Markets flying, airlines grounded

Stocks rallied yesterday despite the prior day’s Fed speakers’ best efforts to derail any stock rally. Bond traders are trying to make sense of all the latest data – they are still unsure, and yield curve remains inverted.

Careful what you wish for. Am I capturing your wishes for the markets by saying “rally?” Of course, I am! Who doesn’t want to see a rally in everything. Stocks and bonds took it squarely on the chin last year scaring the bejesus out of everyone, except maybe some Generation Z investors, too financially optimistic, and Gen Alpha investors… who are probably not yet of investing age. That means everyone. I think it is fair to say that we would all like a little reprieve from the painful drawdowns. It is a new year and there have been some small signs that we are heading in the right direction.

The most recent run of inflation figures point to a slowdown in inflation. Both the Consumer Price Index / CPI, and the Fed-favored PCE Deflator both showed declines from last summer’s highs in November, and December’s CPI, due to come out tomorrow, is expected to show further decline to +6.5%. That will be followed by next week’s Producer Price Index / PPI, which tracks input costs to producers, which is also expected to have declined in December. A lot of the improvements have come from the steady declines in commodity prices in the latter half of last year. You can read more about that in my 2022 Annual Report here: https://www.siebert.com/blog/2023/01/09/yearbook-2022-destroy-after-reading/. Still, further declines in inflation are expected as consumers are expected to slow demand in the coming months due to economic uncertainty, layoffs, and depleted savings. Those are all the ingredients for a slowdown in inflation… and perhaps, a bit of optimism amongst stock investors. But we still may be forgetting about one thing, and that is the Fed, who can be credited for much of last year’s pain in the markets.

Last we heard on Monday, pain-makers have no plans to let up on the… er, pain-making. Monday’s speakers were calling for Fed Funds rates of 5% and higher. On the optimistic side, the 2 Fed speakers which caused Monday’s declines are non-voting FOMC members, but I wouldn’t ignore them. They are, after all, reading the company line, each in his or her own way. Yesterday, their boss, Fed Head Jerome Powell spoke before the opening bell, and he said… nothing. No threatening tone or promises of pain. No basking in success. Nothing. Nothing, really. The Fed is committed to price stabilization, according to Powell… um, obviously. The Fed is also data dependent… um, we would hope so. That’s about it. Crickets? Maybe, but if you are an optimist, you may have found his lack of inflation-fighting rhetoric a signal that, perhaps the Fed’s heart may be softening. For the record, we are far from out of the woods, and a lack of information typically leads to all sorts of speculation… usually incorrect. So, we have that. Markets rallied yesterday. So, we should all be happy, right? Not all of us, actually. The Fed would absolutely view equity markets rallying as a bad thing. For one thing, inflation, though lower, is still 3 times greater than the Fed target. Also as important, an equity bull market contributes to inflation in 2 ways. The first is general consumer confidence when markets are rallying. More confidence means strong demand which props up inflation. Second, with stocks rallying, more profits will lead to more consumption – more disposable dollars to spend, which leads to higher demand to prop up inflation. So, don’t be surprised if Fed speakers turn up their rhetoric as stocks climb. So, next time you wish for a rally, make sure to wish for a mild-under-the-radar one.

WHAT’S SHAKIN’

Expedia Group Inc (EXPE) shares are higher by +1.94% in the premarket topping the S&P500 leaderboard. Oppenheimer raised its rating to OUTPERFORM from PERFORM. The company is due to report Q4 earnings on 2/2. Potential average analyst target upside: +32.0%.

American Airlines Group Inc (AAL) shares are lower by -0.72% in the premarket with high volume. The move is in response to reports of an FAA system failure which grounded flights. The company will report its Q4 earnings on Jan 20^th. Potential average analyst target upside: +5.7%.

YESTERDAY’S MARKETS

Traders spent the day attempting to interpret Powells lack of anything substantive in his speech yesterday, leading to a volatile day which ended in the green. The S&P500 gained +0.70%, the Dow Jones Industrial Average climbed by +0.56%, the Nasdaq Composite Index traded higher by +1.01%, and the Russell 2000 Index advanced by +1.49%. Bonds declined (like the old days) and 10-year Treasury Note yields added +8 basis points to 3.61%. Cryptos continued their recent climb, adding +2.86% and Bitcoin rose by +1.66%.

NEXT UP

• No Fed speakers scheduled and no major economic releases, leaving investors only a bill auction and yesterday's Powell powwow speech AND tomorrow’s CPI release to speculate on. Oh, and there is earnings season, which curiously begins this Friday.
• JPMorgan’s 41^st Annual Healthcare Conference continues in San Francisco. It has been a fount of earnings pre-releases for Healthcare stocks, so keep your eyes open on the sector.