Stocks closed down slightly in an up-down-up session driven by confusion over whether a reopening in China is good or bad for stocks. Recession fears rise to the top of the list of things that go bump in the night and a temporarily quiet Fed will begin to bump again next week.
Who’s in charge? Just when you thought it was safe to look at your 401k value… [cue ominous shark music]… we find ourselves, once again, in what feels like dangerous waters. For the past year, fear of Fed rate hikes has dominated the price action in stocks and bonds. Most of us own both of those, so you would have to search far and wide to find an investor who has not had a… challenging year. But things may be looking up on the interest rate front. The Fed may be ready to take a breather from its assault on the capital markets. By “breather” I mean that they may ease up a bit on the aggression, but rates are likely to remain on the high side, which means that the brakes are still on. Wait, what is the back story on those rate hikes, again?
The Fed is hiking interest rates, depressing the brakes, to slow down the economy. Fast and hot economies lead to inflation, and the US had both in the wake of the pandemic as Americans asserted their pocketbooks. Of course, there were other factors which contributed to the magnitude of inflation, namely a war in eastern Europe and an entangled global supply chain. Whatever the cause, the fact remains that most of the globe is now gripped by inflation, and it is the job of central bankers to put it down using their favorite tool: interest rate hikes. Those hikes and the expectations surrounding them have driven markets down, down further, up a bit, down again, up, down, up, sideways, up-up, and down. Take a breath. All that movement has left a queasy feeling in your tummy… and your stocks down some -17% for the year… if you were lucky. So, naturally when the head guy over at the Fed (Powell) says in a room full of economists that it may be appropriate for the FOMC to slow the pace of rate hikes in December (this month), we all collectively feel a sense of guarded optimism. And that happened… for like 2 days.
It didn’t take long for CEOs and well-respected commercial banking titans to come on air and warn us all… re-warn us all about recession. The word has been bandied about for this past year, but it has taken second seat to rising interest rates. Bank of America surveys institutional fund managers – you know, folks who should be in the know about the economy – and a recent poll shows that nearly 80% of the respondents are expecting a recession in the next 12 months. The reasons are clear. Corporate revenue growth is slowing as the delayed effects of the Fed tightening take hold. Layoffs, albeit small ones, have begun to spring up in the bloated tech sector and more recently have found their way in other sectors. Most recently, PepsiCo (PEP) announced that it is preparing a layoff. Wow, Pepsi? That would seem like a safe place to work, even in tough times.
It is important to remember that it’s not just a potential recession that is mounting, but also inflation, which is still a thing… affecting consumers. If you have to pay more for bread, eggs, and gasoline, you have less to spend on luxuries like expensive bottled water and bubbly soft drinks, although those niceties are usually the last to be shed. That same theme is occurring in other industries as well. I read a report this morning, WHILE YOU SLEPT, that British American Tobacco (BATS), maker of Lucky Strike Cigarettes, is witnessing a consumer shift to cheaper cigarettes as a result of rising living costs. Tobacco companies are considered safe stocks because smokers tend to hang on to their vice, even in tough times… until they can’t anymore. Consumers are facing real challenges in their budgets and when you throw in a fear of recession and potential job cuts, consumers, who make up 2/3 of the US economy, stop consuming… which is, you know how a recession actually occurs. It seems like we just can’t catch a break. Looking on the bright side, the Fed is not expecting a recession (at least they haven’t said so yet, wait until its next projections), 20% of fund mangers are not expecting a recession, and smoking can be hazardous to one’s health, so at least some folks may take up a less-dangerous pastime.
WHAT’S SHAKIN’
Tesla Inc (TSLA) shares are lower by -1.94% in the premarket as investors, responding to reports that the company is slowing production, fear that waning demand in China may be a headwind to sales growth. Of course, it is also not helpful that reports have surfaced that Elon Musk may secure margin loans on his Tesla stock to refinance debt held by his dangerous pastime, Twitter. Potential average analyst target upside: +62.2%
Wynn Resorts LTD (WYNN) shares are higher by +3.11% in the premarket after Stifel raised its price target to $109 from $85 citing that its Macau-centric casinos will benefit from the reopening in China. Potential average analyst target upside: +3.0%.
YESTERDAY’S MARKETS
Stocks gave up early gains on mounting recession fears, but markets ultimately rallied into the close just mildly in the red. The S&P500 slipped by -0.19%, The Dow Jones Industrial Average was unchanged, the Nasdaq Composite Index declined by -0.51%, and the Russell 2000 Index pulled back by -0.31%. Bonds gained and 10-year Treasury Note yields fell by -11 basis points to 3.41%. Cryptos declined by -1.66% and Bitcoin fell by -0.96%.
NEXT UP