Stocks fell last Friday as skittish investors were on edge about earnings… and inflation. Fed speakers do their best to signal to the markets that they are not letting up on the fight.
Be careful what you wish for. Stock investors have had a persistent wishlist for the past 18 months. Let’s just say it is not legal to ask the genie for the market to simply go up. Investors, of course would then default to… you guessed it, lower interest rates. Ok, that is wish number 1, because low interest rates seem to provide a nice environment for stocks to rise. At least, that’s what it looked like since 2009. Nothing new yet. What about wish number 2?
How do we ensure that interest rates will come down? Of course, that would be lower inflation. Lowering inflation is a tough wish to fulfill, given that suppliers have had a bit of the upper hand in pricing power in the past few years. Raising prices is simply all companies can do to grow earnings when unit demand begins to slip. Adding to companies’ willingness to raise prices, consumers are just not giving up any ground.
Demand for services is through the roof. Sure, there are some things that are just cyclical, like auto repair costs. These days, the big expenses associated with fixing your old car is far cheaper than buying a new one. But what about leisure travel? Have you priced out airline tickets recently? How about a hotel stay? Some close family friends recently told my wife and me that they could not believe the shoulder-to-shoulder congestion at the airport given the high costs of travel and slowing economy. That can be confirmed by TSA numbers that suggest that travel has returned to pre-pandemic levels. Wait, shouldn’t inflation and high costs curb that? Well, it hasn’t yet, which is why inflation is still high on the services side. “YOLO,” says the adventure seeker (YOLO = you only live once). Good on you, friend, but maybe, slow it down after this trip, so that airlines are forced to lower prices.
Ok, let’s get to wish number 3. How can we get the Fed to lower rates and get inflation to recede? Disaster, of course! Nothing like a good recession to clear the decks. Well, maybe just a mild recession. If people lose their jobs and the economy contracts, not only will that intrepid demand for leisure travel go down, but the Fed will be forced to turn a softer cheek to avoid a catastrophic recession. Number 3 has been a big one in recent months as the market rallied on weak economic numbers, specifically in employment. You know, the old “bad is good” scenario. However, there is a point where bad becomes bad again, and we may be on the cusp of that shift. Last Friday’s Retail Sales number was weak, falling by -1.0%, representing a second month of declines. Looking at the details of the release, declines were spread across most categories. Notable was a -3.0% monthly decline in General Merchandise Stores and an offsetting +1.9% increase in Non-store retailers… you know, online shopping versus mall shopping. In any case, the monthly decline in retail is another sign that economic growth is grinding downward. This week will be chock-full of earnings releases. As part of wish number 3, would investors wish for weak numbers? Now, we are really stuck in this paradox. Of course, we wouldn’t want companies to have bad earnings, that would cause stocks to decline. Are you wondering how we got here?
WHAT’S SHAKIN’ THIS MORNIN’
Alphabet Inc (GOOGL/GOOG) shares are lower by -3.21%/-2.84% after the New York Times reported that Samsung phones may use Microsoft’s Bing search engine instead of Google search. The move has not been confirmed nor is clear what the reason may be. Many speculate that Samsung is interested in Microsoft’s embracing AI. Alphabet will announce its Q2 earnings next week, more is sure to come. Potential average analyst target upside: +15.5%.
M&T Bank Corp (MTB) shares are higher by +4.64% after the company announced that it beat EPS and Revenue estimates by +3.05% and +1.01% respectively. The bank’s net interest margin came in above analysts estimates while its deposits declined by -2.7%. The bank, additionally, increased its provision for losses due to its expectation of a weaker economic environment. Dividend yield: 4.46%. Potential average analyst target upside: +15.5%.
FRIDAY’S MARKETS
Stocks traded lower on Friday on weak retail sales, hawkish Fed talk, and earnings jitters. The S&P500 fell by -0.21%, the Dow Jones Industrial Average declined by -0.42%, the Nasdaq Composite Index traded lower by -0.35%, and the Russell 2000 Index dropped by -0.86%. Bonds fell and 10-year Treasury note yields advanced by +6 basis points to 3.51%. Cryptos gained +1.82% and Bitcoin added +0.61%.
NEXT UP