Stocks had a mixed close yesterday as investors digested last week’s employment numbers while they awaited inflation figures later in the week. There is much confusion over what is a good economic release and what constitutes a bad one… the answer will emerge soon.
A sheep in wolf’s clothing. More signs are emerging that the market is rapidly approaching a key inflection point. Back in 2019 stock traders were ever hoping for bad economic numbers. Why? They were hopeful that the Fed, which was raising interest rates from late 2015 through late 2018, would be moved to lower them. We all know by now that low interest rates are good for businesses (except lending banks… with caveats ). We now also know that even growth stocks, which don’t necessarily rely on borrowing, behave better in a low interest rate environment. So, naturally, if you own just about anything in the way of stocks, you are hoping for a low interest rate environment. Remember those days? Sure, you do, and you are wondering when they will return, so you can count on your savings account to begin growing again.
During the pandemic, things were simply so bad that the Fed couldn’t possibly raise interest rates. The Fed was the custodian of the ailing economy, at the center of which was the stock market, which despite the difficult times, created great wealth and helped many get through economic hardship. The so-called Fed Put was at the center of the universe. The Fed Put’s cousin TINA was also a big player. TINA stands for There Is No Alternative, meaning, with bond yields so thin and so many foreign economies on the rocks, investment dollars flowed into US stocks propping up equity markets. Remember THOSE days? Sure, you do, and you are wondering when they will return, so you can count on your savings account to begin growing again.
BUT those days seem a long way off. Inflation is high and the Fed is angry about it. The Bank didn’t just raise interest rates last year, it literally slammed on the brakes with both feet, something it hadn’t done in more than 4 decades. The move took a huge chunk out of almost anything we might have owned in our investment accounts. Even historically safe bonds were assailed by the moves. Adding to the stress in the equity markets, those fallen bonds’ yields were higher than they have been since… who can even remember, creating a reverse-TINA environment in which dollars flowed from equities into the bond markets. That didn’t make things easy for stocks last year.
By the start of this year, a new regime began to emerge. Inflation has ebbed since peaking last autumn, and a sense that, perhaps the economy is heading for a recession, is growing. Those 2 conditions, alone, would, under normal circumstances, warrant a Fed pivot from hawkish to dovish, right? Maybe, not so fast. Yes, inflation is slowing a bit, but it is still far higher than the Fed’s target. And the economy? Well, the economy seems to be near-bullet proof. Despite the Fed’s best, best efforts to ravage the labor market, new jobs are being created, with many more to be had. Proof of that came in last week’s JOLTS Job Openings and last Friday’s monthly labor report. Both were slightly lower than the prior months’ but still quite healthy. Regarding inflation, despite the Fed’s best, best efforts to kill it, crazy price jumps are still prevalent, particularly in the services sector. Travelers check online for air travel and hotel stays, they get discouraged, utter numerous profanities, but ultimately, continue to accept sky-high inflation. This is alarming to the Fed, and they are adamant that interest rates must go yet higher and stay high for longer. That mantra persists, despite last month’s epic bank failures, underscoring the Fed’s determination to break the back of inflation… and the economy. The Central Bank’s ploy WILL ultimately work. Inflation will come down and the economy will break (in no specific order), after which the Fed WILL pivot and lower rates. When? Soon, of course. How long is soon? Later this year according to the markets, but sometime next year, according to the Fed. Until then, all we can hope for is sooner than later… and maybe, a soft landing. Who even knows what a good economic number is anymore?
WHAT’S SHAKIN’ THIS MORNIN’
CarMax Inc (KMX) shares are higher by +7.05% in the premarket after it announced that it beat EPS estimates by +121.43%! Meanwhile, the company missed its Revenue target by -5.86%, citing high price points. Not shockingly, that means that higher prices have been deterring buyers causing CarMax to lose sales, BUT margins are so healthy BECAUSE OF THOSE HIGH PRICES. Potential average analyst target upside: -12.8%. WHY IS THIS NEGATIVE?? Because the current price of the stock is above the average of analysts’ 1-year price target. Though that may be interpreted as the stock being expensive, it does not mean that the stock will not continue to rise.
Newmont Corp (NEM) shares are lower by -2.62% in the premarket after the company made an updated bid to acquire its peer Newcrest Mining Ltd amounting to a $19.5 billion price target, higher than the $17 billion offer the company rejected a few months back. Dividend yield: 3.13%. Potential average analyst target upside: 9.3%.
YESTERDAY’S MARKETS
Stocks posted a mixed close as traders were stuck in the vacuum between last Friday’s employment number and Wednesday’s CPI release. The S&P500 gained +0.1%, the Dow Jones Industrial Average climbed by +0.30%, the Nasdaq Composite slipped by -0.03, and the Russell 2000 advanced by +1.02%. Bonds slipped and 10-year Treasury Note yields added +2 basis points to 3.41%. Cryptos gained +1.73% and Bitcoin advanced by +3.58%.
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