Financials kick off earnings season with strong showing

Stocks rallied yesterday as investors moved out of bonds into oversold stocks. Stocks up and bonds down is the way it used to work… what seems to be a long time ago.

Now what? Are you growing impatient? Of course, you are. Just admit it. It’s ok, you are only human. AND HUMANS LEARN… something we probably have all forgotten, as we have recently been so obsessed with how machines learn. In any case, what have you learned about your investments since the Global Financial Crisis? You don’t have to answer that question, I will take it for you. You learned that stocks always go up and that buying the dip almost always works… almost. You were convinced that your run was over in later 2018, but alas it continued, giving you real confidence. Then COVID shook the world, killing millions, turning bustling metropolises into ghost towns. Surely this would end your run. But alas, it did not. You learned all of that, didn’t you? You could not lose!

Why was your run so… um, predictable? Because, for the most part, the macro model didn’t change much since 2008. We had no inflation, a growing-slowly-but-growing-nonetheless economy, record-low unemployment, and a SUPERBENEVOLENT Fed. The Fed was pretty-much giving money away for the period between 2008 and 2022. Come on, you remember the unhappy holidays in 2018, and how shocked you were over your losses. Who rescued you from doom? The Fed, of course. It lowered interest rates after talking about it for 6 months, and you recovered your losses and made money. The Fed called it a “mid-cycle adjustment.” That is an invented technical term for “we just cut interest rates without an imminent recession to boost the morale of everyone, especially stock investors.” Good on them for that.

The pandemic allowed the Fed to parade its entire arsenal of stimulus hardware, and it worked. Indeed, the Fed did save the global financial system from a cataclysmic meltdown. But, alas, it did even more. It goosed the markets to the point of overheating, pushing valuations to extremes. A side effect of that was inflation, though it wasn’t the only factor that caused it. We then got to witness a side of the Fed that we haven’t seen since… er, the 1980s. A time which most had forgotten. I am not talking about the great music, big hair, baggy clothes, and neon. We all remember that. But what about Paul Volcker and Alan Greenspan? The original inflation fighters? Remember them? Come on, surely you do. I’m sorry, I thought I would get by without a chart today, but you must see this one before I conclude. Have a look.

Yep, that’s a chart of the Fed Funds rate since October of 1980. That is what WE learned and as such, what we began to expect. That is why last year’s extreme bump was such a shock for many people. So, to answer the question in my tagline. Now what? Should we just learn to be miserable? Of course, not. Look at the chart and take a few steps back. Do you notice a pattern? Hikes and cuts come in waves. Look at the one in the mid-aughts. It looks similar to the one we are experiencing now. Look further back and you will notice that all of the hiking regimes were followed by easing ones. Of course, rates will, at some point come down. We don’t exactly know when or by how much, but by looking at this chart we can re-learn what we probably already knew. There have been many times in the past 40 years that we had doubts and were nervous about our portfolios, but if we were diligent and prudent, and most importantly, we maintained a long-term perspective we won. Stay focused, be patient, we will get there. Remember? The S&P500 grew by +3,225% since then… now you remember.

WHAT IS HAPPENING WITH STOCKS THIS MORNING

Bank of America Corp (BAC) shares are higher by +1.00% in the premarket after it announced that it beat EPS and Revenue estimates by +10.54% and +0.73% respectively. In the past month 42% of analysts have revised their estimates, 0 up, 12 down, 15 unchanged, and 1 dropped. Dividend yield: 3.55%. Potential average analyst target upside: +25.7%.

Lockheed Martin Corp (LMT) shares are lower by -0.89% in the premarket after the company announced that it beat on EPS and Revenues. The company affirmed its full-year guidance, but it did highlight lower Q3 revenues from slow sales in its F35 program. In the past 1 month 1 analyst upgraded the stock while 1 downgraded it with its BUY/HOLD/SELL mix at 29.6%/66.7%/3.7%. Dividend yield: 2.86%. Potential average analyst target upside: +11.5%.

YESTERDAY’S MARKETS

NEXT UP

• Retail Sales (Sept) is expected to have grown by +0.3% after climbing +0.6% in August.
• Industrial Production (Sept) may come in flat after ticking up by +0.4% in the last period.
• NAHB Housing Market Index (Oct) is expected to have slipped to 44 from 45.
• Fed speakers: Williams, Bowman, Barkin, and Kashkari.
• Earnings after the closing bell: Interactive Brokers, JB Hunt, United Airlines, and Omnicom Group.