Fed dread, trouble ahead

Stocks took a drubbing yesterday as weak forecasts from reporting retailers threw salt on the wounds of already skittish investors. Home sales hit monthly lows not seen since 2010.

A testing of nerves. Bad news! The economy is still standing strong. Ok, take a moment to think about that. No, I didn’t make a typo by using the adjective “bad”, and no it’s not a cultural thing, the still-standing economy IS bad news for stock investors who want the Fed to shy away from raising rates higher. Yesterday morning, there was something for every bear on the breakfast menu. The first item, as implied, was that the economy is expanding, according to S&P Global’s Flash PMI. It is one of the most current indicators of the economy and it is a strong leading indicator. According to the release, purchasing managers feel that the economy is expanding slightly, though economists were expecting otherwise, a slightly contracting economy. Though the manufacturing component was below 50, indicating a contraction, it was still higher than the prior month and economists’ estimates. The services component also beat estimates and was higher than last month, but it came in over 50, indicating an expansion. This should surprise none of us as the services sector has been going strong. The news is also consistent with recent inflation numbers which show a clear surge in services-based prices while goods-based inflation has been ebbing.

That news means, quite clearly that the Fed will have less qualms with raising rates higher for longer. Yet another sign that the market possibly needed to adjust its rather bullish rates outlook. AND IT DID… finally. I have been writing about obsessively as of late, and markets have finally come around with a big adjustment in recent days. The probability of another +75 basis points of hikes have increased to 100% by July, when just +50 basis points were factored in just days ago, according to Fed Funds futures and Overnight Index Swaps. Bond yields have jumped as well adding another tasty delight for stock bears to snack on.

In other news yesterday morning, retail giants Walmart and Home Depot both reported earnings that beat estimates for Q4 but offered a warning of slow sales ahead. The warning is consistent with those given by reporters heretofore. It is now the retailers that are up to deliver earnings and, unfortunately, Walmart and Home Depot set the bar. Now this is legitimate bad news, but the bears seized on it as was evidenced by the Consumer Discretionary sector ending the session as the worst S&P performer, down by -3.34%.

Another bit of legitimate bad news, depending on how you view it, came from the National Association of Realtors which announced that Existing Home Sales declined in January, topping a year of back-to-back declines. The number of existing homes sold in January was the lowest since 2010, you know, after the last housing bubble burst in The Great Recession (see following chart). As aforementioned, that is bad news for the economy, but perhaps if you are searching for a silver lining, there may be one. The decline in the housing sectors is the clear result of the Fed’s monetary tightening and the Fed, in its own words, would like to see the housing bubble shrink. You want to know where the bulls were yesterday? Nowhere to be found. But don’t worry they will soon start rooting around for bargains now that the market adjusted expectations. They always do.

WHAT’S SHAKIN’

Charles River Laboratories International Inc. (CRL) is lower by -7.64% in the premarket after it announced strong EPS and Revenue beats for Q4, but provided full year guidance that was well below analysts’ estimates. 81% of analysts that cover the company rate it a BUY, the remaining ones rate it a HOLD. Potential average analyst target upside: +10.5%.

CoStar Group Inc (CSGP) shares are lower by -14.71% in the premarket after announcing that it beat EPS and Revenue estimates by +7.86% and +0.62% respectively. Current quarter guidance was below analysts’ estimates as was full year guidance. The company further announced that it was no longer in talks to acquire Move from News Corp. Potential average analyst target upside: +13.3%.

YESTERDAY’S MARKET

Stocks fell yesterday in the wake of a collection of negative earnings and economic news. The S&P500 fell by -2.00%, the Dow Jones Industrial Average dropped by -2.06%, the Nasdaq Composite Index declined by -2.50%, and the Russell 2000 Index traded lower by -2.99%. Bonds fell and 10-year Treasury Note yields jumped by +13 basis points to 3.95%. Cryptos fell by -1.74% and Bitcoin gave up -2.30%.

NEXT UP

• MBA Mortgage Applications (Feb 17) were down by -13.3% for the week after falling by -7.7% in the prior week.
• FOMC Meeting Minutes (Feb 1 meeting) will be released at 2:00 PM Wall Street Time. Traders will be interested to see just how many members, besides James Bullard, were considering a bigger +50 basis-point hike. This can be a market mover… pay attention.
• Earnings after the closing bell: Pioneer Natural Resources, Sunrun, Teladoc, Bumble, Mosaic, eBay, Lucid Group, Coterra Energy, Etsy, Altice USA, and NVIDIA.