Market Snapshot
briefing.com
| Dow | 31907.09 | -347.68 | (-1.08%) | | Nasdaq | 11122.90 | -215.45 | (-1.90%) | | SP 500 | 3859.22 | -59.10 | (-1.51%) | | 10-yr Note |
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| | NYSE | Adv 407 | Dec 2508 | Vol 721 mln | | Nasdaq | Adv 814 | Dec 3650 | Vol 5.1 bln |
Industry Watch
| Strong: -- |
| | Weak: Materials, Utilities, Real Estate, Industrials, Financials |
Moving the Market
-- SVB Financial Group (SIVB) being shut down as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California
-- Falling Treasury yields in a flight-to-safety trade
-- Ongoing worries about Fed rate hikes
-- Mega cap leadership driving upside moves
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BA moving higher on 787 Dreamliner news
10-Mar-23 15:35 ET
Dow -326.56 at 31928.21, Nasdaq -197.88 at 11140.47, S&P -52.16 at 3866.16
[BRIEFING.COM] The stock market continues to suffer ahead of the close.
A short time ago, the FAA approved 787 Dreamliner deliveries to resume next week, according to Reuters. Boeing (BA 202.72, +1.48, +0.7%) is up modestly on the news.
Treasury yields made big strides to the downside today in a flight to safety trade. The 2-yr note yield fell 29 basis points to 4.59% and the 10-yr note yield is down 23 basis points to 3.70%.
There is no U.S. data of note on Monday.
Energy complex futures settle mixed
10-Mar-23 15:00 ET
Dow -272.02 at 31982.75, Nasdaq -169.54 at 11168.81, S&P -45.71 at 3872.61
[BRIEFING.COM] Things are little changed in the last half hour. The main indices are trading in fairly narrow ranges.
A short time ago, Treasury Secretary Yellen convened with financial regulators and expressed full confidence in the banking regulators to take appropriate actions in response and noted that the banking system remains resilient.
Separately, energy complex futures settled in mixed fashion. WTI crude oil futures rose 1.3% to $76.68/bbl and natural gas futures fell 4.5% to $2.65/mmbtu.
February deficit widens yr/yr
10-Mar-23 14:30 ET
Dow -347.68 at 31907.09, Nasdaq -215.45 at 11122.90, S&P -59.10 at 3859.22
[BRIEFING.COM] The broader market moved slightly off lows following the release of the February Treasury Budget; the government posted a February deficit which came in slightly worse than expected, pressured in part by higher individual tax refunds brought on by the IRS' work to get through its recent backlog of returns. The S&P 500 (-1.51%) is in second place among the major averages.
The Treasury Budget for February showed a deficit of $262.4 bln versus a deficit of $216.6 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the February deficit cannot be compared to the deficit of $38.8 bln for January.
Total receipts of $262.1 bln fell 9.6% compared to last year while total outlays of $524.5 bln rose about 3.6% compared to last year.
The total year-to-date budget deficit now stands at $722.6 bln vs $475.6 bln at this point a year ago.
Gold propped up by flight to safe havens
10-Mar-23 13:55 ET
Dow -441.40 at 31813.37, Nasdaq -237.09 at 11101.26, S&P -68.49 at 3849.83
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-2.09%) is at the bottom of the major averages, holding losses of about 237 points.
Gold futures settled $32.60 higher (+1.8%) to $1,867.20/oz as today's developments in the SVB Financial (SIVB 106.04, halted)/regional banking sector provides a luster to the yellow metal as a safe-haven investment. Gold ended the week +0.68% higher.
Meanwhile, the U.S. Dollar Index is down about -0.7% to $104.54.
As a reminder, the Treasury Budget for February will be released in about 5 minutes at the top of the hour.
Caterpillar, Walt Disney underperform on Friday in DJIA
10-Mar-23 13:30 ET
Dow -381.70 at 31873.07, Nasdaq -196.40 at 11141.95, S&P -57.41 at 3860.91
[BRIEFING.COM] The Dow Jones Industrial Average (-1.18%) is near session lows, like its counterparts, down now about 380 points.
A look inside the DJIA shows that Caterpillar (CAT 229.87, -11.09, -4.60$), Walt Disney (DIS 93.27, -2.87, -2.99%), and Salesforce (CRM 174.53, -4.19, -2.34%) are among today's top laggards.
Meanwhile, chipmaker Intel (INTC 26.95,+ 0.51, +1.93%) is atop the standings.
The DJIA is now on pace to lose more than 1,500 points this week, or about -4.55%.
A buzz in the air over SVB Financial and February employment report
Today is an employment report day, and until 24 hours or so ago, today was supposed to be all about the employment report and the market's reaction to it. There is another fly in the ointment, though, if you will, and that fly is SVB Financial (SIVB), which has imploded over the last 24 hours or so on concerns about its capital position after experiencing elevated cash burn from its clients.
Yesterday, shares of SIVB plummeted 60%, taking the banking sector and the broader market down with them. Unfortunately, things have not improved this morning for SIVB. The stock is down another 65% in pre-market trading amid a report by Bloomberg that Founders Fund, the venture capital fund co-founded by Peter Thiel, has advised companies to pull their money from Silicon Valley Bank.
We can't say for certain if there has been a withdrawal run on the bank, but there has certainly been a run on the stock as investors are in a sell-first-ask-questions later mode, cognizant of how quickly a confidence crisis in a bank can destroy its stock.
The debate today is whether SIVB's issues are SIVB's issues or the start of a bigger issue for the banking sector. There seems to be an allowance in the stock market for it being more of company-specific problem or at least not a debilitating systemic issue. We say that knowing that the equity futures were little changed this morning even as shares of SIVB were plummeting.
At the same time, though, we can't ignore the fact that the Treasury market was also rallying at the time SIVB was plummeting in a continued flight-to-safety trade that made it look as if some parties at least thought SIVB's issues could be a bigger issue. To that end, the 2-yr note yield was down another nine basis points to 4.79% in front of the employment report, after hitting 5.06% before yesterday's open; and the probability of a 50 basis points rate hike at the March meeting has fallen to 41.0%, according to the CME FedWatch Tool, from 78.6% yesterday.
The yield on the 2-yr note, currently 4.74%, continued lower after the release of the February employment report, which was accented by stronger-than-expected growth in nonfarm payrolls, a larger-than-expected increase in the unemployment rate, and a smaller-than-expected monthly increase in average hourly earnings, although the year-over-year rate increased to 4.6% from 4.4%.
The key takeaway from the report is that it was still a strong report for this point in the Fed's tightening cycle, and while the SIVB issue is causing a notable distraction, the strength of the report in our estimation is still enough to keep a 50 basis points rate hike on the table for the March FOMC meeting.
Other notable headlines from the Employment Situation Report are as follows:
- February nonfarm payrolls increased by 311,000 (Briefing.com consensus 205,000). The 3-month average for total nonfarm payrolls increased to 351,000 from 344,000.
- January nonfarm payrolls revised to 504,000 from 517,000
- December nonfarm payrolls revised to 239,000 from 260,000
- February private sector payrolls increased by 265,000 (Briefing.com consensus 203,000)
- January private sector payrolls revised to 386,000 from 443,000
- December private sector payrolls revised to 232,000 from 269,000
- February unemployment rate was 3.6% (Briefing.com consensus 3.4%), versus 3.4% in January
- Persons unemployed for 27 weeks or more accounted for 17.6% of the unemployed versus 19.4% in January
- The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.8% versus 6.6% in January
- February average hourly earnings were up 0.2% (Briefing.com consensus 0.3%) versus 0.3% in January
- Over the last 12 months, average hourly earnings have risen 4.6%, versus 4.4% for the 12 months ending in January
- The average workweek in February was 34.5 hours (Briefing.com consensus 34.6), versus a downwardly revised 34.6 hours (from 34.7) in January
- Manufacturing workweek decreased 0.2 hour to 40.3 hours
- Factory overtime decreased 0.1 hour to 3.0 hours
- The labor force participation rate increased to 62.5% from 62.4% in January
- The employment-population ratio held steady at 60.2%
Currently, the S&P 500 futures, down seven points just before the release of the employment report, are up 10 points and are trading 0.3% above fair value, the Nasdaq 100 futures, down four points in front of the report, are up 65 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures, down 85 points in front of the report, are up seven points and are trading slightly above fair value.
There is a lot of buzz in the air after the employment report, only we don't know if that buzz is because of flies related to SIVB or excitement related to a better-than-feared employment report (meaning it wasn't as strong as feared). The tape will eventually provide the answer, but it's fair to say that there is still a good bit of uncertainty in the air.
-- Patrick J. O'Hare, Briefing.com
Buckle shares hold up nicely today following decent JanQ results (BKE)
Buckle (BKE +4%) shares are holding up nicely today, avoiding a broader market sell-off, following solid earnings and sales growth, as well as robust comps in Q4 (Jan). The fashion retailer has seen its shares continuously edge lower over the past couple of months, sliding by around 27% from January 11 highs. Although the stock still has a lot of ground to recover, today's move is a positive step in the right direction, as was BKE's relatively upbeat Q4 report.
- BKE expanded adjusted earnings by 4% yr/yr to $1.76 in Q4, on decent 5.5% sales growth. Same-store sales grew similarly, climbing +4.6% in the quarter.
- The numbers were assisted by casualization trends, which, albeit have slowed from peaks seen during the previous two years, where remote and hybrid work provided significant tailwinds, have remained fairly robust.
- American Eagle Outfitters (AEO) noted last week that entering 2023, despite an uncertain macro environment, emerging trends in casual wear continue to provide new avenues to drive growth.
- Kohl's (KSS) commented that women's apparel benefited from higher demand for casual and dressy wear in JanQ.
- In October, Levi Strauss (LEVI) stated that casualization is no longer purely a U.S. trend but has cropped up globally as well.
- BKE is also not suffering from excessive inventory levels. Its inventory may have climbed 22.5% yr/yr to $125.1 mln in Q4, but this was only 3% higher than pre-pandemic levels of $121.3 mln. Management also commented that it feels good about its current inventory position.
- Operating margins also held up decently during the quarter, ending Q4 at 27.4%, a slight 110 bp dip yr/yr. Likewise, merchandise margins contracted by just 75 bps yr/yr in Q4, reflecting a decent job BKE has done managing the highly promotional environment.
Overall, BKE's Q4 report was solid, alleviating potential fears that a cautious consumer would dampen financial performance in the quarter. It helps that BKE still reports monthly comp data, which paints realistic expectations heading into its quarterly reports. On that note, February comps of -6.9% were not inspiring. However, the figure looks less glaring when zooming out, as year-ago comps were +33%.
Bottom line, BKE may find it difficult to operate in a highly competitive atmosphere as a lesser-known apparel retailer. However, BKE's Q4 results demonstrated that it can carve out a meaningful niche, which may help fuel a turnaround going forward.
Oracle's solid results and outlook fail to meet heightened expectations in a turbulent market (ORCL)
Oracle's (ORCL) transition from an on-premise, license-based software company to a cloud, subscription-based company has been a game changer, reinvigorating its growth after many years of stagnation. With that improved growth profile, though, comes higher expectations and more room to disappoint investors, especially after the stock has surged by nearly 40% since last October. Against that backdrop, ORCL delivered a 3Q23 earnings report that was quite solid overall given the tough business climate, but the results and outlook are still failing to generate much excitement.
- While ORCL edged passed EPS estimates, the company fell just short on the top-line, which appears to be enough of an excuse to take some profits off the table. Last quarter, ORCL comfortably beat revenue estimates, so the modest miss is a notable swing in the wrong direction.
- During the earnings call last night, ORCL didn't discuss the macroeconomic headwinds or their impact on its business in great detail, leaving some to wonder if the broader slowdown in IT spending was to blame for the top-line miss. However, CEO Safra Catz did highlight the fact that pay-as-you-go accounts for less than 5% of ORCL's business, suggesting that its business model is more predictable than some of its peers. In contrast, Snowflake's (SNOW) business model is almost entirely consumption-based, which has worked against the company lately as clients rein in spending.
- For ORCL, demand is holding up relatively well. Total Cloud revenue (IaaS and SaaS) increased by 48% in constant currency, inline with its guidance for growth of 46-50%. Excluding Cerner, which ORCL acquired last June, Cloud Revenue growth was still healthy at +28% in constant currency.
- On the topic of Cerner, that acquisition is playing out well for ORCL as the addition significantly bolstered its healthcare footprint. In fact, since completing the acquisition, Cerner has increased ORCL's healthcare contract base by about $5.0 bln. Furthermore, as the company continues to integrate Cerner into the business, its operating margins are steadily improving. More specifically, ORCL has improved Cerner's operating margin by over five percentage points compared to before the acquisition, and more gains are anticipated.
- At this point, ORCL's ERP applications -- Fusion and NetSuite -- make up for the majority of its cloud revenue at about 65% of total revenue. Both of these applications are performing well, growing by 28% and 26%, respectively, in constant currency this quarter. Those growth rates are essentially even with last quarter.
Looking ahead, ORCL is forecasting Q4 total Cloud revenue growth of 51-53% (CC) and total revenue growth of 17-19% (CC), which met analysts' expectations. It also issued upside Q4 EPS guidance and bumped its quarterly dividend higher by 25% to $0.40/share. Overall, it's somewhat surprising to see the stock reacting negatively to ORCL's results, guidance, and dividend increase. We suspect that the sell-off is more related to some profit-taking following the stock's big run, and a risk-off mentality from investors in the wake of the SVB Financial (SIVB) implosion.
Ulta Beauty's glowing JanQ results reflect the beauty industry's ongoing resilience (ULTA)
Ulta Beauty's (ULTA +1%) sizeable earnings and sales beats in Q4 (Jan) reflect continual resilience from the U.S. beauty category as individuals return to work and social activities since the height of the pandemic. The beauty retailer topped Q4 estimates at every corner, expanding its EPS by 23% yr/yr on accelerated sales and comp growth of +18.2% and +15.6%, respectively. Likewise, most of ULTA's FY24 forecasts were ahead of consensus, including its earnings and sales projections.
- Sales in each of ULTA's major categories exceeded prior expectations in Q4, boasting double-digit growth yr/yr, as positive momentum continued across physical and digital channels. Management noted that Q4 represented a continuation of healthy spending growth per member across all income demographics. Speaking of members, ULTA ended the year with over 40 mln customers enrolled in its loyalty program, an 8% improvement from the year-ago period.
- The upbeat numbers in Q4 should have been mostly expected after multiple retailers noted that their beauty categories were notable bright spots in JanQ. For example, Target (TGT), which houses Ulta Beauty shops within its stores, said that its beauty assortment experienced double-digit growth yr/yr in JanQ. Meanwhile, Kohl's (KSS), which has a partnership with beauty retailer Sephora (LVMUY), enjoyed a 90% jump in beauty sales yr/yr in JanQ. As a result, investors were keeping a close eye on ULTA's FY24 guidance.
- Encouragingly, the resilient beauty trends witnessed throughout FY23 will likely continue throughout FY24. ULTA forecasted EPS of $24.70-25.40 and revs of $10.95-11.05 bln, both representing mid-single-digit growth yr/yr at the midpoints. ULTA believes that factors outside of elevated price increases will continue driving growth in beauty, including strong consumer engagement, especially given the beauty category's connection with wellness.
- Furthermore, ULTA remains confident in delivering comp growth between +3-5% over the long term, consistent with its 2021 Analyst Day targets. Meanwhile, ULTA slightly raised its long-term operating margin forecast, expecting 14-15% from 13-15% outlined in late 2021.
Still, a few concerns are worth pointing out, including ULTA's FY24 operating margin forecast of 14.7-15.0%, a minor dip compared to the 16.1% margins posted in FY23. However, alongside raised long-term targets, ULTA noted that the contraction from FY23 is primarily due to its investments to support its strategic priorities, as well as higher store expenses and wage pressures. Also, ULTA's same-store sales growth outlook of +4-5%, a sharp deceleration from the +15.6% posted in FY23, is not particularly eye-catching. However, promisingly, ULTA stayed confident in achieving its long-term comps.
Bottom line, ULTA's buoyant report combined with sturdy results from many of its peers recently, including Coty (COTY), e.l.f Beauty (ELF), and Sephora, continue to prove the beauty industry's defensive positioning during the inflationary environment. As such, we remain bullish on the cosmetics industry and ULTA.
DocuSign heads lower despite upside; investors have concerns about softening demand in FY24 (DOCU)
DocuSign (DOCU -19%) is trading sharply lower despite reporting strong upside with its Q4 (Jan) earnings report last night. The e-signature giant beat handily on EPS and revenue. It also guided Q1 (Apr) revenue in-line and full year revenue guidance was above analyst expectations. In addition to earnings, DocuSign also announced that CFO Cynthia Gaylor would step down later this year.
In terms of the key operating metrics, billings is a closely watched number and DocuSign performed well in this regard. Billings rose 10% yr/yr to $739 mln, nicely above prior guidance of $705-715 mln. Also, non-GAAP operating margin increased to 24% vs 18% last year and well above prior guidance of 20-22%. In Q4, DOCU saw lower expenses for employee-related costs related to the workforce reduction announced in September. That helped drive the strong operating margin in the quarter.
So why is the stock down despite seemingly good numbers? We think investors have no quarrel with the headline numbers and guidance from DocuSign. However, there are other reasons why we think the stock is lower:
- For one thing, DOCU sounded a note of caution on the call. Specifically, the company said it's continuing to experience a challenging macro environment with softening demand trends, including moderating expansion rates. It also does not sound like a quick fix is on the horizon. DOCU expects the macro environment will remain challenging as it moves through the year. DOCU also mentioned a possible modest near term disruption as it realigns its sales force and shifts to more of a self-serve model.
- DOCU also guided to a sequential decline in Q1 for billings ($615-625 mln) and non-GAAP operating margin (21-22%). We do not want to read too much into this because DOCU tends to low ball guidance on these metrics, then report nice beats. However, that Q1 billings guidance is a pretty good-sized drop off from $739 mln in Q4. So it may be more than the customary low ball. It may reflect some caution that DOCU described above.
- The CFO stepping down is perhaps being seen as a negative. DOCU made a point to say her decision was not a result of any disagreement regarding the company's financial statements or disclosures. However, the news is likely adding some jitters in investors' minds. A final catalyst adding to the weakness is likely being caused by JP Morgan downgrading the stock post-earnings to Underweight from Neutral while lowering its target to $48.
Overall, DocuSign ended FY23 on a strong note with good upside in Q4 for EPS, revenue, billings and operating margin. However, we think the cautionary comments on the call, the billings guidance, the CFO departure and a key analyst downgrade are outweighing the good news from the Q4 numbers. Also, the stock had run more than 50% from early December heading into this report, so maybe investors had priced in a stronger outlook for the new fiscal year.
JD.com sinks despite topping Q4 estimates as a recovery in consumer sentiment could take time (JD)
China-based e-commerce titan JD.com (JD -10%) may have topped Q4 (Dec) earnings and revenue estimates. However, management's deflating comments on the current state of the economy are driving a pronounced sell-off today.
JD noted that a shift in consumers' lifestyles and preferences during the post-pandemic environment results in numerous challenges. On the one hand, JD is recognizing a rise in middle-class households, evidenced by daily active user (DAU) growth remaining in double-digits yr/yr during Q4. However, on the other hand, consumers have pulled back from their prior spending patterns, becoming more meticulous in their budgeting.
Due to the volatile economic backdrop, JD is adjusting how it operates its business. The company is pulling back investing in new businesses that have failed to develop efficient business models or reached sufficient economies of scale. JD is also expanding its supply chain capabilities for its core retail business. Building off that, JD is also reallocating resources into retail, streamlining promotional programs, and improving its traffic allocation mechanism.
- Some of these measures are already paying off. JD noted that it had seen a significant increase in product selection on its platform offered by first and third-party merchants. JD's merchant base also grew by over 20% yr/yr for the eighth-straight quarter in Q4.
- Additionally, JD is witnessing an upward trend in users, reflecting early success with its commitment to bolstering its retail offerings. The number of repeat purchases improved in Q4, accounting for a higher proportion of JD's total users, helping advance shopping frequency and average revenue per user (ARPU).
- JD Plus, JD's membership program, reached 34 mln members in Q4, a 36% jump from the year-ago period. The robust Plus growth is vital as JD's data shows that Plus members spend eight times the average annual amount of non-Plus members.
- Revenue in Shop Now, JD's one-hour delivery service, climbed by 80% yr/yr in Q4. With JD stepping up its supply chain investments, it can continue boasting tremendous growth in this omnichannel business.
Overall, the retail landscape is depressed, but JD is leaning on internal measures to better steer through the volatile environment. Encouragingly, as we heard from Alibaba (BABA) last month, demand is recovering as COVID cases die down from highs seen during DecQ. BABA commented that positive demand trends, particularly in discretionary categories, in February indicate an upbeat outlook for the year.
Still, JD warned that the macro economy and consumer confidence remain in the recovery phase, which could linger for some time. There are also added risks given the unstable geopolitical environment, which is not shining favorably on China-based firms like JD.
The Big Picture
Last Updated: 10-Mar-23 16:18 ET | Archive
Stock market temperature goes from hot to cool
The first quarter isn't complete yet but it has been packed with important developments that have included heightened volatility in the Treasury market, declining earnings estimates, stubbornly high inflation, stronger-than-expected growth, increased geopolitical tension, and an upward shift in rate-hike expectations.
Excluding the part about growth being stronger than expected, it hasn't been a great backdrop for the stock market. The stock market, however, has held its own.
The S&P 500 is up 0.6% year-to-date, but the Nasdaq Composite is up 6.4% year-to-date. That is not the full story, though. At their highs this year, the S&P 500 was up 9.3% and the Nasdaq Composite was up 17.2%.
The summation is that a stock market that began the year on a hot note has cooled off. We would be surprised if it heated up again soon in a big way.
Topping Things Off
The tremendous start to the year was driven by the following factors:
- Speculative buying interest in stocks that had been hit hard by tax-loss selling activity in 2022
- Short-covering activity
- Offsides positioning (i.e., more accounts were positioned for a difficult market environment, so, as stock prices bucked conventional wisdom and ran higher, those accounts were playing catch up to participate in the gains)
- The thinking that the economy was destined for a hard landing shifted to thinking it would only experience a soft landing and perhaps "no landing" at all
- There was speculation that the Fed was about to be done raising rates and would be cutting rates once, if not twice, before the end of the year
The stock market went on a tear in January, but as we pointed out at the end of the month, it was running into a wall of valuation constraint that led us to think it would be hitting a top soon.
Sure enough, the top was hit on February 2 -- the day before the much stronger than expected January employment report and a little less than two weeks before the January Consumer Price Index showed inflation sticking at higher levels and the January Retail Sales Report showed consumers were still spending in a robust manner.
Those reports might have helped quiet the hard landing narrative, but they also did something else that created a bigger stir: they forced the market to recalibrate its interest rate expectations, accounting for the likelihood that policy rates and market rates would have to head higher.
The offshoot of that thinking was that the stock market was overvalued trading at 18.5x forward twelve-month earnings. That thinking was correct given that (a) the 10-yr historical average is 17.2x, according to FactSet and (b) earnings estimates were still being revised lower.
Today, the S&P 500 trades at 17.3x forward twelve-month earnings, more in-line with its historical average. Then again, that 10-yr historical average was established with the 10-yr note yield averaging 2.17% and core-PCE inflation averaging 2.12% over the same period. Today, the 10-yr note yield is at 3.70% and core-PCE inflation is up 4.7% year-over-year, so maybe the S&P 500 isn't trading as "in-line" with the historical average as meets the eye.
Plenty of Obstacles
We do know that the stock market has traded in a roller-coaster fashion this year -- up as much as 9.3% on February 2, but up only 0.2% for the year at its low on March 10.
There was an orderly retracement through much of February, but the retracement turned a bit disorderly this week with Fed Chair Powell telling Congressional committees in his semiannual monetary policy testimony that the ultimate level of interest rates is likely to be higher than previously anticipated given that inflation remains too high and the labor market is still running tight.
Beyond that unsettling revelation for the market, there was a stunning failure of SVB Financial Group (SIVB) that culminated with regulators shutting down Silicon Valley Bank, evoking bad memories of the financial crisis. The speed at which SVB Financial failed triggered a run on other bank stocks and a stark flight-to-safety trade in the Treasury market.
The 2-yr note yield, at 5.06% when word of troubles at SVB Financial first hit, collapsed to 4.61% while the 10-yr note yield went from 4.01% to 3.70% (all in a span of less than two days). Ironically, the drop in yields was not a support factor for stocks. It was more of a scare factor that contributed to broad-based selling and heightened worries that other smaller, regional banks could run into similar deposit flight issues.
Time will tell if that is the case, but the SVB Financial issue has added to what was already a heightened sense of uncertainty in the market.
Fed Chair Powell contributed to that uncertainty, noting that the Fed is data dependent and not on a preset path with its policy decisions. Having said as much, he all but ensured that there will be outsized movement following key data points. That isn't constructive for the market, however, since excess volatility dampens investor interest/conviction.
The stock market already has enough obstacles in its way:
- Higher interest rates
- Declining earnings estimates
- A hawkish-minded Fed intent on getting inflation back down to 2.0%
- Russia intensifying its efforts in Ukraine
- China and the U.S. experiencing a widening ideological divide
- The latent lag effect of the Fed's prior rate hikes (and prior rate hikes from other central banks around the world)
- No plan yet in Congress for raising the debt limit
What It All Means
The good news at this point is that the only recession in sight is in the Treasury market. The 2s10s spread recently hit its deepest inversion since 1981. The real economy, however, has yet to buckle under the weight of those expectations.
The Atlanta Fed GDPNow model estimate for real GDP growth in the first quarter is 2.6%; the unemployment rate ticked up to 3.6% in February from a 54-year low of 3.4% in January; the ISM Services PMI sits at 55.1% (a number above 50.0% is indicative of expansion); and the four-week moving average for initial jobless claims is at a lowly 197,000.
It isn't all rosy, however. Existing home sales have declined for 12 consecutive months, new home sales in January were down 19.4% year-over-year, housing starts were down 21.4% year-over-year in January, and the Conference Board's Leading Economic Index has declined for 10 consecutive months.
Interestingly, high-yield spreads are trading roughly where they were in late-2018 when there was no talk of a hard landing.
This economy is a tough nut to crack from both a real-time and forecasting standpoint. We do expect the economy, however, to show more cracks in coming months as the lag effect of central bank rate hikes starts having a greater impact on consumer demand. And if it doesn't... well, then, the market will continue to rue the idea that the Fed is going to keep rates higher for longer.
We said at the start that it hasn't been the best of backdrops for stocks. That remains the case; in fact, the backdrop has worsened with volatility picking up, geopolitical tension increasing, partisan debt ceiling views becoming more entrenched, and higher Treasury yields creating more competition for stocks.
The stock market has held up reasonably well so far, but that also depends on one's starting point this year. From the start of the year, the S&P 500 is up 0.6%. That's not bad. From its high on February 2, it is down 8.0%. That's not good.
That is a fitting swing that underscores the heightened sense of uncertainty about where the Fed's tightening cycle ends and what damage it will ultimately do -- or not do -- along the way.
The stock market's fickle behavior is a reminder that return expectations for equity investors this year should be lowered because stocks have increased competition from bonds, increased competition from the Fed, and increased competition from reduced earnings expectations. In other words, the competition is heating up, which is why the stock market should be cooling down.
-- Patrick J. O'Hare, Briefing.com
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