Stocks got slammed yesterday in the wake of the circling Fed hawks from the prior afternoon. Swirling around in the caldron of unknowns are higher for longer interest rates, recession potential, and corporate earnings declines.
Flammable substances. Can you feel the heat? I certainly can, but it has certainly not come as a surprise. The Federal Reserve raised interest once again on Wednesday in a move that was largely expected despite the eerie media headlines. You knew because you read my note EVERY day. Markets were predicting the +50 basis-point move for some time, and the Fed, as it has in the past, took what the market would afford it. In other words, if the markets were expecting a larger move, the Fed would have likely taken the opportunity. “What,” you’re wondering? “The Fed does not answer to the markets!” Well, that is not exactly true, but the relationship is not as friendly as you might think.
In times like these which are marked by unprecedented, high inflation, the Fed is in the spotlight, and inflation, if left completely unchecked, can cause all sorts of problems far beyond the ivory towers of academia and sterilized boardrooms of banking institutions. That is why managing inflation is job #1 for the central bank. Though it may be inflicting a world of hurt on your portfolio, the Fed is doing its job. Headline inflation is still high at +7.1% even after it eased a bit last month. This would hardly be the time for the grey-suited bankers to celebrate a victory. In fact, this would hardly even be the time for the Fed to hint that it will stop fighting inflation in the near term. Imagine if Chairman Powell told us that the Fed was done raising rates, inflation has pulled back, and that it will likely even lower them later in 2023? Stock markets would have rallied and consumers who are slowly becoming more measured in their spending would rush back out to shopping malls and auto dealerships. That would only serve to re-ignite inflation. What purpose would that serve? Sure, we would all like a nice rally in our oversold portfolios, but the elation would only be temporary, and the Fed’s promised rate cuts would likely never materialize, and rallies would turn into selloffs. No, the Fed’s smartest move was to keep consumers on high alert about inflation.
Economic numbers are, indeed, showing signs of weakening giving us the feeling that the Fed is playing with matches in the middle of a dynamite factory. Well… the fact of the matter is that the Fed IS playing with matches in the middle of a dynamite factory, and it knows it. Powell admitted that the Fed was expecting some economic pain ahead. The Fed’s projections clearly show that bankers are expecting a slowdown in GDP growth along with a pickup in unemployment for 2023. That means that in their minds, the bankers are well aware that they may have to reverse course on a dime if things start to worsen. Yesterday’s Retail Sales numbers came in lower than expected with a monthly decline. The numbers reflected the expected weakness in consumer discretionary spending, WHICH IS EXACTLY WHAT THE FED IS HOPING FOR, because it leads to disinflation (what we are after). Stock market enthusiasm IS, indeed, important to the Fed… sometimes, while during other times it is the Fed’s nemesis. Rising stocks feed consumption, because not only do stock gains provide more money to spend but also give consumers (even those who don’t own stocks) confidence. All that leads to increased demand and… you guessed it, more inflation. At a time where the Fed’s good work is just beginning to show positive results stocks have been rallying which can reduce the effects of the Fed’s policy moves. In other words, the recent rally in stocks and bonds is the Fed’s nemesis right now. So, if you are wondering if Fed members were concerned that stocks lost another 2 ½% yesterday, they were more than likely happy about it. Sorry.
When can we expect the Fed to let up on this painful behavior. First, it should not escape us that the Fed did downshift the rate hiking. If policy makers were truly carefree, they would have raised rates by +75 basis points or more. Second, the Fed’s own economic projections show that it believes that a slowdown will happen in coming months. As mentioned above, the Fed has no incentive to appease the stock market at this point. In fact, it wants consumers to be worried. It is doing a good job at that, wouldn’t you say? The Fed will continue to raise rates and scare consumers until it no longer can which will be when we start to get some truly ugly economic releases or when we start to see some dreadful earnings numbers. At that point we can count on the bankers to start cutting rates and to start behaving more like a friend to the markets… like the good old days. Though we would all wish that time to be now after the tough year behind us, that time is not yet. Stay focused on your long-term objectives. Be smart and don’t let your emotions get the best of you.
WHAT’S SHAKIN’
Adobe Inc (ADBE) shares are higher by +4.5% in the premarket after the company announced that it beat EPS estimates by +2.77% with revenues coming in right on target. Strong demand for its offerings were the reason for the results, according to management, which also re-affirmed its annual sales guidance. Potential average analyst target upside: +16.9%.
Meta Platforms Inc (META) shares are higher by +2.14% in the premarket after JPMorgan Chase upgraded the stock to a BUY equivalent stating the company's “cost discipline” as the reason. Potential average analyst target upside: +25.7%.
Lincoln National Corp (LNC) shares are lower by -2.92% in the premarket after Jefferies lowered its price target to $25 from $40, an oversized move for a company in which only 13.3% of analysts who cover the stocks rate it a BUY. Dividend yield: 5.83%. Potential average analyst target upside: +30.0%.
YESTERDAY’S MARKETS
Stocks dropped yesterday following Wednesday’s rate hike and a slew of bad economic numbers. The S&P500 fell by -2.49%, the Dow Jones Industrial Average declined by -2.25%, the Nasdaq Composite Index dropped by -3.23%, the Russell 2000 Index traded lower by -2.52%. Bonds gained and 10-year Treasury Note yields slipped by -3 basis points to 3.44%. Cryptos gave up -2.62% and Bitcoin lost -2.41%.
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