Fed leads the way

Stocks mostly slipped yesterday as Snap, owner of popular social media application Snapchat lowered guidance, blaming it on poor economic conditions. New Home Sales took a big hit last month, indicating that rising interest rates may be taking its toll.

Sitting on your hands. There is beauty in the simplicity of many of the old Wall Street sayings that most of us seasoned (that is a nice way of saying… older) ‘streeters hold near and dear. Today, I will resurrect one that have used a few times before. Don’t fight the Fed. I have mused over this one many times in recent years. I can recall in 2018 as the Fed was aggressively raising rates while stocks were faltering, I wrote about considering making a t shirt emblazoned with the adage. I would wear it to remind me that Fed was hell-bent on raising rates to a point where the strategy provided the Bank with enough dry powder to lower them if things took a turn for the worse. At the time, things were indeed already looking a bit gloomy for the economy. Corporate earnings were beginning to slow after companies digested the 2017 Tax Cut and Jobs Act benefits and were at the mercy of the record-long, tiring economic expansion that followed The Great Recession. This was reflected in the market’s poor performance in the final months of the year. I searched for answers but could come up with nothing short of “you can’t fight the Fed.” I wrote that until the Fed signaled a letup of its hiking regime, stocks would remain on shaky ground. From late September through mid-December the S&P fell nearly -20% spoiling the typical joviality on Wall Street in December. It was the worst Q4 for stocks since The Great Depression… that is with a “D-e-p”, as in the one that took place in 1929, known to most of us by black and white photos of rumpled folks on long lines seeking work, or even worse, a morsal of food. Most of us expected the pain to persist, until, alas, the Fed made a move, albeit a subtle one. Then and now Fed Chair Jerome Powell exclaimed that the Fed rate-hiking was enough for the moment. In other words, the Fed was about to shift its policy and lift its foot off the brake. Not fighting the Fed at that point meant buying stocks. If you followed that sagely advice, you would have gained some +17% by June of 2019, even with a late-Spring swoon. The Fed finally began to lower rates in July – don’t fight ‘em. If you continued to follow the slogan, you would have earned +44% through the market’s pre-pandemic high. COVID happened and the market sold off in the wake of a first-of-a-kind economic shutdown and flash-recession. The Fed not only responded with a rate cut to 0% but also with aggressive Quantitative Easing (QE), ensuring that rates of all sorts would fall. If you didn’t fight the Fed in that case, buying when Fed Funds hit 0% until when the Fed signaled that “rate hikes may be appropriate” (November 2021), you would have earned +105%, but if you ignored it, you would have lost -16% since that admission. There are lots of factors impacting the markets today, chief among them is the Fed and its path of hiking. This afternoon we will be presented with the minutes from the Fed’s May 4th FOMC meeting at which the governors agreed to raise rates by +50 basis points and to begin Quantitative Tightening next month. Surely the world’s most powerful bankers discussed future plans for brake mashing. The market is expecting 2 more +50 basis point hikes and a possible +25 basis point hike over the next 3 policy meetings. Is the market’s expectation aligned with the guys and gals making those decisions? We may get a clue in those minutes, released this afternoon at 2:00 PM Wall Street time. To finalize with some clarity, the old saying is just a saying and not a trading strategy. The takeaway should be that we are not likely to get a persistent recovery rally in stocks until the Fed signals that its monetary tightening is working, warranting a change in stance. The change could come in the form of tightening but less aggressively, or better yet a rate hiking halt… or even better yet, a lowering of interest rates. That signal may not come in these minutes, but they will at some point. Don’t fight it, be patient, keep your focus on the long game.

WHAT’S SHAKIN’

Best Buy Co Inc (BBY) shares are down by -1.4% in the premarket after the company announced an EPS miss by -1.95%. Though Best Buy beat revenue estimates by +2.30%, it lowered its full year sales and EPS guidance citing a larger than expected deterioration of the macro environment. Dividend yield: 4.79%. Potential average analyst target upside: +30.8%.

Intuit Inc (INTU) shares are higher by +2.52% in the premarket after it announced that it beat on EPS and Revenue estimates by +1.02% and +2.07% respectively, resulting from a strong tax season. The company also raised full year forward guidance on EPS and Revenues beyond analysts’ estimates. Dividend yield: 0.76%. Potential average analyst target upside: +46.7%.

YESTERDAY’S MARKETS

Stocks were mostly lower yesterday as weak forward guidance from Snap sent recession chills through the markets. Stocks erased bigger, earlier losses, closing near session highs. The S&P500 slipped by -0.81%, the Dow Jones Industrial Average gained +0.15%, the Nasdaq Composite Index dropped by -2.35%, and the Russell 2000 Index gave up -1.56%. Bonds gained and 10-year Treasury yields fell by -10 basis points to 2.75%. Cryptos slipped by -0.60% and Bitcoin gained +0.42%.

NXT UP

  • Durable Goods Orders (April) is expected to have gained +0.6% for the month after climbing by +1.1% in March.
  • FOMC Meeting Minutes from May 4th will be released at 2:00 PM Wall Street time. Don’t miss this one.
  • After the closing bell earnings: NVIDIA, Snowflake, Nutanix, Splunk, and Williams-Sonoma.

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