Musk is optimistic, buyers maybe not so much

Stocks closed in the red yesterday as the continued threat of more rate hikes and a softening economy loomed like dark clouds over the heads of investors. Solid earnings beats by closely watched companies were not enough to push stock indexes higher.

Don’t kid yourself. I am thankful for my readership. Some mornings, I wonder if I would just limit my writing, as many writers do, to just being a perpetual, optimistic bull; would my readers appreciate me more? This is the problem. In addition to writing this daily note, I manage money, which means that I am responsible for the financial well-being of real people. That being said, I have a responsibility to not only provide clients with the best and most up-to-date information and service, but I also feel as if I must never candy-coat the facts, even those facts may be painful to hear. That is precisely why I have spilled so much ink writing about inflation, the Fed, rate hikes, the economy… you know, all the stuff you would rather not hear while you eat your morning toast.

Ok, so now that I got that out there, let’s get to the latest installment of reality. Yesterday, bond yields bubbled higher. Almost all Treasuries tenors from 3 months through 30 years are now above 4% (3-month Bills are just shy, and the outlier). Yesterday, yields on 2-year notes gained +12 basis points to 4.55%. That is a big move for the 2-year, and the yield is the highest it has been since 2007. The move and the level are a reflection of the markets factoring in a tougher Fed for longer. Remember, 2-year Notes attempt to reflect where Fed Funds may be in 2 years. This adjustment is likely in response to continuous and unrelenting, hawkish Fed talk. I cover Fed talk a lot in my notes because it is a key policy tool. The Fed is raising interest rates really, really aggressively, which will first serve to kill the real estate market, a key driver for economic growth, and, let’s be honest, a key contributor to the recent spate of inflation. However, that is simply not enough to extinguish the flames of inflation. Consumers must apply pressure to producers in order for them to lower prices. That only happens when consumers reduce demand. One of the best ways to get that to happen, short of taking away their employment (that can happen, too), is to scare them into tightening their belts. Hawk talk is an effective way of doing that. Assuming that those hawkish Fed bankers make good on their threats to raise even faster, well that can only mean more pain for consumers. The bond market is sending us a sign that it believes that the Fed’s threats are not idle.

Those higher bond yields continue to put pressure on growth stock values, even though they are significantly cheaper than they were a year ago. Indeed, those higher bond yields are putting pressure on traditionally defensive utility and high dividend consumer staple stocks. This unfortunately, leaves little for the broader stock market to do but… not rally. What about individual company performance? It is early in earnings season and results so far have been surprisingly positive. Companies are managing through the various “headwinds” which have become a sign of the economic times. Unfortunately, many companies are managing the headwinds by raising prices to cover cost shortcomings. Some companies are surprisingly raising forward guidance as they expect stronger demand this current quarter. Despite all that, the economic challenges continue to overshadow market sentiment.

Something’s gotta’ give, and it will… eventually. At some point, these higher interest rates will cause the economy to slow and allow prices to moderate to a more tenable level. Companies, flush with unpurchased inventory, will be forced to slash prices. We are hearing rumblings of that over and over in the retail space already. The Fed, at some point will have to abandon its foul language and replace it with words of encouragement. Soon after, that will be followed with a less restrictive policy stance. When that happens, those painfully high yields will come down and provide the stock market an opportunity to shine anew. Quality companies in your portfolio will outperform once again, and you will be thankful that you made investment decisions based on facts and figures… no candy coating. Hang in there and stay focused on your long-term plan.

WHAT’S SHAKIN’

Danaher Corp (DHR) shares are higher by +3.14% in the premarket after the medical test products manufacturer announced that it beat EPS and Revenue estimates by +14.21% and +7.02% respectively. The company, additionally, expects stronger full year results, though it did not increase guidance. Dividend yield: 0.38%. Potential average analyst target upside: +22.9%.

International Business Machines Corp (IBM) shares are trading higher in the premarket after it announced that it beat EPS and Revenue estimates by +0.11% and +4.29% respectively. In the past month 31% of analysts that cover IBM have revised price targets, 0 up, 6 down, and 13 unchanged. Dividend yield: 5.38%. Potential average analyst target upside: +11.6%.

Tesla Inc (TSLA) shares are down by -4.73% in the premarket after the company announced a sales miss despite beat on EPS. Management (really, Musk) told shareholders that the company experienced challenges with logistics and the demand has slowed somewhat. Potential average analyst target upside: +32.1%.

Also, this morning: Dow Inc (DOW), AT&T (T), Blackstone (BX), and American Airlines (AAL) all beat on EPS and Sales while KeyCorp (KEY) and Philip Morris International (PM) came up short.

YESTERDAY’S MARKETS

Stocks traded lower yesterday as rising yields held back indexes. The S&P500 Index fell by -0.67%, the Dow Jones Industrial Average slipped by -0.33%, the Nasdaq Composite Index declined by -0.85%, and the Russell 2000 Index dropped by -1.72%. Bonds declined and 10-year Treasury Note yields gained +12 basis points to 4.13%. Cryptos slipped by -0.5% and Bitcoin declined by -0.88%.

NEXT UP

• Initial Jobless Claims (Oct 15) is expected to come in at 233k, a bit higher than last week’s 228k.
• Existing Home Sales (Sept) may have fallen by -2.1% after slipping by -0.5% in August.
• Leading Economic Index (Sept) is expected to have fallen by -0.3% for a second straight month.
• Scary Fed talk today: Harker, Jefferson, Cook, and Bowman.
• Earnings releases: Whirlpool, Boston Beer Co, CSX, Tenet Healthcare, and SVB Financial, after the closing bell.