Stocks took a fall yesterday after aggressively hawkish talk from a Fed official. Bond yields jumped, growth stocks jumped, and crude slipped and slumped.
White hot spotlight. Elon Musk went on a buying binge the other day. You may recall that he went on a selling binge not too long ago, dumping a load of Tesla stock and pledging to sell all his homes. You may find musk, a father of 8 children (most recently X AE A-XII with then “fluid”, now ex-girlfriend Talulah Riley) a bit of an interesting chap. He is, after all, a modern industrialist. He is the founder of PayPal, SpaceX, Tesla (in its current version), and countless other companies including but not limited to Boring Company (digging tunnels for fast transport) and a flame thrower company. He is a prolific tweeter, who has apparently not read the SEC’s rules on inside information and market manipulation. He is, at the end of the day, a brilliant, once in a generation, prodigy who has a penchant for actually delivering on his inspirations. That is why when he announces that he has just spent BILLIONS of dollars to take a position in Twitter, the GLOBAL investment community stops in its place…and pays close attention. His investment in once left-for-dead Twitter sent the stock on a +25% rocket ride on Monday, and yesterday Twitter’s announcement that Musk would be joining the board sent the stock slightly higher yet.
All of this occurred amidst a backdrop of fast-moving and oversized economic conditions which have prevailed over the markets for the past several months. Yesterday, fortunately, or unfortunately (you decide), Musk’s spotlight was stolen by someone you have probably never heard of. She is not the founder of any fast-moving tech company, and she only has 3 children (a small collection compared to Musk’s octet). I am referring to Lael Brainard, who has served as a Federal Reserve Governor since 2014. She is not an industrialist, but rather, an economist, educated at Wesleyan and Harvard, who has also worked as an Associate Professor at MIT. I can go on and on with her impressive resume and heralded public service in the Capital. It is, indeed, remarkable. Brainard’s votes on the FOMC put her solidly in the “Dove” category, second only to Minneapolis Fed President Neel Kashkari. So, when Lael Brainard comes out with a hawkish comment in this environment, even Elon Musk cannot continue to command the market’s attention. In a speech yesterday, Brainard said that the Fed will begin to shrink its balance sheet next month. Ok, we already know, and the market mostly expects the Fed to raise rates by +50 basis points in May, and to follow it with countless others leaving Fed Funds somewhere in the 2% to 2.5% range by year-end. Tough medicine, but the market is expecting it, with high hopes that the moves stop inflation in its tracks. The balance sheet? Well, the market was expecting some news on that later in the year…not quite early spring. She was referring to quantitative tightening, or QT, which is the opposite of quantitative easing, or QE. To buoy the economy during the pandemic, the Fed, in addition to lowering rates to 0%, purchased massive amounts of publicly traded Treasury and Mortgage debt. The buying injected cash into the economy, and even more importantly caused yields to remain low (increased buying pressure means bond prices higher and yields lower). As inflation picked up, the Fed decided to slow down the pace of its monthly purchases, and ultimately stopped them completely last month. Now it is up to the free market alone, to determine where bond yields should be...until the Fed starts SELLING bonds into the open market. That selling will put upward pressure on yields (increase selling pressure means bond prices lower and yields higher). This is a way for the Fed to raise rates other than the Fed Funds Rate. Equities, with Musk far in the rearview mirror, sold off on the news as bond yields jumped. Remember that inverted yield curve? Yesterday’s comments caused it to turn back into positive territory…for now. Yes, it was bit of a surprise. Perhaps Brainard, was pre-empting what we will likely learn more about in today’s release of the last FOMC meeting minutes. The Fed means business.
There is much speculation about what Elon Musk will do on the Board of Twitter. With his appointment, he has, by regulation, amended his SEC filing to identify as an “active” versus “passive” investor. Dr. Lael Brainard was recently nominated to be the next Vice Chair of the Federal Reserve and is awaiting confirmation with a full Senate vote. There is now much speculation on what she will do in that role. With her comments yesterday, we can assume that she will likely be taking an “active” role.
WHAT’S SHAKIN’
CarMax Inc. (KMX) shares are lower by -2.79% in the Pre-Market as Bank of America downgraded the stock to NEUTRAL from BUY. Based on a forward PE of 13.84x, one might consider the stock to be expensive to its peers which have a median forward PE of 6.54x. In the past month 43% of analysts have changed their price targets 1 up, 6 down, 8 unchanged, and 1 dropped. Potential average analyst target upside: +31.5%.
JetBlue Airways (JBLU) shares are lower by -2.38% in the pre-market after it revealed that it made an unsolicited offer to purchase competitor Spirit AeroSystems (SPRT) for $3.6 billion in cash. Raymond James lowered its rating to MARKET PERFORM. Potential average analyst target upside: +28.3%.
YESTERDAY’S MARKETS
Stocks ended yesterday’s session squarely in the red after Fed Governor Lael Brainard said that the Fed would be reducing its balance sheet starting in May. The S&P500 gave up -1.26%, the Dow Jones Industrial Average lost -0.80%, the Nasdaq Composite Index dropped by -2.26%, the Russell 2000 Index sold off by -2.36%, and the S&P500 ESG Index declined by -2.38%. Bonds fell and 10-year Treasury Note Yields jumped by +15 basis points to 2.54%. Cryptos fell by -0.32% and Bitcoin declined by -0.96%.
NXT UP