Musk mandates

Stocks sold off ahead of the holiday weekend last Thursday as rising rates…once again, quashed any hopes of a continuation of earlier gains. Tech stocks took the brunt of selling on Thursday with higher yields in view and options expiration adding to volatility.

You’ve got the power!  It’s earnings season and, as usual, the banks and financials started the party off late last week. It is not just me that gets a bit giddy during earnings season. It is a season like no other, where usually veiled companies open up and air out their laundry, clean and dirty.  It is our chance to not only see how well companies have done over the past 3 months, but also how well they expect to perform over the next 3 or more months. The icing on the cake is the commentary surrounding the releases. That is where we can hear what keeps executives up at night and how they plan to allay investors’ fears of catastrophe. Now, of course, it is not that straight forward and good CEOs leave most of us guessing with plenty of room for interpretation.  Well, that can certainly fuel some decisive market moves. But not just yet.

Inflation and the potential for the Fed to botch its response is still taking center stage…and rightly so. All of us, along with the markets, are placing quite a bit of hope on that all-elusive soft landing in which the Fed raises rates just, just, just enough to ease back on consumption and upward price pressure without causing a crash, AKA a recession. To be clear, that is no easy task, and unfortunately, the Fed does not have a good track record when it comes to soft landings. It may be hard to remember, so I will remind you. By 2018, most economists were warning of an imminent recession after the record expansion and waning benefits of the 2017 tax plan. Company earnings were starting to show cracks, and all the signs were there. As the economy and the market sped downward toward the tarmac the Fed pulled up on the yolk by cutting rates. The initial response was positive for the markets, but the economy continued to expose weaknesses. Before we could see any real positive effects from the Fed stimulus, the pandemic emerged and pushed the economy into a recession. Looking back to the prior recession, The Great Recession, it was caused by the housing bubble burst and the Global Financial crisis. In other words, the Fed had nothing to do with the prior two recessions.  However, if we go back further yet, to the last time the Fed really had to use the brakes to fight inflation, the 1980s, we see conditions more like today. That was a time of high inflation and active Fed inflation fighting. It would not be fair to say that the Fed intentionally caused two costly recessions, because surely, the Fed would not purposefully cause a recession, but they, in fact, did. Many would argue that the Fed did what it had to do, kill a long spate of inflation that held back the US economy for at least a decade, and since then inflation was relatively mild until post-lockdown 2021. So, yes, the Fed’s aggressive and tough monetary policy in the 1980’s certainly drove the US economy into a recession, but was it those Fed-driven recessions that eradicated inflation? Probably not, that was really on us consumers, who changed purchase habits along with a massive manufacturing shift to lower-cost global production.

That brings us to the current high-inflation environment. The Fed stands ready to unleash a massive barrage of belt-tightening maneuvers in order to fight inflation. Those moves certainly increase the risk of a recession over the next 18 months, but will those moves send inflation back down to pre-pandemic levels? Unfortunately, that burden lies on us. Even though the Fed has only raised interest rates by ¼ of a percent, a symbolic move, changes are already occurring in the economy. Mortgage rates, for example are already at 5.25%, a level not seen since 2010! Just prior to the pandemic, those rates were around 3.75%.  Those higher mortgage rates will certainly tamp down the overwhelming demand for housing, which should slow rising housing costs in the months to come. Additionally, higher rates on personal loans, auto loans, and vendor finance being markedly higher, will also slow consumer demand in coming months. There are also some early signs that consumers are now shifting their spending away from goods and into services, reversing the move that occurred during the pandemic. The pandemic-era shift to goods played a large part in the current inflation, both on the demand and supply sides. Finally, just knowing that the Fed may cause a recession might be enough for consumers to pull back somewhat, forcing prices to moderate. This can be likened to the car ahead of you tapping the brakes and lighting its brake lights, ultimately causing you to slow down. Ultimately, it is consumers’ willingness to cut demand and reject higher inflation that will cause prices to recede. Economists, these days, are concerned that inflation will become entrenched, meaning consumers will continue to pay higher prices and, in fact, expect higher inflation to continue. If that occurs, there is no telling what might be the driver that will snap things back to a more acceptable inflation level.  Should we be concerned that the Fed will cause a recession, taking a play out of its 1980s playbook? Sure we should, but if it is inflation that concerns us right now, the power lies within us, not the Fed, to truly fight it.

WHAT’S SHAKIN’

Bank of America Corp (BAC) shares are higher by +1.38% after it announced that it beat Eps targets by +7.51% while it missed its revenue bogey by a scant -0.03%. The company relayed that higher trading profits were earned as a result of higher market volatility. Additionally, the company said that it was minimally exposed to risk in Russia. Dividend yield: 2.24%. Potential average analyst target upside: +32.6%.

Twitter Inc (TWTR) shares are higher by +4.48% in the pre-market as Elon Musk continues to very publicly ponder his purchase of the company, releasing countless tweets to his army of twitter followers over the weekend. Potential average analyst target upside: -1.1%. WHY IS THIS NUMBER NEGATIVE? Because its current stock price is above the average analyst target price for the company. While this may be interpreted as the company being overvalued, it does not mean that the stocks will not continue to climb.

THURSDAY’S MARKETS

Higher bond yields dominated markets on Friday causing selling in stocks, led by interest rate sensitive tech shares. The S&P500 fell by -1.21%, the Dow Jones Industrial Average slipped by -0.33%, the Nasdaq Composite Index dropped by -2.14%, the Russell 2000 Index declined by -0.99%, and the S&P500 ESG Index gave up -1.33%. Bonds fell and 10-year Treasury Note yields climbed by +3 basis points to 2.82%.  Cryptos fell by -3.26% and Bitcoin declined by -3.24%.

NXT UP

• NAHB Housing Market Index (April) may have declined to 77 from 79.
• St. Louis Fed President James Bullard will speak today.
• Lots of earnings in the days ahead along with housing numbers, regional Fed reports, Leading Economic Index, and PMIs. Please check out the attached, earnings and economic calendars for times and details.