Stocks rallied yesterday as bond yields eased on speculation that the Fed may be planning a summer vacation after all. The S&P500 hit a high for the year and so did the tech-heavy Nasdaq 100, but you knew that.
And then there is this. Ok, first I will start with a chart, lifted straight out of my chartbook which I attach EVERY DAY, in case you missed it.
And there it is, the S&P500 at a high for the year. Though you can’t see it, yesterday was the highest close since April of last year… just as the you-know-what was about to hit the fan. For my non-US readers that colloquialism means “things got bad” . Last year was a rough year for stocks and bonds. The rough ride was principally driven by the Fed’s ceaseless monetary tightening and rate hiking. It was certainly not driven by bad economic news. Rather it was driven by good news. GDP grew for the year and unemployment was right around a many-decades low. All this despite raging inflation and the Fed’s best, best efforts to cool the economy down. Earnings growth slowed from a year earlier, but considering that they were abnormally high in 2021, earnings were still respectable.
Unfortunately, all that good news about the economy was bad news for the Fed, and it only strengthened its resolve to knuckle down on consumption. Long before the tightening would have any effect on inflation stocks responded with a selloff. Stocks most affected were rate-sensitive growth stocks… you know, the ones that most of us like to own. Bonds, once a safe haven for investors seeking lower volatility also took a hit, because bonds… well, they are directly affected by interest rates and prices go in the opposite direction of rates.
Now we are here. Inflation is showing signs of improving, and not just in the US. This has caused investors to begin to think of a world beyond rate hikes and possibly one with rate cuts. The above chart is proof of that new hope. The Fed however is not thinking of that world, or if it is, it believes it to be far, far away. It has been very vocal about its reticence to shifting strategies. Of course, WE SHOULD TAKE THE FED FOR ITS WORD, until proven otherwise. “Don’t fight the Fed,” so the saying goes, but the market is doing just that by hitting higher highs while the Fed is still signaling future hikes. But the Fed and its penchant for rate-hike-pain may not be the real enemy right now.
It may actually be the economy. There is no doubt that the Fed’s tightening is having an effect on economic growth. Yes, it is a known side effect of inflation fighting, and the trick is to squeeze just hard enough to throttle inflation, but not too hard as to cause the economy to stall into a recession. Housing was a big driver of inflation in 2021 and 2022. That was due in large part to unprecedented low lending rates. With rates now +525 basis points higher, effects of higher rates are just beginning to show up in results. Earlier this year a mini-bank crisis caused most banks to tighten up their lending practices, which is expected to have a negative impact on housing over the next few years. Potentially making matters worse was a solitary headline I spotted on my Bloomberg this morning. It was just a headline, and I could not find the source of it. Regulators are poised to tighten regulations on mortgage lending practices at big banks. Now, I took that lonely headline seriously, because many in the industry were expecting it. Expecting or not, if it is, in fact, true that regulations are poised to be increased, we can expect economic headwinds, which would only increase the chances for a recession. These challenges to the economy continue to mount, but the markets appear to be focused on the time beyond the time of stress which appears to be getting closer.
STOCKS TO WATCH THIS MORNING
Bank of New York Mellon Corp (BK) shares are higher by +1.17% in the premarket after it announced that it beat EPS and Sales estimates by +6.51% and +1.70% respectively. The company also announced net interest revenues that were above average analyst estimates. In the past month, 33% of analysts modified their price targets, 3 up, 3 down, and 12 unchanged. Dividend yield: 3.39%. Potential average analyst target upside: +24.1%.
Bank of America Corp (BAC) shares are higher by +0.68% after it announced that it beat on EPS and Revenues last quarter. In the past 30 days, 33% of analysts changed their price targets, 2 up, 6 down, and 16 unchanged. Dividend yield: 2.99%. Potential average analyst target upside: +21.5%.
YESTERDAY’S MARKETS
Slipping bond yields helped propel the index to yearly highs. The S&P500 rose by +0.39%, the Dow Jones Industrial Average climbed by +0.22%, the Nasdaq Composite Index traded higher by +0.93%, and the Russell 2000 Index advanced by +1.04%. Bonds climbed and 10-year Treasury Note yields declined by -2 basis points to 3.80%. Cryptos slipped by -1.22% and Bitcoin fell by -1.17%. The S&P ESG Index rose by +0.36%.
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