Netflix casts a shadow over on-edge market

Stocks were under further pressure in Friday’s session as this week’s FOMC meeting looms above the already shaky equity markets. An earnings miss in one company and management missteps at another were enough to shake the confidence of the pricey Nasdaq.

There’s blood in the streets; it’s up to my ankles.  Why not quote the self-proclaimed American Poet himself on this cold, cold Monday morning in January? No one knows for sure the motivation for his 1970 song Peace Frog, but one thing is for sure, there is blood aplenty in the lyrics in which Jim Morrison seemed to run down a list of moving events in his life and in the press, all bloody and well… not positive. There are many versions of the oft-quoted Warren Buffet adage which relates “[be] fearful when others are greedy, and greedy when others are fearful.” Buffet, of course is referring to the old “sell greed and buy fear” line which pre-dates even his reign. No matter which pop icon you choose to quote, markets appear to be playing out the greed transitioning to fear part as of late.

Equities have not been able to catch their breath since being hit with a sharp wave of selling in the past few weeks. Though the timing is somewhat questionable (the Fed made its intentions clear months ago), markets appear to be responding to the Fed’s tightening agenda for the upcoming year. In fairness, it is not out of character for the markets to be a bit out of sorts when it comes to Fed policy. Yes, the Fed aggressively pegged rates at 0% and started buying lots of bonds at the start of the pandemic, all in an effort to shore up the economy and the financial markets. The Fed itself referred to the herculean effort as unprecedented stimulus. It is important to remember that the Fed, even prior to the pandemic, was in full “dove” mode, having shifted there in late 2018, coming to the rescue of a sharp equity market selloff. The Fed began to lower rates in the summer of 2019, helping stocks rally into the years close. The Fed has indeed leaned dovish since late December of 2018, so it is only natural for capital markets to be spooked. Many have referred to the Fed’s former dovishness as “the Fed Put”, meaning that the Fed would always be there to provide an easy exit for a falling stock market. With that so-called “put” gone, traders are now left to their own bidding. I often write about the Fed’s dual mandate of controlling inflation and keeping unemployment low. I have also written about the Fed’s propping up equity markets as a sort-of tertiary, informal mandate knowing fully that declining stocks affect consumer sentiment negatively, even though many consumers don’t own stocks. So, propping up stocks stimulates consumption while allowing stocks to contract puts the brakes on consumption. When the Fed pivoted to dovish in December 2018, its dual mandate was being met. Unemployment was near record lows and inflation was subdued. Today, unemployment is below 4%, not great but good, and inflation is at its highest point since 1982, so the Fed has no choice but to tackle it with rate hikes. Today capital markets appear to be factoring in 3 to 4 rate hikes throughout the year, however, there is still quite a bit of unknown as to exactly when and how aggressively the process might begin. It is likely that the Fed will provide some more “color” on its economically depressive measures at the conclusion of it FOMC meeting this upcoming Wednesday. Still, markets as a whole remain on edge. It is clear that, indeed, entire groups of stocks are being pressured, with the most pressure being applied to those groups which outperformed during the dove years. Earnings season began to ramp up last week and will really pick up in the week ahead. Last week, companies announcing strong earnings were not spared from the selling, while companies announcing missteps were punished heavily.

Coming into this week traders appear to be bracing for negative surprises from both the Fed and from earnings. That can only mean that we have another volatile week in store for us.  Investors have most likely not quite wrapped their heads around the reality that, for at least the near term, stock market returns are not going to mimic the double-digit compounding that they experienced in prior years. It is important to note that at some point, the Fed will be done with its tightening, inflation will recede, and rates are likely to relax once again, but for now we must accept that the Fed must do what it can to fight inflation.  As far as put-less stock traders are concerned, the market does not require a dovish Fed to stave off the selling. At some point, as valuations contract, stocks will begin to look attractive to buyers once again, as traders adopt the famous quote from the iconic banker Baron Rothschild who said, “the time to buy is when there’s blood in the streets.”  Rothschild said that in the 18th century, long before Jim Morrison took up his pen.

WHAT’S SHAKING

Haliburton Co (HAL) shares are higher by +0.69% in the pre-market after announcing that it beat on both EPS and Revenues. According to management, the company’s current growth is expected to continue and has increased its dividend. HAL is the last of the 3 big oilfield service companies to announce with all of them expecting continued growth. On a forward PE basis, HAL is the cheapest of the bunch with a PE of 16 compared to the group mean of 18.66.  Dividend yield: 1.74%.  Potential average analyst target upside: +11.5%.

Citizens Financial Group Inc (CFG) shares are trading higher by +0.91% in the pre-market after RBC raised its price target to $58 from $52 and reiterated its OUTPERFORM rating. The company announced earnings last week which beat on both EPS and Revenue estimates.  Dividend yield: 3.08%.  Potential average analyst target upside: +18.5%.

FRIDAY’S MARKETS

Stocks fell in Friday’s session on continued fears of Fed tightening. Netflix’s big miss after Thursday’s close left investors questioning the potential for stronger earnings in the upcoming announcement of NFLX’s FANG family, putting pressure on the tech-heavy Nasdaq… I should say even more pressure. The S&P500 fell by -1.89%, the Dow Jones Industrial Average sold off by -1.30%, the Nasdaq dropped by -2.72%, the Russell 2000 Index gave up -1.78%, and the S&P500 ESG index fell by -1.73%. Bonds rose and 10-year Treasury Note yields gave up -5 basis points to 1.75%. Cryptos took a proper beating, giving up -11.73% on Friday as the risk-off environment joined forces with fears that the Fed may regulate cryptos and Russia contemplates outlawing crypto mining. 

NXT UP

• Markit Manufacturing PMI (Jan) is expected to be 56.8, down from the prior month’s 57.7 reading.
• Markit Services PMI (Jan) may have slipped to 55.0 from 57.6.
• International Business Machines and Steel Dynamics will announce after the closing bell.
• The week ahead is awash with important earnings announcements as well as more housing numbers, Consumer Confidence, Durable Goods Orders, GDP, PCE Deflator, Personal Income/spending, and University of Michigan Sentiment. The FOMC will meet tomorrow and Wednesday and will announce policy on Wednesday followed by its traditional press conference. Please refer to the attached earnings and economic calendars for times and details.