Say bye-bye to 20% coupons

Stocks gained modestly on Friday with very little conviction in a cloud of mixed signals from earnings, the Fed, and debt ceiling. The week ahead is packed with the same drama but at a higher volume.

What are you waiting for? Some nameless, brand-name investment guru once made a book-selling statement about waiting to buy until there was “blood in the streets.” It sounds good, even intuitive, if not very Wall Street-esque. But how do we know when blood is in the streets? And if we think we smell blood in the streets, how do we know if we are at peak-bloody?

I suppose getting those things right is what separates good returns from great returns, and of course, if that name-brand investment dude knew the answer, he would certainly not share it with us. Pro-tip: he doesn’t know . You will have to wait until the end of this section to find out how the guru has been successful.

Let’s talk about what is vexing the market these days. Quite simply, it is 1) the threat of more rate hikes, 2) the rising potential for a recession, and 3) a slowdown in corporate earnings growth. Assuming you agree, it would seem that the safest bet would be to wait for the Fed to start lowering rates, hold off until any recession passes, and finally, wait until companies stop complaining about rising costs and “macro headwinds” and start to post some good quarters again. You also probably know that if you attempt such as strategy, you may end up sitting in cash for at least another year, and by that time, the market will have already factored in the return to the “good times,” so, in essence, you will miss out on the bulk of the market upside.

I have to digress for a moment. If your funds are set aside for a near-term requirement, like retirement funding or a life event, the safe route is the best route. The good news is that short term Treasury instruments still offer attractive yields, so money set aside for short-term use can still earn respectable returns. Digression over. Let’s get back to long-term returns.

The Fed has raised hell in the markets by raising rates like hell in 2022. We can’t fault it for that as inflation is higher than it has been in decades. Thankfully, inflation has moderated somewhat, the economy is showing some signs of cooling off, and the supply chain is getting… er, less broken. Those high interest rates, designed to stifle demand, have started to dampen growth in rate sensitive sectors like real estate. But the reality is that all that effort from the Fed will take time to work its intended magic. Remember, higher interest rates only affect new borrowers or ones with variable rates. Those investors who are already locked into pre-2022 rates wouldn’t even know that interest rates are higher. Now, to be clear, real estate developers who rely on shorter-term loans, variable rate loans, and lots of debt in general are certainly having to face the reality of lower returns on their investments, which can, has, and will continue to put pressure on the sector. Moreover, the Fed, despite still being in hawk mode, is beginning to signal that its hiking is near the end. Will it be another +25 basis points, or even another +50 basis points? Swaps and futures are pointing to +25, but, in the big picture, does it really matter? The most important thing to remember is that the bulk of the pain appears to be behind us in rate rises.

Recession is a whole topic unto itself. The word evokes fear in all of us, but what does it mean for the stock market? It is true that stocks underperform leading up to and during recessions, but what really comes first? The real question should be, what causes stocks to decline? That answer should be clear to us. Of course, there are lots of things, but for the most part it comes down to earnings. A stock is only as good as its ability to continue to deliver earnings, regardless of recession or the Fed’s mood. A big decline in the stock market can actually lead to a recession, especially these days when many folks have their wealth and savings tied up in the equity markets. Where are we going with all of this?

We are in the midst of earnings season and the Fed is almost done with its hiking. This would seem like a good time to assess how companies might be performing a year from now… when rates won’t be much higher and perhaps even lower. A recession could happen, but only if companies’ earnings continue to decay. Signs of that will also become evident in earnings. It would seem like now would be a good time to determine if the blood flood is starting to recede. I can tell you for a fact that a name-brand investment oracle has his pocketbook open, and his team is looking to spend money… if earnings warrant it. DO look carefully, DO approach cautiously, DO your diligence, DO remember that investing doesn’t have to be all-or-nothing, but DON’T sit and wait for a clear sign... it will never come.

WHAT’S SHAKIN’ THIS MORNIN’

Bed Bath & Beyond (BBBY) Shares are lower by -39.5% in the premarket after it announced that it filed Chapter 11 bankruptcy and that it will liquidate and shutter 360 stores. The company has been struggling and its stock price reflects its struggle, down by some -88% year to date. I don’t usually report these events, but the company’s bankruptcy does have positive implications for its competitors like Walmart and Target.

The Coca-Cola Co (KO) shares are higher by +1.28% in the premarket after it announced that it beat EPS and Revenues by +5.00% and +1.29% respectively. The company attributes its success to the fact that consumers were willing to absorb the higher price points on its products. Good for Coke, but bad for consumers and the inflation narrative. This has been a common theme amongst consumer products manufacturers in this current earnings season, which still has a long way to go. Dividend yield: 2.87%. Potential average analyst target upside: +6.5%.

FRIDAY’S MARKETS

Stocks closed slightly higher on Friday as investors continued to fret over mixed earnings results and mixed messages from the Fed. The S&P500 rose by +0.9%, the Dow Jones Industrial Average climbed by +0.07%, the Nasdaq Composite Index advanced by +0.11%, and the Russell 2000 Index traded higher by +0.10%. Bonds declined and 10-year Treasury Note yields climbed by +4 basis points to 3.57%. Cryptos slid by -3.77% and Bitcoin lost -3.30%.

NEXT UP

• Chicago Fed National Activity Index (March) may have worsened to -.20 from -.19.
• Dallas Fed Manufacturing Activity (April) is expected to have improved to -11.0 from -15.7.
• Earnings after the closing bell: First Republic Bank, Cadence Design Systems, Range Resources, Ameriprise Financial, Crown Holdings, and Cleveland-Cliffs.
• The week ahead: Earnings ramps up considerably. Additionally, we will get more housing numbers, Conference Board Consumer Confidence, more regional Fed reports, Durable Goods Orders, GDP, Personal Consumption / Income, PCE Deflator, and University of Michigan Sentiment. Please refer to the attached economic and earnings calendars for times and details.