The Fed still cares

Stocks rallied on Friday after Fed Chair Powell gave the markets a subtle nod. Consumer sentiment is wavering slightly according to a University of Michigan survey.

With a wink and a smile. It’s been two days since quotes were last flashing on our screens and many can still feel the queasiness of last week’s market action. Of course, it is nice that the markets ended the week in a positive move, but the journey to get there was anything but straight forward. At least 3 days of the last 5 have featured violent intraday swings leaving even the most “well informed,”  seasoned investors scouring their sources for the cause of the moves. The week started with a tumble and ended in an updraft, both unstoppable. The S&P500 ended the week -16% below its recent peak (achieved in early January). That is eerily close to what is considered a bear market, defined as a close more than -20% below a recent high. At one point during last Thursday’s session the S&P500 got as low as -19.6% below January 3^rd’s last all-time-high. If the index closed below that -20% mark, it would mark only the 11^th occasion since 1950, the most recent being in March of 2020. One could understand why traders were a bit on edge last Thursday before the market rallied into the close. One could also understand the feeling of relief when the index opened higher on Friday morning and remained strong through the close. We certainly know the reason for the volatility with all the uncertainties swirling through the markets lately, but that uncertainty is far from over. Last week’s inflation numbers proved that though inflation might be moderating, it is still quite high, and that it has the potential to surprise us on the upside. Corporate earnings season is winding down and while the overall earnings indicate that companies are healthy with continued growth, many companies are warning of challenges in coming quarters. Companies have been raising prices to make up for their increased costs, and while consumers have been unphased to date, companies know that at some point demand may pull back leaving them with higher costs and lower sales. Last Friday, the University of Michigan Sentiment indicator came in well below expected at 59.1, also lower than last month’s 65.2. Though readings above 50 indicate growth, such a precipitous monthly change is a strong indicator that consumers are beginning to grow concerned. If consumers squelch their spending, it can spell trouble for GDP, roughly 2/3 of which is made up by consumers alone. Never mind sentiment, consumers at some point will have to pull back on spending due to affordability alone. Sure, they can borrow money to make up shortfalls…but wait… the cost of borrowing is going up as the Fed races to raise key lending rates. See where I am going with this?

There is a war in Ukraine and the results have been breakneck rises in some of the most basic and necessary commodities: energy, industrial metals, and grains. Additionally, there are supply chain problems causing cost increases in the most basic electronic components found in just about everything that turns on and off. Workers are reluctant to return to work without pay hikes and companies have had to capitulate and raise salaries, putting further cost pressures on them. COVID, one of the key causes of these inflationary forces HAS NOT GONE AWAY, as China has proven. We have watched the aggressive lockdowns in Shanghai and, perhaps, not realized that they have been devastating to the Chinese economy, which is now expected to contract. That can certainly have an effect on the US economy, and it will certainly have an effect on US stocks of companies that sell into the Chinese market. For example, Apple has warned that the Chinese lockdowns will affect iPhone shipments on both production (they are manufactured in China) and sales (Chinese consumers buy them as well). There are indeed some economic headwinds to face at this point. It is the fear of these headwinds (that is a secret codeword for potential recession) and an indifferent, aggressive Fed that has gripped the market with fear…and volatility. In a radio interview on Thursday, Fed Chair Jerome Powell stated that he believed that the Fed Funds rate would be raised by +50 basis points in both June and July. Sounds crazy, but the market has already solidly factored those moves in. He further hinted that growing economic headwinds may make it a bit more challenging for those hikes in the future. His words were calming to investors who fear downside risks such as greater-than-expected hikes. That point may mark the peak of the Fed’s hawkish rhetoric, which has already caused bond yields to spike and borrowing costs to go up. Another indicator are yields on Treasury securities. Longer maturities, which are less influenced by Fed policy, have recently rallied pushing yield slightly lower. The hints given by Powell along with lower bond yields paved the path for Friday’s rally in stocks. It is important to remember that 1 rally does not a bull market trend make and there were certainly plenty signs that Friday’s move could be a bear market rally, in other words it may be temporary. Further, considering that the Fed would only veer and pull back on its hiking program if the economy were to falter, well, perhaps we should be concerned as well. It is important not to panic sell, but equally so, it is important not to panic buy.

WHAT’S SHAKIN’

Cigna Corp (CI) shares are higher in the premarket after being upgraded to OVERWEIGHT by JP Morgan. The health insurer announced sizable EPS and Revenue beats 2 weeks back. Dividend yield: 1.72%. Potential average analyst target upside: +9.9%.

Netflix Inc (NFLX) share are higher by +1.95% in premarket trade being upgraded to OUTPERFORM by Wedbush, stating the moves to mitigate its slide are a positive sign. Netflix has been aggressively moving to stave off its recent subscriber growth stagnation, considering live streaming, ad insertion, and expanding into theater viewing. Potential average analyst target upside: +68.6%.

FRIDAY’S MARKETS

Stocks rallied on Friday after Powell, in an interview, hinted at the revival of the missed Fed Put. The S&P500 gained +2.39%, the Dow Jones Industrial Average rose by +1.47%, the Nasdaq Composite Index jumped by +3.82%, and the Russell 2000 Index advanced by +3.06%. Bonds fell and 10-year Treasury Note yields climbed by +7 basis points to 2.91%. Cryptos gained +7.52% and Bitcoin added +4.25%.

NXT UP

• Empire Manufacturing (May) may have fallen to 15.0 from 24.6.
• In the week ahead, earnings continue with retail along with Retail Sales, housing numbers, more regional Fed releases, and Leading Economic Index. Please refer to the attached earnings and economic calendars for details.