Hope floods the market

Stocks traded higher yesterday led by tech shares, which got a boost from optimistic guidance from Micron. Bank stocks traded higher led by beleaguered regionals as fear of a larger problem abated.

Earning respect. This first quarter has kept us on our toes. With such a difficult 2022, investors were hoping for something different. Perhaps the Fed would finally pivot from its growth stock-killing rate hikes. Depending on what you define as a pivot, we may have already gotten it. The Fed, though still tightening monetary conditions, has shrunk the magnitude of its hikes. However, Fed members continue to insist that more hikes are on the way and that rates will stay at these high levels through, at least, the end of the year. The market hopes otherwise and has, indeed, placed its bets on rate cuts later in 2023 after a small chance of another +25 basis-point hike in May. This tension between what the Fed is saying and what the market is thinking has dominated the bond markets these past 3 months causing huge swings in bond yields. Those huge swings have weighed heavily on interest-sensitive stocks, and the definition of those has changed. Prior to 2022, interest rate-sensitive shares were traditionally found in the utilities and the real estate sectors. But nowadays, you can add the information technology sector, or indeed ANY STOCK THAT WOULD BE CONSIDERED A GROWTH STOCK. So, naturally, all eyes are on the Fed and when it will start lowering those rates. Oh, and there is that little thing about a pending recession sometime this year.

That would have been enough for a zany, volatile 3 months, and then the unthinkable happened with two very public bank failures, which also happened to be the 2^nd and 3^rd largest bank failures in US History. Yep. You can read more about what happened at SVB in my upcoming monthly newsletter (if you don’t receive it, drop us a line and we will add you to the list). So, now we have to worry about the banking system IN ADDITION TO the Fed, a potential recession, and our equity portfolios. Oh, did I mention that inflation is still high? Let’s not forget that, but let’s also think about what that means for companies. It can and it has affected corporate profitability. It can and it has also affected revenues.

When goods and services cost more to produce, companies have lower margins. When goods prices are higher, consumers can afford to buy less. In some cases, consumers even shift purchase habits. We have witnessed this in the results of large multi-line retailers who have reported a shift away from hard and soft lines to food, as food inflation was and still is high. Higher interest rates from Fed hikes will also, in theory, cause consumers to spend less as credit conditions tighten. Higher mortgage payments leave less funds for discretionary spending… goes the story. Well, my point for this morning’s submission is that earnings season starts 2 weeks from tomorrow, and it is traditionally kicked off by guess who, THE BANKS. So, now we can add that to the list of “things to think about”. It will not be an ordinary earnings season as analysts have been shuffling targets and ratings in response to the wave of lower guidance we got in the last earnings season. As you will see from the following chart, analysts are expecting a decline in both sales and profits for the S&P500 (shaded bars are analyst estimates). If you look at company earnings before interest and taxes (EBIT), you will find an increase (yellow bars). So, it is likely that higher interest rates are impacting earnings, which is, what, we think, that the Fed is trying to accomplish. It will be a busy spring for the markets.

WHAT’S SHAKIN’ THIS MORNIN’

Stock index futures are higher this morning led by the Russell 2000 index. The small cap index has a big allocation in banks which are generally higher in the premarket as negative sentiment on the sector is slowly reversing. Bond yields are flat to slightly lower overnight which should help the tech and growth heavy Nasdaq in today’s regular session. Crude oil is higher once again after yesterday’s reports of lower supply.

YESTERDAY’S MARKETS

Stocks climbed yesterday, spurred by positive earnings and upbeat guidance in the tech sector. The S&P500 climbed by +1.42%, the Dow Jones Industrial Average gained +1.00%, the Nasdaq Composite Index jumped by +1.79%, and the Russell 2000 Index advanced by +1.08%. Bonds gained and 10-Year Treasury Note yields were unchanged at 3.56%. Cryptos climbed by +2.85% and Bitcoin was higher by +3.95%.

NEXT UP

• Initial Jobless Claims (March 25) is expected to come in at 195k, slightly higher than last week’s 191k claims.
• Annualized Quarterly GDP (Q4) is expected to come in at +2.7% in line with the prior estimate.
• Fed speakers today: Barkin, Collins, and Kashkari.