Market Snapshot
briefing.com
| Dow | 30807.89 | +99.63 | (0.32%) | | Nasdaq | 11525.30 | +100.28 | (0.88%) | | SP 500 | 3880.25 | +24.25 | (0.63%) | | 10-yr Note | +3/32 | 3.53 |
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| | NYSE | Adv 808 | Dec 2152 | Vol 892 mln | | Nasdaq | Adv 1068 | Dec 3071 | Vol 4.4 bln |
Industry Watch
| Strong: -- |
| | Weak: Communication Services, Materials, Consumer Discretionary |
Moving the Market
-- Fed terminal rate estimate raised to 4.60% from 3.80%
-- Fed raising rates further and keeping them high for longer
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Closing Summary
21-Sep-22 16:30 ET
Dow -522.45 at 30185.81, Nasdaq -204.86 at 11220.16, S&P -66.00 at 3790.00
[BRIEFING.COM] The stock market was confined to a narrow trading range until the FOMC rate hike decision at 2:00 p.m. ET fueled whipsaw price action. The FOMC voted unanimously to raise the target range for the fed funds rate by 75 basis points, as expected, to 3.00-3.25% and suggested that further rate increases will be appropriate. The Summary of Economic Projections conveyed a higher terminal rate of 4.60%, versus 3.80% with the June projection.
The initial reaction was a heavy inclination to sell before a rebound effort, supported by falling Treasury yields, took the S&P 500 above the 3,900 level. The market ran into resistance there, however, and sold off sharply, finishing at its lows for the day.
The takeaway from today's rate hike decision, Summary of Economic Projections, and Fed Chair Powell's press conference was that the Fed will be raising rates further and will keep them at higher levels for longer. Fed Chair Powell conceded that there is apt to be another 100 or 125 basis points of tightening this year and that he thinks it is very likely the fed funds rate will certainly get to 4.60%, which is the Fed's median estimate for 2023 and presumably the new terminal rate.
The equity and bond markets both had volatile reactions. The action in the Treasury market will be interpreted as a belief that inflation will be quelled by the Fed's rate hikes and a material slowdown in economic activity. The 2-yr note yield dropped to 3.95% (from 4.10%) and settled at 3.98%. The 10-yr note yield went from 3.61% to 3.51%.
The moves in the Treasury market supported the rebound effort until it resonated for stock market participants that Fed Chair Powell's message has not changed at all from Jackson Hole where he said, "Restoring price stability will require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy."
This is not a friendly statement for the economy or for the market. It is a statement that suggests multiple expansion is not going to be easy to achieve, because interest rates are header higher. The uncertainty about how much impact that will ultimately have on earnings prospects, along with the uncertainty as to how high the fed funds rate will go and how long it will stay there, is why investors will be reluctant to pay a premium for each dollar of earnings.
The late sell off that ensued was broad and indiscriminate. The three main indices all logged losses of at least 1.7%. The Vanguard Mega Cap Growth ETF (MGK) closed down 1.9% and the Invesco S&P 500 Equal Weight ETF (RSP) closed down 1.7%.
Every S&P 500 sector closed in negative territory with losses ranging from 0.3% (consumer staples) to 2.4% (consumer discretionary). The former was supported by General Mills (GIS 79.72, +4.31, +5.7%), which was able to buck the downtrend after reporting favorable quarterly results.
Energy complex futures settled mixed. WTI crude oil futures fell 0.3% to $83.84/bbl while natural gas futures rose 1.2% to $7.81/mmbtu.
Looking ahead to Thursday, market participants will receive the Q2 Current Account Balance report (Briefing.com consensus -$260.0 billion; prior -$291.4 billion) and weekly initial jobless claims (Briefing.com consensus 220,000; prior 213,000) and continuing claims (prior 1.403 million) at 8:30 a.m. ET, the August Leading Economic Index (Briefing.com consensus -0.1%; prior -0.4%) at 10:00 a.m. ET, and weekly EIA Natural Gas Inventories (prior +73 bcf) at 10:30 a.m. ET.
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index showed a total increase of 3.8% versus last week's 1.2% decline.
- Existing home sales decreased 0.4% month-over-month in August to a seasonally adjusted annual rate of 4.80 million (Briefing.com consensus 4.70 million) versus an upwardly revised 4.82 million (from 4.81 million) in July. That is the seventh straight month that existing home sales have fallen. Total sales in August were down 19.9% from a year ago.
- The key takeaway from the report is that higher mortgage rates are taking a bite out of existing home sales, having created affordability pressures that have forced some sellers to lower asking prices, which in turn is leading to a moderation in the pace of growth in median selling prices.
- The weekly EIA Crude Oil Inventories showed a build of 1.14 million barrels after last week's build of 2.44 million barrels.
Dow Jones Industrial Average: -16.9% YTD
S&P 400: -17.7% YTD
S&P 500: -20.5% YTD
Russell 2000: -21.5% YTD
Nasdaq Composite: -28.3% YTD
Market gives back gains
21-Sep-22 15:35 ET
Dow -296.32 at 30411.94, Nasdaq -103.25 at 11321.77, S&P -34.58 at 3821.42
[BRIEFING.COM] The whipsaw price action continues with the major averages falling back into the red.
Energy complex futures settled mixed. WTI crude oil futures fell 0.3% to $83.84/bbl while natural gas futures rose 1.2% to $7.81/mmbtu.
After the close, Lennar (LEN) reports quarterly results.
Ahead of tomorrow's open, Accenture (ACN) and Darden Restaurants (DRI) report earnings.
Looking ahead to Thursday, market participants will receive the Q2 Current Account Balance report (Briefing.com consensus -$260.0 billion; prior -$291.4 billion) and weekly initial jobless claims (Briefing.com consensus 220,000; prior 213,000) and continuing claims (prior 1.403 million) at 8:30 a.m. ET, the August Leading Economic Index (Briefing.com consensus -0.1%; prior -0.4%) at 10:00 a.m. ET, and weekly EIA Natural Gas Inventories (prior +73 bcf) at 10:30 a.m. ET.
Major indices trade near session highs
21-Sep-22 15:05 ET
Dow +99.63 at 30807.89, Nasdaq +100.28 at 11525.30, S&P +24.25 at 3880.25
[BRIEFING.COM] As Fed Chair Powell continues his press conference, the S&P 500 climbed above 3,900 level before running into resistance. The major indices trade at levels higher than where they were before the rate hike decision.
The moves in the Treasury market support the rebound effort. The 10-yr note yield fell noticeably, down six basis points to 3.51%. The 2-yr note yield is flat at 3.97%.
The upside charge is led by strong mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) is up 1.2% versus a 0.9% gain in the S&P 500 and Invesco S&P 500 Equal Weight ETF (RSP).
The rebound has every S&P 500 sector trading in positive territory.
FOMC raises rates 75 bps, as expected
21-Sep-22 14:25 ET
Dow -221.32 at 30486.94, Nasdaq -90.31 at 11334.71, S&P -26.58 at 3829.42
[BRIEFING.COM] The major averages got smacked after the Fed voted to raises the target range for the federal funds rate to 3 to 3-1/4 percent; the benchmark S&P 500 (-0.69%) is down about 27 points. What's more, the Fed said that ongoing increases in the target range will be appropriate. In all, the Fed's move now moves the median projection for the federal funds rate by year end to 4.1%-4.4% from the 3.1%-3.6% prior projection.
The Fed also said that job gains have been robust in recent months, and the unemployment rate has remained low. The Committee also commented on geopolitical pressures, namely, it said Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity.
In addition, the Committee said it would continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.
The rate sensitive 2-yr note is at 4.061%. Looking more broadly, the 5/30 year curve inversion now stands at its widest margin since 2000 at minus 28 basis points.
Gold slightly higher ahead of FOMC
21-Sep-22 13:55 ET
Dow +152.97 at 30861.23, Nasdaq +76.42 at 11501.44, S&P +25.67 at 3881.67
[BRIEFING.COM] The tech-heavy Nasdaq Composite is tied with the S&P 500 at this point on Wednesday with gains of +0.67% apiece ahead of the FOMC rate hike decision and release of the updated Summary of Economic Projections at the top of the hour, and Fed Chair Powell's press conference at 2:30 p.m. ET.
Gold futures settled $4.60 higher (+0.3%) to $1,675.70/oz, moving off more than two-year lows owing in part to haven bets amid Russia's latest mobilization efforts in the country's campaign in Ukraine.
Meanwhile, the U.S. Dollar Index is up about +0.7% to $111.03 to 20-year highs.
iRhythm can't find its groove today despite reaffirming guidance during Investor Day (IRTC)
iRhythm (IRTC) is out of sync with the market today as the stock sharply sells off during its Analyst and Investor Day. Prior to the event, the developer of electrocardiogram (ECG) monitoring products made its presentation slides available on its website, which included an update on its FY22 guidance and its 2027 financial goals. Specifically, IRTC reaffirmed its FY22 revenue and gross margin guidance of $415-$420 mln and 68-69%, respectively, and guided for adjusted EBITDA of about (3.5)% of estimated FY22 revenue. This pencils out to adjusted EBITDA of roughly $(14.6) mln, in line with IRTC's prior guidance of $(17.5)-$(12.5) mln.
The company also highlighted the specific growth opportunities and cost-cutting initiatives that it anticipates will generate adjusted EBITDA margin of approximately 15% by 2027.
- For instance, IRTC believes that its Zio product, which combines a wire-free, patch-based, wearable biosensor, with a cloud-based data analytics platform, is only tapping into a small portion of its total addressable market. Zio is used to diagnose and monitor atrial fibrillation (AFib), a heart palpitation condition that afflicts about 12 mln people in the U.S. alone. However, there are substantial adjacent markets, such as hypertension and sleep apnea, that IRTC plans to expand into.
- The company noted that about 130 mln people in the U.S. have hypertension (high blood pressure), with up to 90% of AFib patients falling into that at-risk category.
- Similarly, up to 80% of AFib patients also have sleep apnea, a condition that effects about 30 mln people in the country.
- In total, the company sees a $1+ bln revenue opportunity by 2027, representing a CAGR of about 20%, based on the midpoint of its FY22 guidance.
- On the cost side, IRTC is targeting $250 mln in annual gross savings by 2027. A few key components of attaining this goal include the automation of manufacturing and packaging, the expansion of its logistics network, and the reduction of time and cost to collect revenue.
- Additionally, IRTC expects to gain significant leverage from gross margin and G&A cost savings as the business scales.
This all looks very promising for the company, so it's surprising that the stock is weak today. We would point out, though, that shares have rallied by over 30% since the end of June, compared to a 4% gain for the Nasdaq during this same period. This surge made shares quite pricey with a P/S north of 12x. Given the stock's recent strength, its rich valuation, and the general malaise hanging over growth stocks, perhaps a sell-the-news scenario is at play for the company's Investor Day.
General Mills capitalizes on sustained at-home eating trends in Q1, boosting its FY23 outlook (GIS)
General Mills' (GIS +7%) Q1 (Aug) earnings were anything but just run-of-the-mill. The consumer packaged goods mammoth delivered its second-straight double-digit earnings beat while raising its FY23 EPS and organic sales guidance, highlighting the ongoing tailwinds eating-at-home and brand loyalty are providing.
Leading into GIS's AugQ report, visible evidence of these themes was displayed, most notably from peer J.M. Smucker (SJM), which delivered a solid beat-and-raise in JulQ. Likewise, grocers like Kroger (KR) and retail mammoths like Walmart (WMT) saw relative strength in their food categories in JulQ.
- These tailwinds provided the perfect mix for GIS to expand its adjusted operating margins 70 bps yr/yr to 18.7%, helping boost its bottom line by 12.1% to $1.11. Net revs jumped just 3.9% to $4.72 bln, merely meeting analyst expectations. However, organic revenue, which excludes a 5 pt headwind from net divestiture and acquisition activity, as well as 1 pt of unfavorable FX impact, climbed 10%.
- Although at-home eating has remained steady even after the pandemic, away-from-home consumption is amid an ongoing recovery. This is illuminated by GIS's North America Foodservice segment continuing its momentum from FY22 (May), seeing organic sales growth of 18% yr/yr. This growth rate also outstripped GIS's North America Retail segment, which experienced a 12% increase in organic revs.
- However, it should be noted that there is not a perfect inverse correlation between GIS's foodservice and retail businesses, as much of the company's foodservice revenue stems from sales to schools. With inflation throwing a wrench in a healthier rebound in restaurant traffic, GIS's allocation to schools bodes well for the company's foodservice division as demand tends to be more inelastic.
- GIS's Pet business also shined in AugQ, posting 14% organic growth yr/yr. Although this was not as strong as the 22% organic growth in Q4 (May), it was still in the double-digits despite lapping +20% organic growth in the year-ago period.
- GIS's solid AugQ numbers culminated in raised FY23 guidance, expecting EPS in constant currency to jump +2-5%, up from flat to +3%, and organic revs to increase +6-7%, up from +4-5%.
Overall, at-home consumption trends remain a powerful tailwind for GIS. However, inflationary forces are pushing back, illustrated by another quarter of sliding organic volumes, this time across the board. Volumes slipped by 5 pts in AugQ, even though GIS lapped only a 1 pt gain in the year-ago period. GIS attributed roughly three-quarters of the volume decline to promotional pullback, but cautioned that the interaction of pricing on volume is hard to gauge and could pressure margins going forward. We have seen private labels pick up considerable steam in recent quarters, which is likely placing a cap on how much pricing power GIS commands.
Still, food inflation is beginning to show signs of stabilization, lessening the concern of consumers trading down to off-brands going forward. Also, even if inflation intensifies, GIS's brands will likely prove their durability.
Stitch Fix's prioritization of profitability is on trend, offsetting its rough quarter (SFIX)
Stitch Fix (SFIX), a down and out online apparel and styling platform, saw no reprieve from its struggles in 4Q22 as the company posted a much worse-than-expected loss on a 16% yr/yr drop in revenue. The company also issued revenue guidance for 1Q23 and FY23 that was well below expectations, forecasting revenue of $455-$465 mln, and $1.76-$1.86 bln, respectively. The midpoint of SFIX's Q1 guidance indicates that the sales decline will accelerate to -21% next quarter.
A strong earnings report certainly wasn't anticipated due to the recent string of weak results from other apparel retailers, such as American Eagle (AEO), Zumiez (ZUMZ), Gap (GPS), and Abercrombie & Fitch (ANF). However, we were hoping to see some signs of stabilization within SFIX's business, and that didn't come to fruition in a meaningful way.
Like many clothing and accessory retailers, SFIX is feeling the sting of high inflation, both from a demand and cost standpoint. With food, housing, and energy costs accounting for an ever-increasing portion of consumers' overall budgets, some may see discontinuing a SFIX subscription as an easy way to free up money. Unfortunately, SFIX's issues extend beyond these macroeconomic headwinds.
Ever since the company launched its Freestyle service in September of 2021, it has grappled with sluggish conversion rates for new customers on the Fix side of the business. In other words, Freestyle, which allows customers to shop on SFIX's site without a subscription, has cannablized Fix sales, where customers pay to have a stylist arrange personalized outfits. Despite efforts to improve the conversion rate over the past few quarters, it's evident that the company hasn't fully resolved its problems.
- Speaking to SFIX's ongoing conversion troubles, Active Clients decreased by 9% yr/yr, following a decline of 5% in the preceding quarter. This lower active client base is the primary factor behind the company's soft revenue guidance for FY23.
- Gross margin continued to erode, sliding lower by about 260 bps from last quarter to 40.0%. The storyline is a familiar one to those following the retail sector as increased inventory levels and higher liquidations of spring and summer goods weighed on margins. Rising inflation and an increase in transportation costs applied further pressure.
- This combination of lower Active Clients and contracting margins caused adjusted EBITDA to come in worse than SFIX expected at ($31.8) mln. Last quarter, the company guided for adjusted EBITDA of ($30.0)-($25.0) mln.
- As discouraging as the demand outlook is, there is some good news to share regarding cost-cutting and profitability expectations. During the earnings conference call, SFIX noted that it's on track to exceed the high end of the $40-$60 mln in anticipated annual cost savings it projected last quarter. The company also stated that its targeting positive free cash flow and adjusted EBITDA "sometime in FY23" as it right-sizes inventory, evaluates its real estate footprint, and prioritizes investments in product and technology.
Overall, it was another dreadful quarter for SFIX, with few positive highlights. With the stock already down by a staggering 85% yr/yr, though, SFIX's troubles are already baked in. Therefore, investors are looking ahead, and the company's focus on improving profitability and driving positive cash flow in FY23 is taking center stage today.
Coty shares glow on ambitious skincare projections and raised FY23 sales guidance (COTY)
Coty (COTY +4%), which owns numerous beauty product brands, including CoverGirl and Tiffany & Co., is seeing plenty of green today following its raised FY23 (Jun) like-for-like (LFL) sales forecast to +8-9% from +6-8%, as well as its strategy to double skincare sales by FY25. Even though COTY's skincare products comprised just 5% of total revenue in FY22, the category has seen sales stall over the past couple of years. As such, doubling skincare sales to $500-600 mln in under three years will be no small feat. The company also expects further acceleration in the category in FY26 and beyond.
To achieve its skincare goal, COTY will lean on its competitive technological advantages and its Prestige brands, primarily sold through retailers, such as Walmart (WMT), which accounted for around 6% of COTY's total revs. The company will also focus on North America and the Asia Pacific, which comprise over 80% of the Prestige skincare market. COTY's Consumer brands will also play a role, albeit much minor.
COTY is also amid powerful tailwinds, which have grown stronger since the pandemic.
- Beauty product demand continually demonstrates resiliency to the uneasiness in the macroeconomy, especially within the global travel retail industry. For example, in Q4 (Jun), COTY saw sales double yr/yr in its travel business on broad-based strength. Although inflationary pressures may be dampening travel demand to a degree, industry giants like Expedia (EXPE), Booking Holdings (BKNG), and Airbnb (ABNB) still experienced record numbers in their latest quarters. Other companies selling highly discretionary items, like Wayfair (W) and Weber (WEBR), also noted that part of their muted sales growth lately can be attributed to individuals allocating more dollars toward experiences like travel.
- Further evidence of sturdy demand stems from solid quarterly beauty sales by many retailers. For instance, within relatively dim JulQ results from Target (TGT), its beauty sales glowed, reflecting notable strength in Ulta (ULTA) at Target, along with skincare and bath categories. Speaking of which, ULTA's JulQ numbers shined brightly, seeing double-digit comps across all categories.
- Meanwhile, with China, a meaningful region for COTY, easing lockdowns recently, the company should continue seeing demand recover in the area over the next few quarters. In late August, COTY noted that thus far into Q1 (Sep), it already saw double-digit growth in China.
Overall, COTY's skincare sales target is ambitious, but with demand for beauty products only growing stronger, we think it is achievable. COTY is also confident that this robust demand is unlikely to fade over the near term, evidenced by its raised FY23 LFL revenue forecast and reaffirmed FY23 earnings outlook.
t's a big game day for the Fed and Fed Chair Powell
Today is decision day for the Federal Open Market Committee (FOMC). It is also game day for Fed Chair Powell, who must quarterback the press conference to explain the FOMC's thinking.
The interest rate decision is somewhat easy. It is either 75 basis points or 100 basis points, yet the fed funds futures market has made its decision widely known to Fed officials by pricing in an 82% probability of a 75-basis point rate hike. The FOMC will likely walk the line the market has painted for it.
The larger unknowns are what the new terminal rate projection will be in the Summary of Economic Projections (SEP) and what tone Fed Chair Powell will take at his press conference.
The June projection showed a terminal rate of 3.80%. The fed funds futures market is currently assigning a 57.2% probability to the terminal rate being 4.50-4.75%, and that it will be reached in May 2023.
The prospect of a relief rally could arise if the SEP shows something under 4.50% for the terminal rate, but the prospect of any relief rally lasting will hinge largely on what Fed Chair Powell says.
If he strikes a softer tone than he did at the Jackson Hole Conference in late August, suggesting the Fed may be getting close to a point where it can pause its rate hikes, then the stock market should respond quite favorably.
Frankly, we would be surprised if that was the line he walked. He regained inflation-fighting credibility with that Jackson Hole speech, and to give it up less than a month later with remarks that would make it seem as if he is pandering to the stock market's wishes, would be foolish.
We expect him to sound a lot like he did at Jackson Hole. How the stock market ultimately reacts to that will likely hinge on two things: (1) the Treasury market's reaction to what the Fed Chair says and (2) whether market participants take the Fed Chair at his tough word or think the data in coming months will mandate a softer tone from Mr. Powell and the Fed.
The interest rate decision and release of the SEP will hit the wires at 2:00 p.m. ET, but the real reaction function will come to a head after the Fed Chair begins his press conference at 2:30 p.m. ET. Either way, it will make for an excitable finish to the trading day.
The start of the trading day will be less excitable, although the future market suggests it will be painted with a modestly positive bias.
Currently, the S&P 500 futures are up 21 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 52 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 144 points and are trading 0.5% above fair value.
Call it a hopeful stance in front of the Fed decision, rooted somewhat in a belief that the stock market has already priced in a Fed intent on restoring its inflation-fighting credibility. To that end, the S&P 500 and Nasdaq Composite are down 8.2% and 9.6%, respectively, since that Jackson Hole speech.
Ironically, the entirety of those losses, and a bit more, have been logged following the ugly-looking August CPI report on September 13, which made it clear that the Fed has more work to do to tame inflation.
That important point notwithstanding, we know the market is hopeful that it will get some inkling of a softer tone from the Fed Chair today because it is trading higher despite the unsettling news that President Putin is ramping up his war effort in Ukraine by calling for a "partial" mobilization of 300,000 reservists while also threatening that Russia would use its nuclear weaponry if provoked.
To say the least, this is not a positive development, but it is taking a backseat to the big game today and the hope that Quarterback Powell will throw a game-winning touchdown pass to the stock market.
-- Patrick J. O'Hare, Briefing.com
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