Stocks took a wild ride yesterday, Fed Day, as central bankers hiked interest rates by another supersized ¾ percentage point. Powell’s failure to relent caused traders to mash their sell buttons, because they were hoping for a more friendly demeanor.
The hawkish pivot, we weren’t waiting for. When we think of the word “pivot” we imagine something or someone turning on a dime and reversing direction. In basketball, a pivot would include a world-class athlete quickly shifting directions by planting a foot firmly on the parquet and wheeling the other around quickly. In soccer, or non-American football if you like, a player will pivot by executing a pull-back, completely changing directions and momentum… if executed properly.
My regular readers are likely to recall that – in times of a more-tame market – I am prone to marvel at the wide variety of hawks that dwell in the small woods behind my garden. I have this thing for the regal raptors. Keen eyesight, deft of wing, a fierce predator, and a nurturer. All that applies to the world outside my office window. Within my office however, on the gaggle of screens that relay capital markets information… well, let’s just say that hawks are less than welcome.
Yesterday, the markets got what they were expecting but in the most peculiar fashion. Markets had fully factored in a +75 basis-point rate hike by the Fed, and the bankers delivered. If you have been reading my notes daily, you should have gotten the impression that I was attempting to dissuade you from expecting some sort of massive change of heart by the frantic Fed. Inflation is out of control and is now feeding itself like sort-of, a dumpster fire. The Fed, late on the scene, is doing its level best to put it out, but the blaze won’t relent so easily. The US economy is the world’s largest, so speeding it up and slowing it down is not as simple as the one-and-done maneuvers we execute each day as we drive our autos to and fro. No, the US economy is complex and requires patience… and a whole lot of muscle to get it to move. But it is moving, all you have to do is listen to corporate earnings announcements, which I do each day WHILE YOU SLEEP. The very folks who raised prices in the first place are starting to see a decline in demand. Sure, they can hold off and collect as much revenue as possible, but eventually they will have to relent.
They haven’t yet, however. This leaves the Fed no option but to continue to apply pressure until there are clear signs that prices will recede. Ok, so we are expecting that, in fact, as consumers, we welcome that, but as investors we are hoping to get through with this already. So, the Fed followed the program to the letter. It raised interest rates exactly to where the market allowed it to… for this round. Recently increasing hopes that the Fed would begin to pivot had to be addressed, and many expected it to be addressed in a binary fashion. Either the Fed would signal an outright change of policy in the future, or it would say nothing at all. For the foolishly hoping speculators, a change would send stocks higher, and an omission of mention would send stocks lower, AND THE FED GAVE US NEITHER… or did they? In its policy statement the Fed did hint toward less aggressive hikes in the future – a bona fide policy change. If the Chairman decided to go home, fix himself a nice salad, and tuck into a good Netflix series, the markets would have rallied and kept rallying. However, Powell’s job was far from over once the policy statement was released. He needed to temper the markets and let them know that the dumpster fire still rages on and that fighting it will continue to require lots of water, but perhaps at a decreased rate of flow. What it all amounted to was Powell stating that discussions of pauses in rate hiking were “premature”. Further, he said that “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” This shocked the markets, or rather in the subtlest way possible, completely shut down any remaining hopes for a dovish pivot in December. What ensued was, as you probably know by now, a selloff in equities.
Now, I am sure that the Fed did not want the stock market to sell off, but more importantly, the Fed definitely did not want any of us to think that inflation was under control and that rate hikes would end. Moves may be smaller going forward, but they will continue, and they are likely to remain high until… um… inflation goes away. Going back to the quaint woods that back up to my garden, I have witnessed Red-tailed hawks with 5-foot wingspans (that’s big, trust me) corner, swivel, and dive within what appears to be inches. In the case of the Fed hawks, we witnessed a slight bank turn with what appeared to be a minor climb in altitude. No pivot, not yet, but it will come at some point… keep your eye on inflation and employment… we will find all the clues we need right there.
WHAT’S SHAKIN’
ETSY Inc (ETSY) shares are higher by +10.74% after it announced that it beat EPS and Revenue estimates by +41.10% and +5.48% respectively. Current quarter guidance came in right on top of analysts’ estimates. Potential average analyst target upside: +34.6%.
Fortinet Inc (FTNT) shares are lower by -13.56% after it announced a solid Q3 performance, but it lowered full year billings guidance slightly. Of the analysts that cover Fortinet, 24 rate it a BUY, 8 rate it a HOLD, and none rate it a SELL. Potential average analyst target upside: +25.5%.
Lumen Technologies (LUMN) shares are lower by -18.1% in the premarket after the company announced an EPS and Revenue miss by -60.28% and -0.69% respectively. Further the company suspended its $1/share dividend. Dividend yield: 0%. Potential average analyst target upside: +13.5%.
Also, this morning: DataDog (DDOG), Air Products (APD), Cigna(CI), Regeneron (REGN), ADT (ADT), Under Armour (UAA), and Crocs (CROX) all beat on EPS and Revenues while Westlake Corp (WLK), Iron Mountain (IRM), Moderna (MRNA), and Zoetis (ZTS) came up short of targets.
YESTERDAY’S MARKETS
Stocks closed lower after a volatile day in response to statements made by the Fed chairman in the wake of a fresh +75 basis-point rate hike. The S&P500 traded lower by -2.50%, the Dow Jones Industrial Average lost -1.55%, the Nasdaq Composite Index dropped by -3.36%, and the Russell 2000 Index declined by -3.36%. Bonds traded off and 10-year Treasury Note yields added +5 basis points to 4.10%. Cryptos lost -1.93% and Bitcoin pulled back by -1.48%.
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