Stocks had another rough day after they could just not shake nuanced remarks by Fed Chief Powell. The Leading Economic Index, which is supposed to predict economic growth fell more than expected, but economists disagree.
Buckle up, buttercup! As I rode my Peloton in the wee hours of the morning (or was it still the late hours of yesterday )I promised myself that I would keep it short and sweet today with no charts, so I can leave you on a light note. I will try to stick to that pledge… mostly. Look at this chart and keep reading… I am trying… I promise.
Can you see it? That is good news, worth breaking my early morning / late evening pledge. It’s true that the large group of renown analyst expert economists polled by Bloomberg have collectively lowered their probability for a recession over the past several weeks. Those same economists collectively expect GDP to grow by +2.1% this year, which is good, trust me. If you don’t trust me, I will remind you that the GDP grew by +1.9% last year… so, this year is expected to be better. AND those very same economists expect the Consumer Price Index / CPI to end the year at +4.2%. That seems high at first glance, and it is certainly higher than the montra-fied (I made that word up) +2% target of the Fed. BUT, I will remind you that CPI closed out last year at +8.0%. So, come on, armed with those facts, what are your thoughts on the economy? Not sure yet? Those economists expect unemployment to close out the year at 3.7% only 1/10 of a percent higher than last year… low by historical standards by a mile. So? Not so bad, then.
I have played this game with you in the past but let’s have another go at it, now that you are in the know about the economy. Ready? You are a Regional Fed President. Your job for 18 days out of the year is to meet with your colleagues and discuss the economy and vote on policy. The aim of those 18 meetings and 9 decisions is simple: keep inflation in check AND maintain a healthy labor market. On the remaining 347 days of the year, your job is to dress like a banker and speak like a banker. You got it? Good, let’s proceed. You have read all the reports… which I have kind-of summed up for you in the last paragraph ☝. You may even have your own opinion, but you cannot deny that the economy, based on the recent numbers, appears to be in relatively good shape, given that you nearly choked the life out of it last year by hiking interest rates faster than any time in the past 40 years or so. You know that these things take time, but the fruits of your 2022 labors are just beginning to pay off. You notice that the once hot housing market is beginning to decline (you read my note yesterday ). Oh, and you have a staff of eager, young economists that have produced huge spreadsheets and a whole slew of charts that more-or-less agree with what I just told you.
You have 2 choices. Raise interest rates or lower interest rates . What do you do? It’s a tough decision, right? Maybe, read the fine print… ah, there it is, you can choose to do nothing at all, and simply wait and see how this all plays out. Now, doesn’t that seem like a rational thing to do? Now, you remember when your kids were young and how kids interpret the word “maybe” as a contractual obligation. “Maybe we will have ice cream for dessert” means “we ARE having ice cream for dessert.” Come on, you remember. You had to learn to say, “if you finish your dinner AND your homework AND you behave, I will consider it.” That’s it, promise nothing, owe nothing. If you say on live television that maybe you will lower interest rates in the future, what do you think the market might do? How about all those people like you and me who have decided to take it easy on big expenditures, for now, to wait and see what happens with inflation and the economy? That’s right, many would rush out and buy that car, that house, the big TV, computer, or whatever. That would be counterproductive. So, you say “if inflation gets back to 2% AND the economy is healthy, AND, and, and… I will consider lowering interest rates.” Promise nothing, owe nothing. That is how you keep your job as a regional Fed President.
Why do I write this? Because I want to remind you that we should not expect the Fed to make the mistake of promising to lower interest rates until something bad happens… and nothing has… yet. What Powell said yesterday was nothing new, despite the market’s reaction. We are at the beginning of a critical earnings season, which is the true telltale about what is going to happen to your portfolio over the next few months, if not years. Stay focused on what is important. If you do, maybe there will be an ice cream Sunday awaiting you for your patience. You can interpret that any way you like.
WHAT’S GOING ON BEFORE THE OPENING BELL
Intuitive Surgical Inc (ISRG) shares are lower by -6.75% in the premarket after the company announced that they missed revenue estimates but beat on EPS. In the past month 65% of analysts have modified their price targets, 0 up, 15 down, 8 unchanged. Potential average analyst target upside: +20.0%.
The premarket leaderboard is sprinkled with defense stocks after Biden’s Oval Office Speech. Textron, General Dynamics, Northrop Grumman, and RTX are all higher by +1.11%, +0.84%, +0.42%, and +0.31% respectively.
Also, this morning: Comerica, American Express, and Huntington Bancshares all beat on EPS and Revenues while Schlumberger, Regions Financial, and Interpublic Group missed the mark.
YESTERDAY’S MARKETS
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