A passion for slashin’

Stocks dropped for a third consecutive session on continued economic jitters and an insensitive Fed. Federal Reserve speakers did their best to keep stocks from rising with tough talk… even from members that are considered doves.

What they say and what they do. The bulls came out to play yesterday but were quickly chased back into their pens by their herders: the Fed. Nobody can argue that the recent run of economic numbers has shown signs that inflation may be abating. Still, other indicators show an economy that is weakening, which may be bad for growth, but will ultimately aid in lowering inflation going forward. A hot economy stokes inflation, while a limping one, in theory at least, tames inflation. You know, lower consumer demand resulting from a spiraling economy.

The Fed is tasked with keeping inflation low, and while it is slowing a bit, it is still far too high, which means that Fed policymakers not only had to work through winter break, but they may also have to put off their spring break plans. It is clear that the Fed’s job is not done yet, but the question that is vexing markets in these past several days is: just how far The Bank is willing to go with its monetary tightening before it risks an economic meltdown? Well, an economic meltdown seems to be the last thing on the minds of Fed members these days. While a small number of speakers have said that smaller hikes may be appropriate going forward, most are saying that much is still needed to get inflation back to normal. “Smaller hikes” can be viewed as a dovish shift, yes, but “much… needed” is intentionally ambiguous and hawkish. The Fed’s other job is to keep unemployment low, and while December’s monthly read of New Nonfarm Payrolls showed a slight decline, the overall employment picture has been, heretofore at least, quite strong. This worries the Fed because a healthy labor market leads to wage pressure, which adds to inflation.

What also worries the Fed is the potential for a bull market. “Wait, what,” you are thinking, “why would the Fed want stocks to falter?” Come on, you know why. Just think about it, don’t you feel like it is a bit easier to throw down your credit card when your portfolio is up? Of course, you do. Wouldn’t you be more likely to embark on that overdue bathroom renovation if you could just get another +5% gain on your favorite surgical device stock? Of course, you would. Here is a fun fact: surveys show that even people who don’t even own stock are more confident when they hear that the stock market is going up. The Fed is well-aware of this, which is why Fed members feel like they have nothing to lose when they make hawkish statements that send equities lower.

In reality, Fed members can say anything they want. It is ultimately policy that counts, and that will be deliberated on, and released in 2 weeks’ time on Feb 1. THAT is what will count. According to futures, there is a 100% probability that the Fed will raise rates another +25 basis points, with a minimal 6% chance of a bigger +50 basis-point hike. So, technically, Fed members who say “more needs to be done” are telling the truth… just that the “more” will be less than it was last year. Whew, we should be thankful for that. Fed members should be privately happy that the markets, while shored up, have not exploded upward. They should also be pleased with the recent spate of announcements of tech companies and investment bank layoffs. Last night, WHILE YOU SLEPT, Alphabet / Google announced a 12,000-job cut, joining the growing number of tech companies announcing layoffs. Tech companies went on a hiring frenzy leading up to and through the pandemic, and they are all eager to right-size now, especially with most of their stocks down by double digits off their 2021 highs. Those layoffs will ultimately show up in the monthly economic figures and, ultimately, support the more dovish Fed members who are aiming to let up on the brakes a bit. Markets are still in that gray area where Fed members can still cause damage by mere words… or a lack of them. For investors, now is the time to focus on earnings and the words from management; those words are far more telling about what we can expect from your favorite surgical device company than the words of some banker from St. Louis.

WHAT’S SHAKIN’

Eli Lilly & Co (LLY) shares are lower by -1.69% after it announced that it failed to get an accelerated approval for its donanemab, used for treating Alzheimer’s. The company has been tasked with providing more data and that no other deficiencies were identified. The company further announced that the setback would not impact guidance. Lilly will announce its Q4 earnings on Feb 2. Dividend yield: 1.28%. Potential average analyst target upside: +12.7%.

Netflix Inc (NFLX) shares are higher by +6.4% in the premarket after it announced that it had exceeded estimates for new subscribers generated by its newly introduced cheaper subscription tier. The stock is rising despite missing earnings by a broad margin. Potential average analyst target upside: +8.5%.

Alphabet Inc (GOOG/GOOGL) shares are higher by +3.71%/+3.52% in the premarket after the company announced that it cut 12,000 jobs, representing a -6% of its workforce. Alphabet joins a growing number of its tech peers in announcing layoffs. Alphabet will announce its Q4 results on February 2^nd. Potential average analyst target upside: +33.9%.

YESTERDAY’S MARKETS

Stocks closed in the red yesterday as economic fears and more negative Fed chatter limited the dip-buying. The S&P500 fell by -0.76%, the Dow Jones Industrial Average traded lower by -0.76%, the Nasdaq Composite Index declined by -0.96%, and the Russell 2000 Index gave up -0.97%. Bonds fell and 10-year Treasury Note yields gained +2 basis points to 3.39%. Cryptos advanced by +2.00% and Bitcoin climbed by +0.77%.

NEXT UP

• Existing Home Sales (Dec) may have fallen by -3.4% after declining by -7.7% in November.
• Fed Speakers: Harker and Waller.
• Next week: lots of earnings, along with Leading Economic Index, Flash PMI’s, GDP, Personal Income, Personal Spending, Durable Goods Orders, PCE Deflator, University of Michigan Sentiment, more housing numbers, and more regional Fed reports. Check back on Monday for calendars and details.
• Today is an options expiration day which is likely to add some trading volatility.