Stocks took it on the chin yesterday after Fed speakers did their best to warn of further tightening. Stocks got the message this time.
It’s right in front of your nose. You can speculate all you want. You can try and read between the lines. You may even attempt to uncover a conspiracy theory. When the man with his finger on the trigger of a gun pointed at your head says that he is going to pull the trigger enough times… you’d best take him seriously. The man in this case is Fed Chair Jerome Powell.
Powell is a banker known for his calm, cool, and calculated communication style. He does not get emotional. He does not shoot from the hip. Above all, he is publicly committed to the Fed’s forward guidance doctrine. In that the Fed does its best to signal its intentions to the market so that a) the market actually does what the Fed wants, and b) the market doesn’t overreact in surprise when the Fed actually does what it signals.
Just look back at 2021… November. Powell meets with lawmakers and for the first time says that it may be appropriate to raise interest rates in the future as inflation appears to not be transient, as the Fed once thought. That’s it eight or so words… drop the mic. Markets reacted instantly attempting to factor in exactly how much, how far, and how, precisely, the Fed was going to go to kill now-non-transient (AKA sticky)inflation. Oh, and also, how bad inflation might get. Treasury yields and mortgage rates instantly began to climb. By the end of February of last year, 2-Year Treasury Note yields were around 1.5%, nearly a whole percentage point higher than they were prior to Powell’s uttering those 5 words. Mortgage rates, too, were nearly a full percentage point higher. All this without a single policy move from the Fed. The market was doing the work of the Bank. Not unexpectedly, I hope, the Fed made good on its promise to raise interest rates. Unfortunately, inflation became worse, helped along by Russia’s invasion of Ukraine, low crop yields, bird flu, and a lagging resurgence of travel and hospitality, amongst other things. The Fed began to talk tougher and promise more pain. Markets reacted… the Fed once again, made good on promises.
So, here we are after a challenging 2022. Inflation is easing somewhat, and the Fed has lowered the increments at which it is hiking rates. But one thing has not changed: the Fed is still concerned with inflation and members are signaling quite clearly that more rate cuts (plural) are coming. You see, there is this magical, restrictive level of interest rates that the Fed is looking for. There is r*, also know as r-star, which is the neutral rate at which policy is neither restrictive nor stimulative. That is thought by many economists to be at around 4%. Any higher than that would mean that rates are restrictive to economic growth, or anti-inflationary. In case you didn’t know, this last move by the Fed put us at 4.75%. Will that be enough to get inflation back to +2%?
The market thinks… “ish”, meaning, kind-of, almost. Actually, the market is counting on another half percentage point will get us there. In fact, the market believes that that last thrust on the brakes will push the economy into a stall, forcing the Fed to pivot completely and lower interest rates in order to avoid a crash… all by the end of this very year. The Fed? It doesn’t agree, as evidenced by the clear and concise language by the chairman and a steady stream of member speakers in the past 2 days. No rate cuts, guys! Inflation won’t get back to normal until next year! More rate hikes are coming. That is the clear and concise message from the man… er, men and women with their fingers on the trigger. We best take them seriously and keep our hands up until the message changes. It will, be patient.
WHAT’S SHAKIN’
STERIS PLC (STE) shares are lower by -9.20% in the premarket after it announced that it missed EPS and Revenue targets by -7.9% and -4.47% respectively. The provider of infection prevention products and services (sterilizers) also lowered its full year guidance below analyst estimates. It did mention and improved supply chain conditions, consistent with many other earnings announcements to date. Dividend yield: 0.87%. Potential average analyst target upside: +5.2%.
The Walt Disney Company (DIS) shares are higher by +7.00% in the premarket after it announced that it beat EPS and Sales targets by +33.18% and +0.50% respectively. Markets celebrated new-again CEO Bob Iger’s plan to lay off 7,000 employees a cut to expenses by $5 billion. That positive news overshadowed the company’s missing its Disney+ subscriber estimates. Potential average analyst target upside: +17.8%.
MGM Resorts International (MGM) shares are higher by +7.29% in the premarket after it announced a stronger than expected EBITDAR for the quarter. EBITDAR is earnings before interest, taxes, depreciation, amortization, and rents. It is typically used in the hotel industry. The company attributes the gains to strong revenues from Las Vegas and Macau properties. Finally, the company announced a $2 billion share buyback. Dividend yield: 0.02%. Potential average analyst target upside: +28.3%.
PepsiCo Inc (PEP) Shares are higher by +1.66% in the premarket after the company announced that it beat EPS and Sales estimates by +1.67% and +4.16% respectively. The company additionally, boosted its full year organic revenue growth above analysts’ estimates and raised its dividend by +10%. Dividend yield: 2.68%. Potential average analyst target upside: +12.2%.
ALSO, this morning: Shutterstock (SSTK), Hilton Worldwide (HILT), BorgWarner (BWA), Philip Morris (PM), Duke Energy (DUK), and S&P Global (SPGI) all beat on EPS and Revenues while Tapestry (TPR) and Tenet Healthcare (THC) came up short.
YESTERDAY’S MARKETS
Stocks sold off yesterday after a stream of hawkish Fed member comments spooked the bulls. The S&P500 fell by -1.11%, the Dow Jones Industrial Average traded lower by -0.61%, the Nasdaq Composite Index declined by -1.68%, and the Russell 2000 Index dropped by -1.51%. Bonds gained and 10-year Treasury Note yields fell by -1 basis point to 3.6%. Cryptos lost -1.25% and Bitcoin gave up -1.04%.
NEXT UP