Stocks had a mixed close yesterday as confused investors tried to interpret the FOMC tea leaves. Everyone wanted to be a fly on the wall during the last FOMC meeting, and yesterday we all got the chance… a few weeks late though.
You are here. Markets tend to be ahead of the news… or at least they try to be. Big moves in either direction cannot be noticeably sustained unless a consensus is reached. As the market is held by hands far and wide, that consensus can be prescient. Remember back in those dark days of the pandemic lockdowns? Don’t get too deep, but you probably recall that as things seemed to worsen out in the real world, stock markets began to rally… hard. My phone was ringing off the hook with clients wondering why the market was rallying while there were shortages of ventilators and refrigerated trucks. Of course, no one was complaining about the rally after watching stocks slide some -34% in early 2020. However, there was something unnerving about it, because for a minute, many investors could not understand why, which led them to believe that the rally couldn’t last. Well, it did. Why? Because the market was already focusing on the period after the lockdowns. Moreover, investors began to realize that some companies would benefit from the new normal of pandemic life. It didn’t take long.
Of course, that was a stark example, but you can often hear me talk about the market factoring in things. We can observe it by simply watching performance in response to data, news, or rumors… at a high level. We can also look at the futures and options markets to see where traders are placing their bets with a very specific timeline. In the bond markets, we can take note of specific maturities on the yield curve to give us a timeline on what bond traders are thinking. Those areas are where we get most of our quantitative data. For the most part, all of those tend to stay in a reasonably tight sync… until recently.
If you are a regular reader, you could not help but sense my frustration recently. Bonds, futures, swaps markets, options, AND EVEN THE FED were all saying one thing while the stock market seemed to be on its own mission. Well, to be clear, the bond market was a bit mischievous as well, but not as perversely as the equity market. This, in and of itself posed a problem for the Fed, as lower yields and a rising stock market is viewed by the Bank as looser monetary conditions, something it wants to avoid in order to continue its assault on inflation. Let’s turn the clock back to last December. The Fed came out with its Q4 forecast which included, amongst other things, its infamous Dot Plot (shown below). In it, the frustrated bankers predicted a Fed Funds rate of just over 5%, on median, by the end of 2023. You can see by the dots, that most members predicted that rate or higher! Only 2 FOMC members expected rates to be just below 4%. Like it or not, those are the predictions of the folks who make the policy, so it is incumbent on us not to ignore it. Markets rallied in January as bond yields pulled back. Were markets ignoring the handwriting on the… plot?
The plot… er, thickens. The problem with projections of any kind (even the Fed’s) is that, in a fluid environment like the global economy, things can change on a dime. That means those predictions made back in December may no longer be valid today. They will be updated at the next FOMC meeting in March, but do we have to wait until then to see what the bankers are thinking? Of course not, we simply have to listen to them speak. They love to speak, and they often are quite clear about their views which are likely to be memorialized in the upcoming Dot Plot. Supporting their tough talk is the recent spate of strong economic data suggesting that the economy has not quite cooled down enough to pressure inflation back to the Fed’s preferred 2% target. Also supporting the tough talk is minutes from this month’s FOMC meeting during which members where quite clear and still quite consistent with the Dot Plot above. The good news is that equity markets and bond markets are on the same page… finally, with policy makers. They finally arrived there a day or so ago. BUT, of course, all that can change with upcoming data, so please, please pay attention.
WHAT’S SHAKIN’
Bath & Body Works Inc (BBWI) shares are lower by -4.27% in the premarket after it announced that it beat on EPS and Revenues in Q4 but lowered forward guidance. The company updated guidance for the current quarter as well as for the full year, and both fell short of analysts’ targets. Dividend yield: 1.90%. Potential average analyst target upside: +30.7%.
NVIDIA Corp (NVDA) shares are higher by +9.91% after the company announced that it beat EPS and Revenue estimates by +8.18% and +0.52% respectively. The company’s push into AI, all the rage lately, helped to overcome weakness in the PC market. Parallel processors, the company’s forte, have long been a go-to for AI and big data crunching. In a past life, those same chips were hotly sought after by Bitcoin miners. They still are and they are still leaders in 3D graphics processing. The recent explosion in AI interest rounds out the company’s portfolio. Dividend yield: 0.70%. Potential average analyst target upside: +19.1%.
YESTERDAY’S MARKETS
Stocks closed mixed yesterday as traders trued up their plans with FOMC minutes. The S&P500 slipped by -0.16%, the Dow Jones Industrial Average gave up -0.26%, the Nasdaq Composite climbed by +0.13%, and the Russell 2000 advanced by +0.34%. Bonds gained and 10-year Treasury Note yields declined by -4 basis points to 3.91%. Cryptos fell by -3.08% and Bitcoin pulled back by -1.63%.
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