Trounce and bounce!

Stocks had a wild ride, making a quick stop in correction territory before bringing it home with a rally into the green. The wild intraday move is a clear result of fringed nerves as traders struggle to make sense of a massive turn in Fed policy.

Reality check, please.  We could all do without a day like yesterday! I am not sure if the old salt’s tail is true or not, but it is said that if you are in rough seas, you should gaze at the far horizon to avoid getting seasick. We are all well aware that the Fed is going to raise interest rates this year. In my rapidly diminishing not-work life I find myself talking about higher interest rates with just about everyone, including my beloved mother-in-law.  Fed Funds futures markets have factored in 3 to 4 rate hikes throughout the end of the year. Indeed, the 2-year Treasury Note, whose yield to maturity rests proudly and undaunted above 1% is screaming: short term interest rates will be at 1% in two years. That is at least four 25-basis point rate hikes between now and when the 0 7/8 of 1/31/24 mature (that coupon is 0.875% in case you were wondering). Regarding the Fed… well, I don’t know what your thoughts on the matter are, but it has made it pretty clear that it intends to raise interest rates. It has been doing so since last November just as the Nasdaq hit an all-time high.  The Nasdaq clearly got the message, and it factored the hikes in with two dips of -6.05% and -6.7% before closing the year out -2.6% below its all-time high of November. So, what happened at the beginning of the year, JUST A FEW SHORT WEEKS AGO? One clear stimulant is the Fed’s FOMC Minutes from its December meeting. The Fed announced its policy back in December in which it kept rates steady but sped up its bond-purchase tapering. The meeting minutes, released in the first week of the year, revealed two things we already knew and one which was somewhat surprising. Not surprising: the Bank wants to taper faster so that it could raise rates earlier.  Surprising: The Fed is considering quantitative tightening later this year. You are wondering, “wait, what? What is that?” Not only is the Fed going to stop buying bonds in the open market, but it may even begin to sell them, which would push yields higher. Talk about a surprise, a Balance Sheet Runoff (its technical term) was not even on the minds of most investors. Even the most cautious traders had that listed under “possible but not probable.” Ok, so now that is on the table and most likely explains the -4.5% dip in the Nasdaq the week of the minutes release. That also is the probable cause for 10-year Treasury Note yields to have climbed by +25 basis points for the week.  The last time we witnessed a weekly yield gain in the 10-year Note even close to that was in June 2020. Why all the fuss? Well, the minutes hinted that the Fed is more concerned about inflation than their public statements would lead us to believe. Is that surprising to you? Imagine if you got a phone call from a Fed governor and she asked you if we are experiencing inflation and if you could provide some examples. I am sure, after mentally filtering out what you really want to say, you would simply say “yes, and I have plenty of them.”  Once again, nothing really new.

Let’s take a step back for a second.  The S&P500 has a historic average annual return of around +10.5% going back to the 1950s. Since 2015, the S&P has only experienced 2 losing years, -0.73% and -6.24% for 2015 and 2018 respectively. The past 3 years (2019 – 2021) have had fantastic returns of +28.88%, +16.26%, and +26.89%. I am sure that I don’t have to remind you that a pandemic covered 2 of those years and a flash-recession occurred in one of them, but by simply looking at the returns, one might never know. If you invested in the tech-heavy Nasdaq 100 using the QQQ ETF in 2019 and held it through the close of 2021, you would have earned +157.91%.  That is huge! So, perhaps the prospects of climbing interest rates, runaway inflation, a jumpy market, and the possibility of higher long term capital gains tax rates were enough for some investors to want to cash out and wait for things to calm down. S&P500 companies are expected to continue to post record per share earnings this year. Clearly that is not evident in the recent volatility in the markets. Volatility will ultimately simmer down, and with the prospect of earning and compounding +10.5% per year on average going forward, stocks will still be the best game in town. Stay focused on that far horizon.

WHAT’S SHAKIN’

Raytheon Technologies (RTX) shares are lower by -4.11% in the pre-market after the company announced that it beat EPS estimates by +5.52% but missed Revenue estimates by -1.34%.  Further the company Earnings, Revenues, and Free Cash Flows guidance for 2022 were below analyst estimates.  Dividend yield: 2.32%.  Potential average analyst target upside: +18.1%.

American Express Co (AXP) shares are trading higher by +3.19% in the pre-market after it announced that it had beaten EPS and Revenue estimates by +18.91% and +5.51% respectively. The company expects revenues to climb by as much as +20% this year as card spending has hit new records. In the past 30 days, 25% of analysts have changed their 12-month price targets 5 up, 2 down, 20 unchanged, and 1 dropped coverage.  Dividend yield: 1.08%.  Potential average analyst target upside: +20.8%.

Also, this morning.  Verizon (VZ), Archer-Daniels-Midland Co (ADM), Polaris Inc (PII), Lockheed Martin Corp (LMT), and 3M Co (MMM) all announced beats on EPS and Revenues. Johnson & Johnson (JNJ) announced a beat on EPS but missed on Revenue estimates. Still ahead before the bell: Texas Instruments (TXN), PACCAR Inc (PCAR), NextEra Energy (NEE), General Electric (GE), and Invesco Ltd (IVZ).

YESTERDAY’S MARKETS

The mornings’ pain led to afternoon euphoria for stocks after deep losses gave way to dip-buying and gains later in the session. The S&P500 rose by +0.28%, the Dow Jones Industrial Average climbed by +0.29%, the Nasdaq Composite Index added +0.63%, the Russell 2000 jumped by +2.29%, and the S&P500 ESG Index climbed by +0.17%. Bonds pulled back and 10-year Treasury Note yields gained +2 basis points to 1.77%.  Cryptos lost -7.95% and Ethereum added +0.83%.

NXT UP

• FHFA House Price Index (Nov) is expected to have grown by +1.0% after rising by +1.1% in the prior month.
• Conference Board Consumer Confidence (Jan) may have pulled back to 111.2 from 115.8.
• Richmond Fed Manufacturing Index (Jan) is expected to have slipped to 14 from 16.
• The Fed begins its FOMC meeting today and will announce results and provide a press conference tomorrow.
• After the closing bell earnings: Navient, F5 Inc, Microsoft, and Capital One Financial.