Stryker, stricken by the usual suspects

Stocks slipped yesterday as investors geared up for the big Fed decision being debated today but released tomorrow afternoon. Rising bond yields clapped shackles on tech stocks as they slid further in yesterday’s session.

A little patience… and understanding. Ok, so October is done and dusted. Thankfully no black Monday’s, Friday’s or whatever, you pick. On the contrary, the S&P500 rose some +8% for the month, and the Dow gained almost +14%. In this current environment you might be unimpressed about numbers of that magnitude, but it does help to get some perspective. Portfolio Managers, including yours truly, are constantly pressing “long-term focus”, that is because we know that the S&P500 has returned some 9 ½% annualized on average over the past 50 years, which is a respectable return for any portfolio. Knowing that, if you didn’t already know it, those monthly numbers reported above look far more impressive, considering the state of the markets and the economy. Inflation remains high, the Fed has unleashed its most powerful anti-growth weapon, the probability for a certified recession is increasing, and earnings growth is slowing. Yeah, that is the kind of environment which delivered those impressive results in the equity markets.

Starting today, the world’s most formerly-famous, now-infamous bankers will meet in an austere conference room to discuss monetary policy. Markets largely expect the FOMC to hike key rates by another +75 basis points, another installment in its ongoing battle with inflation. According to the latest economic data there are some signs that consumers are cutting back a bit. Though we are still in the midst of earnings season, there is a clear trend of companies lowering future sales guidance based on softening demand. Consistent with that is the level of corporate spending reported in last quarter’s GDP figure. Consumers and companies make up almost the entirety of GDP growth, save for the Government, which controls spending based on policy rather than on confidence. BUT, and this is an all-caps “but”, inflation remains high. I have voiced my concerns with many of you in our discussions and in this note as well. A good chunk of this current spate of inflation comes from the supply side. Sure, consumers are buying stuff like there is no tomorrow, bidding up prices on homes, autos, you name it, but the inflation problem is far broader.

All of us need shelter and home prices and rents have skyrocketed in the past few years. The good news there is that home prices are indeed, receding, directly tied to higher interest rates… good job Fed. Rents, however, have not followed suit as landlords are keen to make up for the lean pandemic years, and more importantly, demand remains high. In an economic slowdown, rents are typically the last expense item to be compromised, so they will ultimately ease in response to tightening monetary policy, but not anytime soon.

In addition to shelter, we also all require food, and that is a big problem for us all. Food prices remain one of the largest contributors to inflation. Unfortunately, on that front, the Fed has little control. Mother Nature is largely to blame for higher food costs, and unlike the Fed she is her own boss. Livestock-borne illnesses, poor crop yields, and the war in Ukraine have caused just about anything we eat to cost more to produce. While fluctuations in commodity prices for at least the first 2 drivers are normal, the addition of the war combined with already high core inflation makes for the perfect storm we are experiencing today. As an example, just yesterday, it was reported that Russia sought to block wheat shipments from Ukraine causing wheat prices to spike by +6.4%.

Supply problems go far beyond food, as crucial microchip supply has gummed up manufacturing lines and continues to do so. Supply chain challenges and still-existent COVID lockdowns in Asia have made factory output for basic components inconsistent, which hampers productivity, causing costs to go up. Companies are also facing increased shipping costs as fuel prices skyrocket. Suppliers are also facing an ongoing tight labor market in which they are struggling to fill openings, ultimately causing them to pay higher wages.

Yes, the Fed’s tighter monetary policy will slow inflation of certain necessities, but unfortunately for others, specifically those related to supply challenges, we may have to remain patient as those work themselves out. And those will, either by themselves over time, or if the Fed rides the economy into a bona fide recession, the equivalent to a control-alt-delete reset (that is like pulling the plug for you non-technical types). JOLTS Job Openings today will show if labor demand is slowing down as companies embrace for leaner days. Also, ISM Manufacturing will tell us if supply chain wait times are easing. Regarding the Fed, we will have to wait and see what comes from their policy meeting. Though a large rate hike is expected, many are hoping to get some more color on the Fed’s next steps beyond today’s meeting.

WHAT’S SHAKIN’

ABIOMED Inc (ABMD) shares are higher by +51.56% in the premarket. The company announced that it had beat EPS targets by +123.79%, but the large price increase is due to its announcement that Johnson & Johnson (JNJ) had agreed to acquire the company for $380 per share.

Pfizer Inc (PFE) shares are higher by +3.97% after the company announced that it beat EPS and Revenue estimates by +26.82% and +7.21% respectively. The company raised full year guidance as it expects increased sales from vaccine-related products. Dividend yield: 3.43%. Potential average analyst target upside: +15.4%.

Stryker Corp (SYK) shares are lower by -6.21% in the premarket after it announce that it missed EPS estimates by -5.03% with a slight Revenue beat of +0.30%. The company commented that it is experiencing currency headwinds and raw component inflation and lowered its full-year EPS guidance below analyst estimates. Dividend yield: 1.21%. Potential average analyst target upside: +4.2%.

Eli Lilly & Co (LLY) shares are lower by -1.78% in the premarket after it announced a solid result beating on both EPS and Revenues. However, the company lowered its full year guidance for the third straight quarter resulting from one-time charges and the poor currency exchange rate environment. Dividend yield: 1.08%. Potential average analyst target upside: -5.9%. WHY IS THIS NEGATIVE? This occurs when the company’s stock price is higher than the average analyst price target. While this may be interpreted as a stock being expensive, it does not mean that shares cannot continue to rise.

Also, this morning: Enterprise Products Partners (EPD), Marathon Petroleum (MPC), IDEXX Labs (IDXX), Eaton Corp (ETN), KKR (KKR), and Simon Property Group (SPG) all beat on EPS and Sales while Zebra (ZBRA), Uber (UBER), and Catalent (CTLT) came up short.

YESTERDAY’S MARKETS

Stocks closed lower as investors positioned ahead of today’s start of the FOMC meeting. The S&P500 traded lower by -0.75%, the Dow Jones Industrial Average slipped by -0.39%, the Nasdaq Composite Index pulled back by -1.03%, and the Russell 2000 Index broke even. Bonds fell and 10-year Treasury Note yields climbed by +3 basis points to 4.04%. Cryptos gained +0.18% and Bitcoin lost -1.37%.

NEXT UP

• S&P Global Manufacturing PMI (Oct) is expected to come in at 49.9 in line with flash estimates.
• JOLTS Job Openings (Sept) may have declined to 9.75 million from 10.053 million vacancies from August.
• Construction Spending (Sept) is expected to have declined by -0.6% after pulling back by -0.7% in August.
• ISM Manufacturing (Oct) may have slipped to 50.0 from 50.9.
• Earnings after the closing bell: AIG, Devon Energy, AMD, ZoomInfo, Caesars Entertainment, McKesson, Energy Transfer LP, Electronic Arts, Airbnb, and Public Storage.