Watches are telling the wrong time!

Stocks traded lower yesterday after trading higher for most of last week as traders get the pre-FOMC jitters. Bonds have fallen as well, an indication that investors are still concerned about the Fed’s next moves.

What goes up… Stock indexes were not themselves yesterday. Since the start of the year, we have gotten used to seeing indexes open in the red and, somehow manage to claw their way back into the green, sometimes posting sizable gains. That is nothing like last year where it seemed like the ground was constantly crumbling below the market’s feet. It is clear that the Fed, though not done, is nearer to the end of its tightening cycle than the beginning, but how much longer will we have to endure the nasty language, the rate hikes… and the constant fear that the Fed will put the economy into reverse accidentally? Indeed, that is the big question, the gravity if you like, that will keep the markets from really breaking out this year. There is only one thing that can change that: The Federal Reserve.

Today, the party-pooping bankers will meet to discuss rate policy. For the record, I have a great deal of admiration for the Fed… my stock portfolio… not so much, which is why I use these tongue-in-cheek descriptions. Indeed, fighting inflation today, though painful, avoids much larger pain in the future. Kind of like taking a bitter pill or that big chalky vitamin each morning. The FOMC is broadly expected to raise interest rates by +25 basis points, which would be a significantly less-aggressive move that we have become accustomed to.

There have been tangible signs that the Fed’s monetary tightening has hit its mark. Indeed, inflation has begun to slow somewhat. Moreover, it is clear that consumption is slowing, which can be observed by the recent Retail Sales release as well as in the current earnings season in which not only are companies reporting slower sales from last quarter, but also forecasting a continued slowing, prompting a wave of cost cutting measures. Cost cutting measures usually means layoffs which ultimately lead to lower consumption and demand. Layoffs, which, in theory, mean lower demand for labor, ultimately leads to lower wage-growth, a key driver of inflation. All of this should impress on the Fed’s policy decision. But wait, not so fast. As with most things in the economy… we have a number for that! This morning, the Bureau of Labor Statistics will release the Employment Cost Index which is the Fed’s favorite method for tracking labor cost. You will see from the following chart that it grew rather quickly from 2020 onward and how it fell slightly last quarter. Economists are expecting it to fall slightly further this morning, but you can see by the chart it is still elevated which will be of concern to the Fed. I plotted CPI on the same chart so you can see graphically that there is a relationship between labor cost and inflation… now you know what the Fed knows Finally, I leave you with some anecdotal information I picked up in my morning reading ritual. I read that Chrono24 (a private German company), the largest online watch seller of vintage, new, and used watches, is laying off 13% of its workforce, as the value of the priciest watches have fallen by some -33% in the past year, a clear sign that inflation and economic fears are taking a toll. You can see a chart of the Subdial50 Index below. It tracks the market prices of the 50 most traded watches. While that may be nice to know, I am not so sure that it is high on the FOMC’s list. You never know, though. Stay tuned.

WHAT’S SHAKIN’

Samsung Electronics Co Ltd (005930 KS) shares fell by -3.63% after it announced that it beat EPS targets but missed on revenues. The company fell short on announcing expected cost-cutting measures for the current year, keeping CAPEX level with 2022. Dividend yield: 2.37%. Potential average analyst target upside: +22.5%. WHAT DOES ‘KS’ MEAN? Samsung trades on the South Korean KRX exchange. Unfortunately, there is no US-traded ADR for Samsung, so you cannot invest in the company directly, however due to its influence on the semiconductor industry, its movements can be tracked with ETFs or funds that track the Philadelphia Semiconductor Index (SOX).

NXP Semiconductors NV (NXPI) shares are lower by -4.59% in the premarket after despite beating Q4 estimates provided current quarter guidance that was below analyst expectations. The company attributes that drop to weak demand from mobile, industrial, and smart home customers. Dividend yield: 2.25%. Potential average analyst target upside: +3.4%.

Whirlpool Corp (WHR) shares are higher by +3.15% in the premarket after announcing a +19.74% positive EPS beat. Additionally, the company provided full year sales and EPS guidance that was above analysts’ estimates. Management expects significant cost savings resulting from easing raw material inflation. Dividend yield: 4.55%. Potential average analyst target upside: -4.5%. WHY IS THIS NEGATIVE? Because the stock’s current price is above the average analyst 12-month price target. This can be interpreted as the stock being expensive, but it does not mean that the stock cannot climb higher.

YESTERDAY’S MARKETS

Stocks traded lower yesterday as Fed jitters sent the bulls into hiding. The S&P500 fell by -1.30%, the Dow Jones Industrial Average slipped by -0.77%, the Nasdaq Composite dropped by -1.96%, and the Russell 2000 Index declined by -1.35%. Bonds fell and 10-year Treasury Note yields climbed by +3 basis points to 3.53%. Cryptos slid by -2.85% and Bitcoin traded off by -4.41%.

NEXT UP

• Employment Cost Index (Q4) is expected to have grown by +1.1%, slightly less than the +1.2% growth in the prior quarter.
• FHFA House Price Index (Nov) may have declined by -0.5% after breaking even in October.
• MNI Chicago PMI (Jan) is expected to have remained constant at 45.1.
• Conference Board Consumer Confidence (Jan) may have increased to 109.0 from 108.3.
• After the market earnings announcements: Boston Properties, AMD, Match Group, Snap, Electronic Arts, Amgen, Western Digital, Edwards Lifesciences, Stryker Corp, and Mondelez.