Stocks rallied yesterday in the wake of Fed Chairman Powell’s Senate testimony. Powell confirmed the Fed’s tough but thoughtful stance on inflation and the bulls cheered because no news is good news.
Round and round it goes, where it stops… The five-star general in charge of fighting the war against inflation is Fed Chairman Jerome Powell. In fact, he is even more powerful than a military general in that he technically answers to no one. He is somewhat of a political appointee, but once confirmed by Congress he is free to do his bidding, and he sits behind the biggest cannon in the world: monetary policy. He can make your mortgage payment jump or recede. He can cause weakened companies with high debt loads to implode or flourish. Indeed, his power can mean the difference between a 4-wheel drive or 2-wheel drive in your next Ford F-150 pickup truck. With a mere word or three he can move equity markets the world over; determining who will return home rich or poor after the markets close. In late 2018, the stock market was in a tough place before Powell gave a verbal nod to stimulus, causing a bull run that lasted all the way up to the pandemic. Of course, he backed up those words with a few rate cuts along the way, but his mere words were sufficient to cause markets, stuck in some sticky mud, to get up and go.
Yesterday morning the stock market began the session on edge. Inflation worry has been the name of the game since the start of 2022 a little more than a week ago. The Fed’s minutes last week confirmed what we suspected and more. The Fed is now a hawkish institution. It wants to stop supporting the economy and in fact, slow it down. We knew this but were unsure of just how aggressive policymakers were going to be. Would the Fed pump the brakes, apply the brakes with ease, or would the Bank slam on the brakes? The minutes implied something in the middle of ease and slam… which was not expected. Powell’s speaking to lawmakers in his confirmation hearing is just what the skittish market needed. Perhaps a bit more information to fill in the gaps from the intentionally ambiguous FOMC minutes. Powell did just that. He was clear that bond buying would end in March and that rate hikes would come soon after. How many? He strongly implied 3. He also confirmed that the Fed was considering starting a balance sheet runoff later in the year. That is a carefully constructed phrase that means the Fed will sell bonds rather than buy bonds… it should cause yields to rise. Ok, clarity accepted. The market was satisfied. What the market really liked was that the Chairman did not expect inflation to get out of control. He was confident that supply chain pressure would end, and that inflation would ease later in the year. That still implies transitory inflation but with different words. Powell is no longer allowed to use the word transitory after he, himself retired it in his late 2021 Congressional hearing. Have you been to the market recently? If you have, you might have noticed that shelves are sparse with produce. Grocers are now citing transportation hang-ups and farm labor shortages as reasons for the stock outs… and price hikes. Are those workers out due to COVID? Have all the truckers retired early in The Big Resignation to seek peace in front of their televisions? Unfortunately, these are questions that are tough to answer, even for the most powerful general in the world. However, he does know that, mathematically at least, year over year inflation numbers will slowly go lower over time and that month over month inflation seems to be tailing off slightly. We will get confirmation from this morning’s CPI release, but for now the Chairman’s words will suffice.
Movers n’ Shakers
Illumina Inc (ILMN) shares jumped by +16.98% yesterday after it provided 2022 guidance that was above Wall Street estimates. The company further revealed that it was developing its own gene sequencing technology. The announcement also caused shares of Pacific Biosciences of California (PACB) to fall by -11.34%. Illumina failed to close on a planned merger with Pacific Bio after the deal was blocked by antitrust regulators in December. There has also been lots of street buzz around genetic-based healthcare upstarts recently as larger pharma players seek to buffet their offerings through acquisitions. Potential average analyst target upside: +0.8%.
Kroger Co (KR) fell by -2.83% yesterday after rival grocer/retailer Albertsons (ACI) announced EOS and Revenue beats yesterday but offered conservative forward guidance. Shares in Albertson fell by -9.75% and the S&P500 Food Retail Sub-Industry Index fell by -2.83%. Dividend Yield: 1.76%. Potential average analyst target upside: -4.8%. Why is this number negative? Because its current stock price is above the average analyst 12-month target. While this can be perceived as the stock being overvalued, it does not mean the stock will not continue to rise.
Dish Network Corp (DISH) is trading higher by +6.98% in the pre-market after the New York Post reported that the company is in merger talks with DirecTV. You may recall that a proposed merger between the two companies was blocked by the FCC and DOJ in 2002… if you can remember that far back. Potential average analyst target upside: +38.3%.
Biogen Inc (BIIB) shares have tumbled by -9.2% in the pre-market after the Government announced that Medicare will only reimburse clinical trial patients receiving its Alzheimer’s therapy Aduhelm. This comes as a blow to the company whose stock has already fallen by some -41% after its Alzheimer’s drug received controversial FDA approval last summer. Potential average analyst target upside: +22.8%.
Stocks rose yesterday after the Fed Chairman confirmed what markets have already priced in: 3 rate hikes starting as early as March and the possibility of a balance sheet runoff… oh, and inflation should get better later in the year. The S&P500 rose by 0.92%, the Dow Jones Industrial Average climbed by +0.51%, the Nasdaq Composite Index jumped by +1.41%, the Russell 2000 Index traded higher by +1.05%, and the S&P500 ESG Index added +0.90%. Bonds traded up and 10-year Treasury yields slipped by -3 basis points to 1.73%. Cryptos gained +3.50% and Ethereum added +5.11%.
- Consumer Price Index YoY (Dec) is expected to be +7.0% compared to last November’s +6.8%.
- Fed Beige Book will be released. It reports economic health throughout the Fed regions and marks the start of a countdown to the next FOMC meeting.
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