Cold-hearted Fed and Illumina disappoints

Stocks had a mixed close yesterday, giving up big gains from the morning session, after Fed speakers rained on the happy parade. Though the rhetoric offered nothing new, it served as a reminder that the Fed is still holding all the cards.

Who is in charge here? I can tell you, for sure, that YOU are not in charge of the markets. I can tell you, for sure, that YOUR needs will not be factored into the markets’ performance this year. Finally, I will remind you of my oft-repeated caveat: the market rarely does what is convenient for you. Now that we got that out of the way, I pose the question: “is anyone in charge of the market?” Well, for the moment there seems to be one entity, comprised of a group of individuals, that the markets appear to be responding to. If you are thinking “of course, it’s the Federal Reserve Federal Open Market Committee,” then you are correct. Do you remember the bull market? It was so powerful that it literally trampled the minutes-long bear market that emerged at the start of the pandemic when just about THE ENTIRE WORLD was in lockdown and global economies sank into the red. Can you remember the years prior to the pandemic, say, back to the end of The Great Recession? Sure, you can, it was a great time to own stocks… and bonds, though not for their coupons.

Starting at the end of The Great Recession / Global Financial Crisis it was Fed policy with ZIRP and QE, which spurred markets into a secular bull market. As a reminder ZIRP is Zero Interest Rate Policy and QE is quantitative easing in which the Fed buys bonds in the public market to prop up bond prices, keep yields low, and provide liquidity to the markets. In late 2015, the Fed started to tighten its policy and markets struggled a bit, but companies were still in growth mode which helped the economy limp along until 2017, when a Republican-led tax package gave companies a boost with lower tax rates and the ability to repatriate funds stranded overseas. By 2018, corporate earnings growth slowed, causing markets to struggle and the Fed reversed its policy in the last weeks of the year. The result was a rally, and by the summer, the Fed would begin to cut rates once again, and for the first time since 2008. The result was… a rally, which carried us right up to the pandemic. As the pandemic rolled into the US in the first quarter of 2020, Fed Funds were at 1.75% after 3 successive -25 basis-point cuts in 2019. The onset of the pandemic sent stocks into a tailspin which seemed never-ending… until the Fed stepped in with an unprecedented monetary easing package which pegged Fed Funds back to 0% in 2 swift moves. The decline in stocks was backstopped and a great rally began once again. That rally lasted until last November of 2021. It was cut short by 2 sentences uttered from the lips of one man: the Chairman of The Federal Reserve. He warned that rate hikes may become appropriate. That warning was followed by action as the Fed began raising interest rates in March of last year, and it would continue to do so for the remainder of the year; +25 basis-point hikes became +50, became +75, and ultimately +50 basis-point bumps. The results? You know by now.

Based on that very brief, and overly simplified history, it should be clear to you that the Fed has the ability to drive the markets. It is no wonder that investors would like to see the Fed become benevolent once again, as they were in 2008, 2018, and 2020. We know what drives Fed behavior. The Fed is driven by its dual mandate: low inflation and low unemployment. The former is the problem at hand and the reason for all the rate-hiking. Inflation has eased somewhat, therefore, markets expect the Fed to slow down the brake-pumping. However, the Fed is not interested in what the markets want or expect. The Fed expects rates to close out this current year at least a ½ percentage point higher than today (somewhere around 5%). The markets expect Fed Funds to close out the year -25 basis points lower than they are today (somewhere around 4.25%), not before they go up by another +50 basis points and peak in the summer. That equates to +50 up and -75 back down. So, we have a difference in opinion between the folks that make the policy and markets. Guess who ultimately wins.

If you are unsure, you need only watch yesterday’s market action. Stocks started the session in rally mode following last Friday’s big bump which came in response to a slowing employment figure and a weak service sector PMI. Yesterday featured two Fed speakers and their message was clear: no rate cuts until inflation gets back to 2%. The last reading on inflation was… um, +7.1% and we will get another release this upcoming Thursday which is expected to be… um, +6.5%. Sure, that is an improvement over last July’s +9% peak, but it is far from that 2% target set by the Fed. So, if we apply just some basic logic here, we know that rate cuts are not likely to come anytime soon. The market drew the same conclusion yesterday, giving up sizable morning gains after comments by Raphael Bostic (a known hawk) and Mary Daly (a known dove). It is important however to realize that the Fed can and will, as it has many times in the past, adjust its message and policy based on unfolding macro factors. The end of 2023 is a long time from now and lots can happen along the way. As we travel that road, our best bet is to follow the time-honored Wall Street adage: don’t fight the Fed!

WHAT’S SHAKIN’

Danaher Corp (DHR) shares are higher by +0.67% in the premarket after the company revealed that its preliminary revenue growth was in the high single digits, which is higher than prior guidance and in line with analyst targets. The company will announce its Q4 earnings on January 24^th.  Dividend yield: 0.39%. Potential average analyst target upside: +17.4%.

AT&T Inc (T)  shares are higher by +1.00% in the premarket after Wells Fargo upgraded the company to OVERWEIGHT. The company is set to release its Q4 results later this month. Dividend yield: 5.82%. Potential average analyst target upside: +11.25%.

Illumina Inc (ILMN) shares are lower by -11.05% in the premarket after it warned of weaker than expected earnings for 2023 at the JPMorgan Healthcare Conference being held this week. The company will announce Q4 earnings on 2/10. Potential average analyst target upside: +18.1%.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday after hawkish Fed comments derailed an opening rally. The S&P500 slipped by -0.08%, the Dow Jones Industrial Average fell by -0.34%, the Nasdaq Composite Index gained +0.63%, and the Russell 2000 Index advanced by +0.17%. Bond gains and 10-year Treasury Note yields pulled back by -2 basis points to 2.53%. Cryptos climbed by +4.96% and Bitcoin added +1.33%.

NEXT UP

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• NFIB Small Business Optimism (Dec) declined to 89.8 from 91.9 missing estimates. It was released this morning at 6 AM Wall Street Time, WHILE YOU SLEPT.
• Fed speakers: Powell will speak at 9:00 AM prior to the market opening. Given yesterday’s price action, Powell’s words can dictate the market’s contours today. See above
• Earnings: Lots of healthcare companies are scheduled to speak at the JPMorgan Healthcare Conference today… expect more earnings previews.