Apple seeds of hope for big tech

Stocks had a second day of vanished early gains as investors show their nerves in the face of a potentially aggressive Fed. The US Economy had a strong 4^th quarter according to the latest GDP numbers.

What’s up?  Most of us probably grew up watching Bugs Bunny. If you did, here comes some nostalgia if you didn’t…well, pay attention. Here is the scene: there is a big black kettle filled with water. Underneath is a blazing fire, and Bugs Bunny sits in the water looking as if he is taking a relaxing bath, even humming an off-pitch, shower-worthy tune. The water slowly gets hotter while the intrepid bunny continues to stare down his mortality in defiance. Another character bellies up to the caldron and begins to slice carrots into the water. Bugs grabs one of the carrots, takes a few bites, and with carrot morsels spilling from the corners of his mouth says: “ah, what’cha cookin’, Doc?” More defiance, indeed. The water gets hotter and hotter, and Bugs smells something and is not sure if it is good or bad. Before long, he realizes that it is him that is to be the central character in a rabbit stew. Of course, he survives and then goes on to wreak misery on his would-be diner. 

In 2016 through the end of 2019, the economy was on tenterhooks after the longest expansion in modern history. Common wisdom told us that “we were due for a recession.” There were plenty of warning signals along the way. One notable signal was the Treasury yield curve. The spread between 2-year Treasury Note yields and 10-year Treasury Note yields flattened considerably during that period. In the summer of 2019, the curve even inverted, meaning you would get more yield for investing in a 2-year versus a 10-year maturity note. That only happens when investors are expecting bad things for the economy in the future. In fact, history shows us that an inverted yield curve predated all the recessions going back to the 1970s. In reality, and despite the signs, no recession came leading up to the pandemic, though there were some close calls along the way. If you look at the stock market through that period, the S&P500 grew by +58%. Of course, that growth didn’t exactly happen in a straight line as there were a few draw-down periods, but for the most part, the market grew at an annualized rate of around +14%. The Fed was already lowering the Fed Funds rate leading up to the pandemic as the water grew hotter. In response to the flash recession, the Fed cut rates to 0% which managed to steepen the yield curve to its steepest since 2015. 2-year yields fell in response to the Fed policy and 10-year yields, low through most of 2020 began to rise as confidence about the future began to increase. The stock market, similarly, began to predict a better future. The S&P rose by some +16% for the year…a year which included a recession, a presidential election, and yes, a pandemic. The economy was clearly struggling to come back, but stocks were focused on the future beyond the dark days. In 2021, we were clearly on the road to recovery and the economy was reopening in fits and starts. The yield curve steepened further, and stocks climbed higher, but there was emerging a new challenge. One that comes from a healthy economy…inflation. By April, annual inflation reached +4.2% (CPI), more than twice the Fed’s target level, and it continued to rise through the year. The water was getting hot, but stocks were rallying, and investors hung in there. By October 31, the S&P500 was up by +23% for the year. That month the CPI registered an annual growth of +6.2%...three times the Fed’s target level. The water grew hotter yet, but investors responded by laying back and humming an off-pitch tune. In November, the Fed made it clear that it was concerned with inflation and that rate hikes “may be appropriate.” The revelation caused some investors to sit up straight.  Something smelled, but it was unclear whether it was good or bad. In December, it became evident that the majority of FOMC members believed that rates would be higher in 2022 as they bellied up and began cutting carrots. Earlier this week, the Fed released its policy statement and made it apparent that rates would begin to rise in March.

January has been a month of realization for equities. The water was boiling, and investors realized that they were, indeed the main course.  Some traders have jumped out of the pot while others chose to jump in. Those traders are attempting to focus on the future beyond the tightening cycle. The treasury yield curve is also focusing on the future, and it appears to portend a policy misstep, as it has flattened significantly since last March. That error would be the result of the Fed raising rates so aggressively that the moves would cause the economy to falter. The stock market, based on the recent intraday volatility has not yet decided whether the smell is good or bad…the water sure is hot, though. That Bugs Bunny scene from above occurred in many different episodes over the years, similar but with different antagonists, er chefs. I always wondered why that intrepid rascally rabbit continued to get back in the pot despite his earlier revelations.  Perhaps, he recalled that he was always able to come out on top, despite the uncomfortable passages.   

WHAT’S COOKIN’

Chevron Corp (CVX) shares are lower by -3.97% in the pre-market as the energy giant reported that it missed EPS estimates by -17.89% despite exceeding analysts’ sales targets. In the past 30 days, 45% of analysts have changed their price targets, 14 up, 0 down, 16 unchanged, and 1 dropped. The miss, according to the company, is the result of non-recurring expenses.  Dividend yield: 4.2%.  Potential average analyst target upside: +1.5%.

Apple Inc (AAPL) shares are trading higher by +2.5% in the pre-market after yesterday’s post-close announcement that it had beaten EPS and Revenue estimates by +10.51% and +4.11% respectively. The company surprised analysts by overcoming the supply challenges faced by its competitors. During the earnings call, CEO Tim Cook related that the company was investing heavily in the “metaverse” and plans to release a VR headset later this year.  Dividend yield: 4.2%.  Potential average analyst target upside: +1.5%.

Also, stirring the pot this morning:  Weyerhaeuser (WY), Synchrony Financial (SYF), Caterpillar (CAT), Church & Dwight (CHD), VF Corp (VFC), and Philips 66 (PSX) all beat on EPS and Sales.  LyondellBasell (LYB) missed on EPS while Charter Communications (CHTR) missed on Revenues.

YESTERDAY’S MARKETS

Stocks started the session with a rally in response to strong economic numbers, but the rally ultimately faded into losses as yields spiked as bond investors bet on an overly aggressive Fed botching. The S&P500 fell by -0.54%, the Dow Jones Industrial Average slipped by -0.02%, the Nasdaq Composite traded lower by -1.40%, the Russell 2000 Index dropped by -2.29%, and the S&P500 ESG Index gave up -0.60%. Bonds gained and 10-year Treasury Note yields fell by -7 basis points to 1.79%. Cryptos gave up -5.4% and Bitcoin slipped by -0.43%.

NXT UP

• PCE Deflator (Dec) is expected to show a +5.8% annual gain, slightly higher than November’s +5.7% increase.
• Personal Spending (Dec) is expected to have declined by -0.60% after posting a +0.60% gain in the prior month.
• University of Michigan Sentiment (Jan) is expected to come in at 68.8, in line with prior estimates.
• Next week will bring lots more earnings announcements in addition to Markit Manufacturing/Services PMIs, JOLTS Job Openings, and the show-stopper monthly employment figures from the Bureau of Labor Statistics. Please check back on Monday for calendars and details.