego that new television or wait for the next iPhone release to upgrade. I am sure that the average consumer does not look at GDP projections before going out to the grocery store or to Best Buy to make a purchase. Most consumers do, however, know that the stock market is under some pressure lately which could be a hint that things might get rough. Consumer confidence is, in fact tied to stock market performance. “Ok, Mark, I get your point, but I still have to buy chicken to eat and fill up my car to drive to work… regardless of the stock market,” you object. I am right there with you.

Many folks have been comparing this recent spate of inflation to that of the 1970s and 1980s. I won’t get into the whys, because you know if you were around during those years, but let’s just say it was bad. It was so bad that the Fed had to take extreme measures. Under the leadership of Paul Volcker, the Fed raised the Fed Funds rate aggressively several times. During the early 1980s, the Fed Funds rate was as high as 19%!  In response, 30-year fixed mortgage rates hit all-time highs just above 18%. That is one way to cause consumers to stop buying homes. Average auto loan rates topped 17.5% during that period as well. That surely contributed to folks buying less cars. Do you know what really caused consumers to stop buying? Recessions. Under Volcker’s tenure the US went through 2 recessions which were directly linked to Fed policy. A third recession in the late 80’s under Alan Greenspan’s Fed, which was also partially linked to aggressive Fed policy, finally, ultimately put inflation back in its box. Fast forward to today, where inflation is around the same place as it was in 1982 and the Fed is suggesting that it might have to raise the Fed Funds rate to 0.25% in March. There is some good news here, trust me. Markets and media distribution are far more efficient than they were back in the 1980s. Markets have therefore been factoring in at least a year’s worth of rate hikes and even quantitative tightening. The Fed has not yet raised rates and 30-year mortgage rates have already risen from around 3.2% in December to 3.73%. The roughly +50 basis point gain is highly correlated to the approximately +40 basis point gain in 10-year Treasury Note yields over that same period. In case you haven’t noticed, the S&P500 is around -9% lower than its December highs. Fed Funds futures are assuming 4 rate hikes for the year. The market, you see, has already tightened credit and stocks have factored that in, which, in effect, has done the dirty work of the Fed. Is all that going to be enough to cause consumers to stop spending money and cause inflation to ease? The other day, I overheard a young person mention to a friend that he was going to cut back on his visits to Chipotle and start making his own lunch after his portfolio gave up most of his 2021 gains.

WHAT’S SHAKIN’

Tractor Supply Co (TSCO) shares are higher by +3.8% in the pre-market after the retailer announced that it had beat EPS and Revenue estimates by +4.07% and +2.82% respectively.  The company also provided upbeat 2022 EPS guidance that was significantly higher than analysts’ estimates and raised its dividend by +77%.  Dividend yield: 1.77%.  Potential average analyst target upside: +16.8%.

Intel Corp (INTC)  is trading lower by -3.21% in the pre-market after it announced big beats on EPS and Revenues after last night's close. The company offered guidance which disappointed and linked lower margins to large capacity investments.  Dividend yield: 2.69%.  Potential average analyst target upside: +10.5%.

Netflix (NFLX) shares are higher by +4.39% in the pre-market after hedge fund giant Bill Ackman announced that he had taken a large stake in the company which was recently hammered after announcing disappointing guidance. Pershing Square’s investment places the hedge fund in the top 20 holders. Potential average analyst target upside: +44.9%.

Also, this morning:  Danaher (DHR), Dow (DOW), Ball Corp (BLL), Blackstone (BX), Brunswick, Valero Energy (VLO), Comcast (CMCSA), and Rockwell Automation (ROCK) all beat estimates on EPS and Sales. 

YESTERDAY’S MARKETS

Stocks started yesterday’s session with lots of euphoria and gains as investors bought the dip.  Late in the afternoon Fed Chair Powell spooked the markets with hawk talk causing gains to turn into losses. The S&P500 fell by -0.15%, the Dow Jones Industrial Average gave up -0.38%, the Nasdaq Composite Index gained a scant +0.02%, the Russell 2000 Index dropped by -1.38%, and the S&P500 ESG index advanced by +0.03%.  Bonds slipped and 10-year Treasury Note yields jumped by +10 basis points to 1.86%. Cryptos climbed by +2.16% and Bitcoin eased by -0.61%. Northrop Grumman (NOC) and Southwest Airlines (LUV) beat on EPS but missed on Sales while McDonald’s (MCD) and HCA Healthcare (HCA) missed on both fronts.

NXT UP

• Initial Jobless Claims (Jan 22) is expected to come in at 265k, lower than last week’s 286k.
• GDP Annualized Quarterly Growth (Preliminary Q4) may have risen by +5.5% compared to Q3’s +2.3% read.
• Pending Home Sales (Dec) is expected to have slowed by -0.4% after pulling back by -2.2% in November.
• After the closing bell: we expect earnings from Juniper Networks, Apple, US Steel, Robinhood, Visa, Western Digital, ResMed, KLA Corp, Mondelez, Stryker, and Eastman Chemical.