Airlines slowly gaining altitude

Stocks ended yesterday’s session in the red as freshly spiking bond yields emptied the air from the bulls’ sails. Chairman Powell’s tough talk is not appreciated by the markets but necessary for the long-term health of the economy.

Nasty business. Have you been to Washington DC and walked past some of the greyish-white regal buildings that house the government agencies? The weather is a few degrees warmer than up here in glass and grey-stoned Wall Street. Washington also has its Cherry Blossoms, which made their annual debut just a few weeks ago. That would seem like the perfect backdrop for… well, a bit of stress…especially lately. I am not referring to the ever-present tug of war between political ideologies. I am not even referring to dealing with the sad, sad crisis occurring in Ukraine. No, I am referring to that relatively small, almost perfectly white building at 2051 Constitution Ave. NW. That is the building that houses the US Federal Reserve Board. It has a simple façade, as a bank…THE BANK should have, adorned simply with an eagle with spread wings. Looking at it you would think, “those folks are on top of things as they ply the helm of the largest economy in the world.” Well, they are certainly at the helm, but it has not been smooth sailing and the clouds appear to be darkening on the horizon.

Let’s go back to the basics. The Fed has a dual mandate: keep inflation low and keep employment high. That’s two, right? That seems simple enough, but of course, it is not. Most economic theory, even common sense, suggests that it is impossible to achieve both simultaneously. When unemployment is low – people who want to work are working – consumers have more money to spend. When consumers spend more money, it generally leads to inflation. To make the situation more challenging, when there are fewer people out of work, companies must compete to fill empty positions, and that competition usually includes raising wages…which leads to inflation. Ok, so it is clear that the Fed must find some happy medium. We must be willing to accept a bit of inflation while simultaneously live with a reasonably low unemployment rate. It is not easy to strike that balance, but in fact, the US enjoyed a healthy balance for several years leading up to the pandemic. In those years, the Fed was slowly raising interest rates and running off its balance sheet after pulling the economy out of The Great Recession. The economy was growing at a moderate pace…the Fed calls this the long-term mean (for what that’s worth). Unemployment touched a multi-decade low, but slowly. Inflation was…well, there wasn’t any, really. The CPI bobbed around the Fed’s 2% target from the end of the recession through year 2 – the recovery year – of the pandemic. In fact, at one point in 2015, the Fed was concerned that inflation was too low. Hard to imagine, these days. That state of banking nirvana gave the Fed a chance to look toward the capital markets and tend to their health. That became the Fed’s shadow mandate. Keep stock markets running happy and it will serve to keep the economy moving forward. A rising stock market has proven to keep consumers confident, even the ones that don’t own stock. Confident consumers keep the economy growing. In 2019, the Fed was juggling 3 balls when the Central Bank reversed its policy course and cut interest rates in what it termed as a mid-cycle adjustment. Those cuts were applauded by the markets, which continued to climb. Yes, consumers were confident, the economy continued to grow, unemployment was low, and there was not a hint of inflation.

Today, the Fed finds itself in a very different situation. Inflation is white-hot, and the war in Ukraine has made an already bad situation worse. Many would argue that the Fed missed an opportunity to quash inflation if it acted earlier, but unfortunately, it would have come at a risk of derailing the economic recovery. As a very wise mentor once reminded me, “we are here now.” Inflation is high and unemployment is low. In fact, unemployment may be too low, as implied by Chairman Powell’s comments yesterday. Those comments underpinned his pretty straight-forward admission that interest rates are going to need to be raised quickly to tackle inflation. The Fed has shifted away from mandate 1, employment, to mandate 2, inflation. What of the shadow mandate…the markets? Well, it appears that the Fed must now drop that third ball and focus on juggling just 2. That is, after all, its job. 

WHAT’S SHAKIN’

United Airlines Holdings Inc (UAL) shares are higher by +1.32% in the pre-market despite its missing on EPS and Revenue targets in its yesterday’s announcement. Though the company missed its targets, it is bullish for FY 2022 and expects to return to profitability. The stock was upgraded to OVERWEIGHT BY JPMorgan Chase, which also upgraded American Airlines (AAL) to NEUTRAL (it is up by +1.22% in the pre-market). Potential average analyst target upside: +14.7%.

Newmont Corp (NEM) shares are lower by -3.32% in the pre-market after it announced that it missed its EPS target by -3.5% and beat on Revenues by +0.98%. The company says that it remains on track to achieve its full-year guidance. In the past month 57% of analysts have modified their price targets 12 up, 0 down, 8 unchanged, and 1 dropped. Dividend yield: 2.85%. Potential average analyst target upside: +6.0%.

Schlumberger NV (SLB) shares are higher by +2.46% in the pre-market after it announced that it beat EPS and Revenue targets by +8.8% and +1.06% respectively. The company further announced that Russian energy sanctions are spurring a boom in oil exploration in search of alternatives, which should offer benefits to the oil services company. Dividend yield: 1.72%. Potential average analyst target upside: +16.9%.

YESTERDAY’S MARKETS

Stocks fell yesterday after the Fed Chairs comments caused bond yields to spike. The S&P500 fell by -1.48%, the Dow Jones Industrial Average was lower by -1.05%, the Nasdaq Composite Index traded lower by -1.07%, the Russell 2000 Index dropped by -2.29%, and the S&P500 ESG Index declined by -1.40%. Bonds traded lower and 10-year Treasury Note Yields gained +7 basis points 2.90%. Cryptos fell by -0.65 and Bitcoin fell by -1.79%.

NXT UP

• S&P Global Manufacturing PMI (April) is expected to have slipped to 58.0 from 58.8.
• S&P Global Services PMI (April) may have risen to 57.9 from 57.7.
• Next week: lots of earnings announcements in addition to regional Fed reports, more housing numbers, Durable Goods Orders, Consumer Confidence, GDP, Personal Income, Personal Spending, PCE Deflator, and University of Michigan Sentiment. Check back on Monday for calendars and details.