Market Snapshot
briefing.com
| Dow | 31311.85 | -1071.45 | (-3.31%) | | Nasdaq | 11716.49 | -549.89 | (-4.48%) | | SP 500 | 3960.22 | -150.26 | (-3.66%) | | 10-yr Note |
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| | NYSE | Adv 339 | Dec 2741 | Vol 939 mln | | Nasdaq | Adv 940 | Dec 3132 | Vol 5.1 bln |
Industry Watch
| Strong: -- |
| | Weak: Communication Services, Consumer Discretionary, Information Technology, Real Estate |
Moving the Market
-- Hotter-than-expected CPI data renewing rate hike concerns
-- Rising Treasury yields
-- Downside leadership from mega caps and growth stocks
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Closing Summary
13-Sep-22 16:30 ET
Dow -1276.30 at 31107.00, Nasdaq -632.84 at 11633.54, S&P -177.72 at 3932.76
[BRIEFING.COM] The stock market logged steep losses today on the heels of disappointing August inflation data that served as a reality check for a market that bought into the peak inflation narrative. The major averages took a sharp turn lower at the open and then moved sideways before geopolitical worries sent the market distinctly lower ahead of the close. Broad selling brought the S&P 500 and Nasdaq Composite below their respective 50-day moving averages, and the S&P 500 fell toward the 3,900 level by the close.
The initial sell-off was precipitated by hotter-than-expected August inflation data, which challenged the peak inflation narrative. This fueled worries about the Fed's rate hike path. To that end, the fed funds futures market is now pricing in a 32% probability of a 100 basis point rate hike at the September 20-21 FOMC meeting versus 0.0% yesterday, according to the CME FedWatch Tool. Effectively, then, the market is assigning a 100% probability to a rate hike of at least 75 basis points next week.
Geopolitical factors further weighed on investor mentality following a Reuters report that the U.S. is looking at possible sanctions on China that would deter a possible invasion of Taiwan. This came after an earlier Reuters report today that said President Putin and President Xi will be meeting in Uzbekistan on Thursday and that they will discuss various matters, including Ukraine and Taiwan.
Bids fell by the wayside following this afternoon news item and the major indices cascaded lower into the close, settling near their worst levels of the session.
Separately, a fund manager survey by BofA revealed the highest cash level (6.1%) since 2001 and a record-low share of fund managers taking higher risk than normal. That extreme bearish-minded positioning is considered to be a contrarian indicator, but the stock market's performance was ultimately dictated by the disappointing CPI report and geopolitical worries.
Treasury yields rose sharply in response to the CPI data. The 2-yr note yield, which was at 3.50% before the release, settled at 3.76%. The 10-yr note yield, which was at 3.30% before the release, settled at 3.42%.
The US Dollar Index also moved noticeably higher following the CPI report. It was up 1.4% to 109.86.
Selling efforts were broad and orderly in nature in what amounted to a general buyers' strike. All 11 S&P 500 sectors closed in the red with losses ranging from 2.5% (energy) to 5.6% (communication services). All 30 Dow components finished with a loss.
There was little discrimination as many stocks logged sizable losses. The Vanguard Mega Cap Growth ETF (MGK) closed with a 5.4% loss and the Invesco S&P 500 Equal Weight ETF (RSP) closed with a 4.0% loss. The Russell 3000 Growth Index closed down 4.6% and the Russell 3000 Value Index closed down 3.6%.
Decliners outpaced advancers by an 8-to-1 margin at the NYSE and a 10-to-3 margin at the Nasdaq.
Energy complex futures settled mixed with WTI crude oil futures falling 0.4% to $87.49/bbl while natural gas futures rose 0.2% to $8.33/mmbtu.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Application Index (prior -0.8%) at 7:00 a.m. ET, August PPI (Briefing.com consensus -0.1%; prior -0.5%) and core PPI (Briefing.com consensus 0.3%; prior 0.2%) at 8:30 a.m. ET, and weekly EIA Crude Oil Inventories (prior +8.84 million) at 10:30 a.m. ET.
Reviewing today's economic data:
- NFIB Small Business Optimism reading was 91.8 compared to the prior 89.9 reading
- Total CPI increased 0.1% month-over-month in August (Briefing.com consensus -0.1%) and core CPI, which excludes food and energy, rose 0.6% month-over-month (Briefing.com consensus 0.3%). That left the year-over-year increases at 8.3% for total CPI (versus 8.5% in July) and 6.3% for core CPI (versus 5.9% in July).
- The key takeaway from the report is the acceleration in the year-over-year rate for core CPI, which was pushed in part by increases in the indexes for shelter, medical care, and new vehicles. That has provided a disheartening data point for market participants -- and the Fed -- that suggests the rate hike at the September 20-21 FOMC meeting will be 75 basis points and that one cannot be assured that there won't be another aggressive rate hike after that.
- The Treasury Budget for August showed a deficit of $219.6 bln versus a deficit of $170.6 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the August deficit cannot be compared to the deficit of $211.1 bln for July.
Dow Jones Industrial Average: -14.4% YTD
S&P 400: -14.5% YTD
S&P 500: -17.5% YTD
Russell 2000: -18.4% YTD
Nasdaq Composite: -25.6% YTD
Major indices trend sideways into the close
13-Sep-22 15:25 ET
Dow -1150.30 at 31233.00, Nasdaq -577.84 at 11688.54, S&P -160.59 at 3949.89
[BRIEFING.COM] The three main indices move sideways near session lows heading into the close.
Energy complex futures settled mixed with WTI crude oil futures falling 0.4% to $87.49/bbl while natural gas futures rose 0.2% to $8.33/mmbtu.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Application Index (prior -0.8%) at 7:00 a.m. ET, August PPI (Briefing.com consensus -0.1%; prior -0.5%) and core PPI (Briefing.com consensus 0.3%; prior 0.2%) at 8:30 a.m. ET, and weekly EIA Crude Oil Inventories (prior +8.84 million) at 10:30 a.m. ET.
Market logs fresh lows
13-Sep-22 15:00 ET
Dow -1071.45 at 31311.85, Nasdaq -549.89 at 11716.49, S&P -150.26 at 3960.22
[BRIEFING.COM] The major indices fell to fresh session lows in the last half hour.
The consumer discretionary sector (-4.5%) is near the bottom of the pack. Starbucks (SBUX 88.66, -0.42, -0.5%) shows the slimmest losses amid its annual Investor Day. It's the only component with a loss smaller than 1.0%.
Retailer and homebuilder components show the steepest losses. The SPDR S&P Retailer ETF (XRT) is down 5.6% and the SPDR S&P Homebuilder ETF (XHB) is down 5.1%.
August deficit wider than a year ago
13-Sep-22 14:30 ET
Dow -942.29 at 31441.01, Nasdaq -493.36 at 11773.02, S&P -131.92 at 3978.56
[BRIEFING.COM] The major averages held their lower lines following the release of the August Treasury Budget. In recent trading, we've sunk to session lows with the benchmark S&P 500 (-3.3%) in the middle of the pack.
The Treasury Budget for August showed a deficit of $219.6 bln versus a deficit of $170.6 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the August deficit cannot be compared to the deficit of $211.1 bln for July.
Total receipts of $303.7 bln rose 13.2% compared to last year while total outlays of $523.3 bln were up 19.2% compared to last year.
The total year-end budget deficit now stands at $945.7 bln, down around -65.1% y/y, vs $2.71 trln last year.
Hot inflation reading pinches gold on Tuesday
13-Sep-22 14:00 ET
Dow -872.39 at 31510.91, Nasdaq -468.35 at 11798.03, S&P -121.30 at 3989.18
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (-3.82%) clings to a decent "lead" at the bottom of the standings.
Gold futures settled $23.20 lower (-1.3%) to $1,717.40/oz after this morning's hot inflation reading bumped up the dollar.
Meanwhile, the U.S. Dollar Index is up about +1.3% to $109.72.
Nasty reaction to a nasty CPI report
Recent history has been repeating itself, which hasn't been a bad thing for the stock market.
The peak inflation narrative had been resuscitated along with the peak hawkishness narrative. The S&P 500 found support at 3,900. The notion that there will be a soft landing had been in active discussion. And global fund manager cash levels were at their highest level again since 2001, according to Reuters, which cited the latest BofA Global Fund Manager Survey.
Entering today, the Dow, Nasdaq, and S&P 500 had surged 4.3%, 6.9%, and 5.8% from their lows last Tuesday. They had been on a hot streak alright, blazing a trail with the help of short-covering activity, some weakening in the dollar, and presumably some performance chasing.
That hot streak promises to cool off at today's open, however, primarily because consumer inflation continues to run hot. In fact, it was hotter than expected in August and put a chill on some of the peak inflation/peak hawkishness/soft landing chatter.
Specifically, total CPI increased 0.1% month-over-month in August (Briefing.com consensus -0.1%) and core CPI, which excludes food and energy, rose 0.6% month-over-month (Briefing.com consensus 0.3%). That left the year-over-year increases at 8.3% for total CPI (versus 8.5% in July) and 6.3% for core CPI (versus 5.9% in July).
The key takeaway from the report is the acceleration in the year-over-year rate for core CPI, which was pushed in part by increases in the indexes for shelter, medical care, and new vehicles. That has provided a disheartening data point for market participants -- and the Fed -- that suggests the rate hike at the September 20-21 FOMC meeting will be 75 basis points and that one cannot be assured that there won't be another aggressive rate hike after that.
The food index was up 11.4% year-over-year. That is the largest 12-month increase since the period ending May 1979. The energy index was improved, up "only" 23.8% year-over-year, versus 32.9% in July. Take food, energy, and shelter out of the CPI mix, and you still see an index that is up 6.4% year-over-year.
The worrisome perception of rate-hike matters hit home immediately in the Treasury market, equity futures market, and currency market.
The 2-yr note yield, which is most sensitive to changes in the fed funds rate, shot up to 3.72% from 3.50% and the 10-yr note yield jumped to 3.43% from 3.30%. The S&P 500 futures, which had been up 31 points in front of the release, are now down 93 points and are trading 2.6% below fair value.
The Nasdaq 100 futures are down 365 points and are trading 3.4% below fair value. The Dow Jones Industrial Average futures are down 569 points and are trading 2.0% below fair value.
The U.S. Dollar Index was down 0.5% at 107.82 before the CPI report. It is now up 0.7% to 109.05.
It has been a nasty reaction for anyone caught on the other side of those trades. In general, though, the August CPI report was just a nasty report at this stage of the game.
-- Patrick J. O'Hare, Briefing.com
Eastman Chemical heading south today after cutting Q3 guidance as macro headwinds intensify (EMN)
Eastman Chemical (EMN) is going south today after the company downwardly revised its Q3 EPS guidance ahead of is presentation at the Credit Suisse Basic Materials conference. The specialty chemical provider now expects to generate EPS of about $2.00, compared to its prior outlook of "solid adjusted EPS growth above the year-ago period." In 3Q21, EMN posted EPS of $2.46, so this new forecast represents a substantial cut to its original expectation.
EMN may not be a household name, but the materials and chemicals that it produces are used in many common products that people use every day. Personal electronics, consumer durables, automobiles, personal care, agriculture, and construction are just some of the end markets that EMN participates in. As such, the company's financial performance can be viewed as a gauge for the health of the broader economy.
On that note, while the hotter-than-anticipated CPI report for August is doing the heavy lifting for today's sell-off, EMN's downside guidance isn't helping the cause. Fellow chemical maker and DJIA component Dow (DOW) is trading notably lower in sympathy with EMN, and shares of Ford (F), Thor Industries (THO), Whirlpool (WHR), Weber (WEBR), and La-Z-Boy (LZB) are also sharply lower. While F, THO, and WHR, in particular, are feeling pressure from rising interest rates, EMN also singled out consumer durables as a category that has slowed more than it anticipated in August and September. In fact, the weakness EMN is seeing in durable goods is directly linked to those higher rates.
In addition to the magnitude of EMN's guidance cut, what stands out is how rapidly conditions have deteriorated. The company reported Q2 earnings in late July, and, at that time, it was still relatively upbeat about its prospects for the remainder of the fiscal year. Specifically, the company stated that it expects to deliver above end market growth in its specialty product lines in the second half of the year, while it continues to raise prices in response to persistently higher inflation.
Since then, a few factors have changed for the worse, including the aforementioned deceleration in the consumer durables end market.
- During EMN's Q2 earnings conference call, the company stated that it kept pace with higher raw material, energy, and distribution costs as it raised prices across each operating segment. Consequently, each segment recovered spreads, enabling EMN to generate record Q2 sales revenue and adjusted EPS. Now, however, certain costs have trended even higher than expected, most notably including natural gas prices in the U.S.
- Therefore, the pricing actions that EMN previously implemented to recover spreads are no longer enough to maintain its adjusted EPS outlook.
- Logistical issues are compounding the problem, particularly on the East Coast where marine shipping issues are negatively impacting high-value specialty products in advanced materials bound for other markets.
- EMN experienced an electricity outage at its Kingsport facility and the recovery in its polymer lines took longer than expected. As a result, volume and product mix were affected.
The main takeaway is that EMN is taking hits from multiple sides, including both demand side and supply side headwinds. There still may be some pockets of strength, including in the agriculture and personal care end markets, but the prospect of even higher interest rates in the near future doesn't bode well for EMN overall.
Planet Labs shines through a cloudy trading session today on upbeat JulQ results (PL)
Planet Labs (PL +13%) is a ray of sunshine during a cloudy trading session today after topping Q2 (Jul) revenue estimates and slightly increasing its FY23 sales outlook. PL, which went public via a SPAC merger late last year, is now seeing its shares up roughly 4% on the year.
PL images the Earth's landmass using its 200 satellites to gather data to reveal insights into a wide array of trends, such as agriculture, biodiversity, and supply chains. The company's customer base comprises many agriculture, mapping, forestry, and finance companies as well as government agencies. Some examples include Google (GOOGL) and NASA. For instance, PL and Google currently have a content license agreement; Google also owns a 10% stake in the company. A few of PL's competitors include Blacksky Technology (BKSY), Spire Global (SPIR), and Satellogic (SATL).
Despite today's move, PL still trades around 50% below its IPO price of $10.00. However, the company's Q2 results contained multiple highlights, putting it on the right track to potentially recover its shares' sizeable lost ground.
- Revenue growth of 59% yr/yr to $48.45 mln, which topped PL's prior forecast of $41-43 mln, was a massive acceleration from just 26% posted last quarter. Gross margins also saw a sizeable expansion of 13 pts yr/yr to 48%.
- Although PL's customer count decelerated from previous quarters, the company still grew the figure 17% yr/yr to 855. Perhaps more notable, net dollar retention expanded to 125%, a considerable jump from 105% in Q1 (Apr).
- PL's excellent revenue growth in Q2 allowed it to raise its FY23 sales forecast to $182-190 mln, up by roughly the size of its Q2 beat from its prior outlook of $177-187 mln. The company also expects similar margins from Q2 for the year.
In addition to PL's solid Q2 numbers, the company also boasts a few advantages. PL's imaging data can enable precision agriculture, which is becoming more popular, as evidenced by robust growth posted by Deere (DE). For example, despite already seeing 23% sales growth in its Production & Precision Ag segment in FY21 (Oct), DE expects this business to grow between 25-30% in FY22. Also, nearly all of PL's revs come from licensing arrangements, providing a steady income stream. Furthermore, most of these subscriptions are multi-year contracts, helping to cushion from a significant loss of revenue if economic conditions rapidly deteriorate.
Bottom line, PL's Q2 earnings report may be the spark needed to ignite a further push toward its IPO price. Although uncertainty in the macro environment could pressure PL to deliver similar numbers from Q2 in subsequent quarters, its end market use cases are proving their resiliency to a less-than-ideal economic backdrop.
Braze blazing a trail lower after issuing tepid guidance; carnage in tech stocks not helping (BRZE)
Expectations for Braze's (BRZE) Q2 earnings report were running high after fellow customer experience management platform developer Sprinklr (CXM) raised its FY23 EPS guidance last week. Echoing BRZE's sentiments from mid-June when the company issued its beat-and-raise Q1 report, CXM's executives stated that demand continues to be robust as businesses look to gain operating efficiencies in a tough macro climate. With investors anticipating a similarly bullish outcome for BRZE's Q2 report, shares had climbed by 15% over the past week, taking the stock's total gain to over 35% since BRZE's impressive beat-and-raise Q1 report.
Facing a higher bar to hurdle compared to last quarter, BRZE's results were solid as it exceeded EPS and revenue expectations, but it wasn't free from blemishes.
- After generating positive free cash flow of $15.7 mln last quarter, BRZE took a significant step backward in Q2 as free cash flow came in at $(24.7) mln. The jump to free cash flow profitability in Q1 was driven by strong bookings from Q4. With the company sliding back into negative territory in Q2, there's some concern that bookings growth has materially slowed.
- Unlike CXM, BRZE did not raise its FY23 guidance by a substantial amount. In fact, its EPS forecast for Q3 was slightly below expectations, while its revenue outlook was merely in line with expectations. Accordingly, the company only nudged the upper end of its FY23 EPS guidance higher by a penny, despite beating Q2 estimates by a bit more than that.
- Similarly, BRZE bumped its FY23 revenue higher by just $1.5 mln at the mid-point of the guidance range, even though it exceeded the Q2 forecast by roughly $5 mln.
- In the earnings press release, CEO Bill Magnuson struck a more cautious tone, acknowledging that macroeconomic headwinds are presenting challenges. However, he did express confidence in the durability of the business and BRZE's ability to grow within a massive addressable market.
- If one wanted to nitpick, BRZE's slowing revenue growth is another minor flaw, dipping to 55% in Q2, compared to 62% last quarter and 64% in Q1. Dollar-based net retention rate for customers with over $500K in ARR also ticked lower to 130% from 133% last quarter. These slight declines are certainly not alarming in isolation, but they're still worth pointing out because growth concerns are so elevated right now as interest rates climb higher.
- On that note, a hotter-than-expected August CPI report is not helping the cause for BRZE, or virtually any tech stock today. With that report, it's nearly a lock that the Fed will raise interest rates by at least 75 bps next week.
Based on BRZE's overall Q2 performance, the stock's dive lower seems unjustified. After all, the company did add 480 new customers from the same period a year earlier, with the number of customers generating $500K or more in ARR up by 69% yr/yr to 139. Non-GAAP gross margin also improved by 250 bps yr/yr to 69.3%. Unfortunately, the stock is being swept up in a nasty tech stock sell-off, and its less-than-impressive FY23 guidance is making it an easy target.
AppLovin's intent to not submit another merger proposal to Unity (U) is met by a cold reaction (APP)
AppLovin (APP -6%) is not receiving much warmth from investors today after the company announced yesterday after the close that it does not intend to submit another proposal to combine with Unity Software (U -11%). Meanwhile, shares of Unity are sinking, although much of the move can be attributed to today's CPI data.
APP provides software for mobile app developers, particularly mobile game developers. The company aims to tackle marketing and monetization challenges faced by mobile app developers, making it a good fit for Unity, which provides developers with the tools necessary to build mobile video games. APP initially submitted an unsolicited proposal, which it has now withdrawn, to combine with Unity in a stock deal valued at roughly $20 bln. If Unity had agreed, it would have had to break off its pending ~$4.4 bln acquisition of ironSource (IS -4%), which provides similar services to APP. On a side note, we also believe that with APP not looking to submit a likely more palatable offering to Unity, it ups the likelihood of the IS merger closing.
The chances Unity would accept APP's merger proposal were slim, especially since it came just one month after Unity agreed to merge with IS. Nevertheless, after Unity unanimously decided against APP's proposal, investors sent APP's shares over 7% lower. Since then, the stock has struggled, trading down by around 30%.
- We think APP's initial proposal was made out of concern that IS combining with Unity would create a much tougher competitive landscape, explaining APP's sharp downward move since Unity's rejection.
- With Unity growing its monthly active end users by over 44% yr/yr in FY21 to approximately 3.9 bln, APP may find it difficult to entice users to use its platform over IS's given the sheer size of its reach with Unity.
- By adding IS, Unity becomes more attractive for developers looking for a one-stop shop to create apps and monetize and market them successfully, placing another hurdle in APP's way. APP may offer monetization and marketing tools, but it does not supply software for game development as Unity does.
Although the road ahead is looking considerably challenging for APP, at the very least, it can get back to business with the Unity proposal no longer hanging over its head. APP's latest Q2 earnings report, where it missed top and bottom line estimates and trimmed its FY22 sales outlook, spotlights the challenging environment for the mobile app ecosystem. APP expects the near term to be rife with headwinds but is focused on the one thing it can control: improving its software. This is where APP's competitive advantage lies. However, this advantage could start to get clipped by a fortified competitor in IS and Unity.
Oracle holds up well in a weak market as cloud revenue came in at high end of guidance (ORCL)
Oracle (ORCL -0.7%) is trading slightly lower after reporting Q1 (Aug) results last night. With the overall market selling off on the inflation data, even a small downtick tells us investors are pretty pleased with Oracle's report. At first glance, we questioned why the stock is holding up well despite an EPS miss, in-line revs and downside guidance for Q2 (Nov). However, there were some nuggets of good news in there.
- First off, on the EPS miss, a lot of that seems related to stronger-than-expected FX headwinds. Oracle estimates it had a $0.08 impact on EPS. When it provided guidance in June, Oracle was expecting a $0.05 impact, so we should probably add that $0.03 which makes the final result still a bit weak but generally in-line. Investors tend to not punish companies for things outside their control like FX, we think that is helping Oracle here.
- Another factor here is that this was the first quarter that included recently-acquired Cerner. We had expected some volatility with analysts' models, but Cerner seems to have performed about as expected.
- Oracle's cloud business was a standout in the quarter. Q1 Cloud Revenue (IaaS plus SaaS) rose 45% yr/yr to $3.6 bln, which was up 50% in constant currency (CC). This was at the high end of prior guidance (including Cerner) of +42-46% and +46-50% in CC. We think investors were pleased to see that.
- Speaking of the cloud, Oracle also announced some positive news. Last quarter, the company announced that it built a high-speed interconnect between Microsoft's Azure cloud and the Oracle Cloud, which allows Azure customers to directly use the very latest Oracle Database technology even if their application is running in Azure.
- Last night, Oracle announced it is making the latest version of its MySQL HeatWave database available on Amazon's AWS cloud. Multi-cloud interoperability is one of the reasons its infrastructure business is booming, growing over 50% yr/yr and these deals with Azure and AWS should only help. Oracle expects its total cloud business to exceed a $20 bln annual run rate next year.
Overall, we think investors are not really focusing on the EPS miss and downside EPS guidance as much of that seems FX-related. The more important metric was total cloud revenue coming in at the high end of guidance and the deal with AWS following so closely on the Azure deal was a big positive as well. Finally, we think the stock would have been up more today, but it had run a bit over the past week which tells us much of the good news may have been priced in.
The Big Picture
Last Updated: 09-Sep-22 15:14 ET | Archive
An exciting week for stocks that proved only one thing
The Labor Day week was a short week but it was long on gains. As of this writing, the Dow, Nasdaq, and S&P 500 were up 2.8%, 4.1%, and 3.7%, respectively, for the week.
Those are some impressive gains, which include the losses that were registered on Tuesday. In effect, then, the Dow, Nasdaq, and S&P 500 have risen 3.7%, 5.5%, and 4.7%, respectively, in just three trading sessions.
What's more is that they scored those gains while the Fed and other central banks were trying to score points as inflation fighters by either talking tough on the need to keep raising rates or by actually raising rates.
One can view the stock market's winning performance either as a sign that it had already discounted the probability of aggressive rate hikes in the near term or as a sign that it does not believe the Fed and other central banks will ultimately be as tough with their policy tightening as they are indicating.
A third interpretation of this week's gains is that they were predetermined by the negative sentiment that had been building over the course of three straight losing weeks for the stock market.
A fourth choice is all of the above.
Expectations Rising
A week ago, the fed funds futures market was pricing in only a 57.0% probability of a 75-basis point rate increase at the September 20-21 FOMC meeting. At the moment, that probability sits at 86.0%, according to the CME's FedWatch Tool.
The strong pickup in expectations for a more aggressive rate hike was driven by several factors:
- China locked down Chengdu (a city with 21.2 million residents), exacerbating concerns about ongoing supply chain disruptions.
- Russia indicated that the shutdown of the Nord Stream 1 pipeline will be long lasting, compounding Europe's energy crisis.
- Cleveland Fed President Mester (FOMC voter) repeated that she thinks the fed funds rate should be somewhat above 4.00% by early next year and that she is not anticipating a rate cut in 2023.
- A Wall Street Journal article on Wednesday suggested the Fed is likely on a path to raise the target range for the fed funds rate by 75 basis points at its September meeting (Nick Timiraos, who is thought by the market to be the Fed's go-to correspondent when it wants to tease a policy idea, was the author of that article).
- Fed Governor Brainard (FOMC voter) said the same day as the Wall Street Journal article that monetary policy will need to be restrictive for some time and that the Fed is in this for as long as it takes to get inflation down. To be fair, she also acknowledged the risks of overtightening.
- Fed Chair Powell (FOMC voter) did not do anything to push back against the view floated in The Wall Street Journal when he spoke at the Cato Institute's Monetary Conference. Instead, Mr. Powell reiterated that the Fed is strongly committed to its price stability mandate and will keep at it until the job is done.
- St. Louis Fed President Bullard (FOMC voter) told Bloomberg that he is favoring a 75-basis point rate hike at the September meeting.
- Fed Governor Waller (FOMC voter) said he supports another "significant increase in the policy rate" at the next meeting.
- The Reserve Bank of Australia raised its key lending rate by 50 basis points and the Bank of Canada and ECB both raised their key lending rates by 75 basis points this week.
There was some better inflation news in the ISM Non-Manufacturing Index for August, as the Prices Index dropped to 71.5% from 72.3%. That is still too high, but it at least pointed to a moderation in price pressures.
On balance, however, this week was littered with hawkish-minded Fed speak and hawkish-minded moves from other central banks. The comments and the rate-hike actions caused some headline stir, but clearly they did not faze the stock market.
When the market responds positively to a negative factor, it is fair to argue that the negative factor has been priced in already.
Not Convinced
Most central banks are talking tough about needing to get inflation down with higher interest rates. The Fed's unofficial mantra is "higher for longer."
The stock market knows policy rates are headed higher. It's the longer part that it seems to be calling into question.
Participants are not convinced -- not yet anyway -- that the Fed will stick to its hard-headed ways. The Fed has itself to blame for that, largely because it has tacitly endorsed the Fed put since the financial crisis and in the process has groomed market participants to think the Fed won't have the gumption to leave the stock market in a world of hurt.
Beyond that, however, market participants are looking at falling commodity prices, sliding inflation expectations, a weakening housing market, a eurozone economy seemingly headed for a recession, and a growing number of earnings warnings (and earnings estimate cuts) as budding proof that the Fed will be compelled to take a kinder, gentler approach to raising rates before ultimately cutting them in 2023.
That's a reason why the market trades better than one might think when bad news comes its way.
Bearish Sentiment Is Bullish Catalyst
The three-week stretch leading up to the Labor Day weekend was not a good stretch. The S&P 500 declined 8.3% over that stretch while the Nasdaq Composite fell 10.9%. Measured from the August 16 intraday high, the S&P 500 was down 9.3% and the Nasdaq was down 11.8% going into the Labor Day weekend.
The rally off the mid-June lows had been stopped in its tracks with a pointed failure right at the S&P 500's 200-day moving average. A terse speech on August 26 from Fed Chair Powell on the need to restore price stability further fueled the selling efforts and undermined investor sentiment along with rising interest rates.
The Labor Day holiday was something to look forward to, yet investors approached it carrying a forlorn attitude about the stock market's behavior.
A gauge of just how forlorn investors had gotten was provided this week by the American Association of Individual Investors (AAII). It conducts a weekly survey and the latest survey revealed that bearish sentiment among individual investors had reached 53.3%, versus the historical average of 30.5%, while bullish sentiment had dropped to an unusually low 18.1%, versus the historical average of 38.0%.
The bull-bear spread is -35.2%, which the AAII also deems unusually low. On the bright side, the AAII observed that, "Historically, the S&P 500 has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and the bull-bear spread."
The extreme level of bearish sentiment (and lack of bullish sentiment) was considered to be a contrarian indicator that sparked a willingness to buy into a short-term oversold market and to buy/swing trade beaten-down stocks.
It did not hurt matters either that market participants knew the summer rally was catalyzed by reports of extreme bearish sentiment and the notion that the Fed could engineer a soft landing and shift to a rate-cut cycle sooner rather than later.
What It All Means
We have been down this road before, where the stock market strings together a rally effort that defies the fundamental backdrop.
That backdrop did not improve this week so much as the stock market did. Stocks went up even though interest rates went up. Stocks went up even though China hurt global growth prospects by adhering to a zero-Covid policy. Stocks went up even though the geopolitical environment worsened.
Stocks went up because technical drivers outweighed fundamental factors. They went up because extreme bearish sentiment readings were a contrarian rally call.
Stocks went up because the mega-cap stocks got back in gear.
After three straight losing weeks, stocks went up because that is what they are prone to do from time to time in a range-bound market. It was a big week even though it was a short week of trading. The S&P 500 moved back above its 50-day moving average (4,029) but it did not break out of its summer trading range, the top end of which is 4,325.
The stock market got back to work with a bullish bias following the Labor Day weekend, but it has a lot of work left to do to stamp out the bear market challenges. That will not be easy with the Fed and other central banks still raising rates, earnings estimates still being cut, and global growth slowing.
It was an exciting week but it did not prove anything other than that the stock market was primed to bounce from a short-term oversold condition -- a condition that came to be on the recognition that the fundamental backdrop is lacking the hues of a bull market.
-- Patrick J. O'Hare, Briefing.com
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