Stocks gained yesterday on positive earnings. Traders are on edge ahead of today’s FOMC meeting – they are getting ready to take some tough medicine.
Breaking the bad news. Back in the day, you would hear this on Fed day: “our man at the Federal reserve will now read the decision of the Federal Open Market Committee…” It’s true, and you can read as much into that as you like. The FOMC would quite literally print out its decision and hand it out to the press folks camped out in the briefing room, they would then go live and relay the results. The big wirehouses would have their “men” stationed in Washington DC as well, and they would relay the message back to their respective trading floors. A wirehouse, on Wall Street refers to a big, full-service broker-dealer. The name comes from a time when bigger firms connected all their branches via telephone (the at-the-time newfangled device) and telegraphs so that orders and market quotes could be quickly relayed.
As you might imagine, the fresh information from the Fed was rapidly traded upon after which the policy information was methodically disseminated to the firm’s clients… from the largest account down. By the time the information that the Fed was cutting or raising rates got to folks like you and me, institutional traders were already having dry martinis on the terrace, shirttails untucked. I could go off on this, but maybe not today. Today I want to cover signaling.
In the past I have written about the briefcase indicator. If you have forgotten, I will remind you. Traders, desperate for a leg up, used to try and guess Fed policy based on how full then-Fed-Chairman Alan Greenspan’s briefcase was. The fatter the briefcase, the more likely a policy change. Not quite sure how that worked out, but it was a thing, really. Chairman Ben Bernanke thought that the public deserved to know more and instituted public guidance measures. In fact, the infamous Dot Plot was part of that initiative. Bernanke believed that guidance was a policy tool. Simply tell market participants what the Fed was thinking, and the market would react accordingly. Bernanke’s Fed was careful and measured compared to today’s free-for-all in which it seems that some FOMC members are in competition for online “likes”… banking influencers.
A lot has happened since the Fed’s last FOMC meeting march. We are in the midst of corporate earnings which are relatively strong and we have had a spate of positive economic news along with a muted, but positive uptick in inflation numbers. This has sparked fears amongst traders that the Fed will be less inclined to enact rate cuts this year, and they have acted on it. Check out the following chart on how the markets have traded since the Feds last policy meeting.
This chart shows how the S&P500, 7-10 Year Treasuries, and the Magnificent 7 fared since the Fed’s last FOMC meeting. That’s right, all down around -2%. While much has happened since the Fed March 20th meeting, it is likely that the majority of the slip is related to the market’s perception about the number and the timing of rate cuts. Oh, and there is that Fedspeak I spoke about earlier. Many analysts use natural language models and machine learning to assess text sentiment. I don’t know if you noticed that it is very popular these days to talk about it, but it has honestly been around on Wall Street for some time without much fanfare. I have been using these since at least 2012 🤓. Bloomberg analyzes transcripts from all Fed speakers and analyzes their content for hawkish and dovish. They then use that analysis to construct an index. Check out the plot of the Fedspeak Index then follow me to the close.
I purposely included the index back to 2012 so you can see how the rhetoric tracked, almost pre-dated, actual policy moves. More recently, you can see how hawkish-oriented speech hit a zenith in 2022, receded through 2023, and ultimately dipped last December. That dip was when Powell pivoted. If you look closely all the way to right of the chart, you will notice that it bottomed early this year, but recently ticked up with more recent hawkish rhetoric from the Fed. If we look back to the Fed’s late, late 2018 dovish pivot, you will notice that the index turned into dovish territory immediately after. That has not yet occurred in this more recent pivot. You can read into that if you want to. OR you can look at the first chart. OR, best of all, you can just wait to hear what the Fed wants us to know tomorrow afternoon. Do you want to gander a guess as to what might be said?
WHAT IS THE MARKET SIGNALING THIS MORNING
Eli Lilly & Co (LLY) shares are higher by +7.00% after the company announced mixed results but raised guidance based on success of the company’s obesity drugs. In the past month, 6 analysts have raised their targets while 1 has lowered them. Dividend yield: 0.70%. Potential average analyst target upside: +11.5%.
F5 Inc (FFIV) shares are lower by -9.68% after the company announced that it beat on EPS with a slight loss in Revenue. The company lowered current quarter guidance below analyst expectations. In the past month 1 analyst raised their price target while 6 lowered them. Potential average analyst target upside: +1.0%.
Also, this morning: Eaton Corp, Zebra Technologies, Marathon Petroleum, Tenet Healthcare, Molson Coors, Sirius XM, 3M, American Tower, Coca-Cola, and Corning all beat on EPS and Revenues, while Air Products, GE Healthcare, Martin Marietta Materials, Incyte, ADM, McDonalds, and PayPal missed the mark.
YESTERDAY’S MARKETS
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