Tech attempts a rescue but falls short

Stocks had a fine rally yesterday closing out a month volatility and losses for most. The Treasury yield curve continues to flatten on fear of a too-aggressive Fed causing an economic downturn.

Bye-bye, jumpy January.  It was one for the books, this past month was. Tech stocks had a rough month, which I am sure I don’t have to tell you. The tech-heavy Nasdaq Composite Index fell by -8.98% for the month. Despite a last-ditch effort 2-day rally of +6.54%, it was the worst January since 2008, when the index fell by -9.89%.  Remember that? If you were there and you forgot, I understand…it was a tough year which ended in deep losses for the index. You either forgot because your mind buried the pain or because you held on while the index gained +436.89% through yesterday. In other words, your perseverance paid off handsomely. Incidentally, since that rough 2008, the Nasdaq only had two losing years: 2011 and 2018 with losses of -1.80% and -3.88%. One last thing on that rough 2008. The US was in a recession and in the midst of The Global Financial Crisis. Two different things, actually, but together they are responsible for that recession’s “Great Recession” moniker. The cause for the Nasdaq’s recent tumble is clearly not a recession. In fact, according to the Bureau of Economic Analysis’s latest Q4 GDP estimate, the US GDP grew by an annualized +6.9%, beating economists’ estimates, and far exceeding the +1.9% growth in Q4 2019, prior to the pandemic. No, tech shares did not fall because of a recession. Many have pegged the blame for the pullback on the potentially rising interest rates promised by the Fed. Theory suggests that high interest rates diminish the present value of the great future growth in earnings – a hallmark of tech stocks. Let’s check that out further. The Fed hiked 1 time in 2015, 1 time in 2016, 3 times in 2017, and 3 times in 2018. During that period, the Fed Funds rate went from 0% to 2.5%...8 hikes. The Nasdaq composite’s annual returns for those years were +5.73%, +7.5%, +28.24%, and -3.88%. Today, many expect the Fed to raise interest rates 3 to 4 times through the end of the year. Most Fed governors, the guys and gals that make those decisions, expect 3 hikes, so let’s go with that for now. Looking back at the Fed’s last rate hiking regime, we note that it raised rates 3 times in 2017 and another 3 in 2018. As noted above, ’17 was a solidly positive year while ’18 posted a small loss. Was that loss the result of the 3 rate hikes? Possibly, but if we look at the combined earnings of the index, we see spectacular growth (+49%) from 2016 to 2017, which probably explains the index’s gain in ’17. In 2018, earnings declined year over year by -10%. Aha, that may have something to do with it.  To put it into perspective, even if the Fed were to raise rates, 5 times this year as some would suggest, that would still only put Fed Funds at 1.25%, far lower than it was in 2018, the last losing year for the Nasdaq. It is also important to note that the Nasdaq composite is made up of some 2500 companies. Some of those companies are solid, mega-cap earners like Apple and Microsoft, while others are just beginning to be profitable but with great year over year growth.  The latter are clearly more volatile due to the uncertainty of growth sustainability. It is also important to note that volatility works in both directions. When investors are confident, volatile stocks can achieve eye-watering growth, but when investors are spooked, no matter what the reason, those stocks can make for some wincingly painful drawdowns. One has to ask whether higher rates will affect a company’s ability to continue to grow earnings. If so, then it is correct to question a growth stock’s value. We should certainly not ignore the potential impact of interest rate hikes on the health of the economy, but for individual companies we know, regardless of interest rate hikes, earnings growth is the real driver for success. 

WHAT’S SHAKIN’

AT&T Inc (T) shares are lower by -4.67% in the pre-market after it announced that it was spinning off its WarnerMedia unit to Discovery group and cutting its dividend. AT&T shareholders will receive stock in the newly created Warner Bros. Discovery Inc. as a result of the transaction. AT&T is a popular stock amongst income investors with its greater than 8% dividend, so any challenge to its dividend would make the stock less attractive to some.  Dividend yield: 8.3%.  Potential average analyst target upside: +17.6%.

United Parcel Service (UPS)  shares are higher by +6.83% in the pre-market after announcing that it beat EPS and Revenue estimates by +15.72% and +2.56% respectively. The company offered positive guidance for 2022, which also exceeded analyst estimates and raised its dividend by +49%.  Dividend yield: 3.00% (before the hike).  Potential average analyst target upside: +13.5%.

Exxon Mobile Corp (XOM) is trading higher by +1.50% in the pre-market after it beat EPS and Revenue estimates by +6.29% and 13.78%, respectively. The company also announced a resumption of its $10 billion buyback program.  Dividend yield: 4.65%.  Potential average analyst target upside: -0.6%.  WHY IS THIS NEGATIVE?  Because last night’s closing price was higher than the average analyst price target. While that can be interpreted as the stock being expensive, it does not mean that it will not continue to rise.

Also, this morning: Sirius XM (SIRI), Entegris (ENTG), Pulte Group (PHM), and Catalent(CTLT) all beat on EPS and Revenues.  Enterprise Products Group (EPD) and Scotts Miracle-Gro (SMG) both missed on EPS while Stanley Black & Decker (SWK) beat on EPS but missed Revenue targets.

YESTERDAY’S MARKETS

Stocks rallied yesterday to close out a challenging and volatile month in which traders came to grips with the reality of upcoming rate hikes. The S&P500 rose by +1.89%, the Dow Jones Industrial Average climbed by +1.17%, the Nasdaq jumped by +3.41%, the Russell 2000 gained +3.05%, and the S&P500 ESG Index advanced by +1.80%. Bonds slipped and 10-year Treasury Note Yields gained +1 basis point to 1.77%. Cryptos climbed by +3.05% and Bitcoin added +1.81%.

NXT UP

• ISM Manufacturing (Jan) is expected to have slipped to 57.7 from a revised 58.8.
• JOLTS Jobs Openings (Dec) may have fallen to 10.3 million from 10.562 million vacancies.
• After the closing bell earnings: PayPal, Electronic Arts, PerkinElmer, Match Group, Starbucks, Advanced Micro Devices, Gilead Sciences, General Motors, and Alphabet/Google.