Right-sizing wave coming ashore?

Stocks soared in last Friday’s session as investors were determined to look past economic stresses. Options expiration helped the market score gains but it was not enough to log weekly gains for the S&P and the Dow… the Nasdaq was a different story.

Feel the blood rush. If you have ever ridden on a roller coaster, you know that point where you go from positive g-force to negative g-force… that discomfort that is satisfying and frightful all at once. You could be racing up an incline feeling gravity press down on your body then all of a sudden as you hit a peak and prepare to soar down a decline, you feel all of your organs float upward as if you were in outer space… well, technically that is kind-of what outer space is. But alas, the feeling can only last for a split second because gravity, here on Earth, doesn’t give up that easily.

Those of us who have been close to the markets recently have certainly felt like we were riding on one of those roller coasters. These past few months were not like anything we have experienced in recent years. For 2020 and 2021, there was certainly plenty of volatility to contend with but, despite the craziness in the world, there was an overall feeling of rising. Last year was the complete opposite. Plenty of volatility with the overall feeling that we were falling. But these last few months, it feels like we are at an inflection point with no real direction… yet.

A big part of that overall falling feeling last year was, of course, the Fed and its policy, which was very much the gravity that brough markets back down to earth after they soared for almost 2 years prior. Easy monetary policy and soaring corporate profits helped propel markets to new high after new high… the Fed also had a hand in that. The Fed is now at a crossroads. It has clearly already lifted its foot off the brake a bit with its last rate-hike being slightly less than the ones prior. The vocal rhetoric from Fed members is still tough but there have been subtle shifts indicating that the time of tightening may come to a close soon. The markets have weighed in, expecting 2 more +25 basis-point moves through spring with a rate cut in the summer.

You can’t blame the market from feeling that way. Economic numbers do suggest that inflation has, in fact, peaked. You know, inflation, the reason that the Fed hiked rates in the first place. That inflation, even if it peaked, is still too high and the Fed has signaled as much. The Fed is now focused on the labor market, particularly in the services sector which is still experiencing extraordinary inflation. Tightness in the labor market is a principal driver of inflation, and now that the cost of raw materials is easing, higher wages caused by companies’ inability to hire necessary workers is the last hurdle to overcome, at least according to Fed commentary. The economic numbers on the labor market have indicated a slight easing, but not nearly enough to call it a day. However, that may be about to change.

Layoff announcements have begun to pick up in recent weeks, particularly in the tech sector. The layoffs continue, as recently as this morning WHILE YOU SLEPT, when Spotify (SPOT) announced a -6% force reduction. Tech-oriented growth companies have been at the forefront of recent right-sizing because it was that group of companies that got bloated through those ups experienced in 2020 and 2021. In case you didn’t notice, it was that group that experienced the biggest downs last year. To be exact, the S&P500 Information Technology sector fell by -28.91% last year and the Communication Services Sector fell by -40.42%. Communications Services contains companies like Alphabet (GOOG), Meta (META), and yes, Spotify (SPOT)!

The week ahead will feature the first big earnings announcement wave of Q4 earnings season, and many of those large tech companies will be amongst those announcements. Aside from the obvious focus on topline performance, analysts will be very interested in learning of… you guessed it, planned force reductions. Why? Well, you know the answer to that question. Fed members are in a media blackout period ahead of their Feb 1 policy announcement, so we will have to wait until then to hear their collective thoughts on the tightness of the labor markets… and the path of rates going forward. Until then, enjoy the feeling of zero gravity… it won’t last long… it never does.

WHAT’S SHAKIN’

Salesforce Inc (CRM) shares are higher by +4.73% after activist hedge fund Elliott Investment Management takes a major stake in the company. The once high-flying tech favorite fell by -47.83% last year and investors will be hopeful that potential management shakeups can turn the ship in a positive direction once again. The company will announce its Q4 results on 3/1. Potential average analyst target upside: +24.4%.

Synchrony Financial (SYF) shares are higher by +2.8% in the premarket after it announced that it beat EPS and Revenue estimates by +13.56% and +1.46% respectively. The company also announced a smaller credit loss provision than analysts were expecting. Dividend yield: 2.59%. Potential average analyst target upside: +11.2%.

FRIDAY’S MARKETS

Stocks shot higher on Friday as dip buyers rushed in to take advantage of earlier in the week declines. The S&P500 rose by +1.89%, the Dow Jones Industrial Average advanced by +1.00%, the Nasdaq Composite Index jumped by +2.66%, and the Russel 2000 Index traded higher by +1.69%. Bonds fell and 10-year Treasury Note yields gained +8 basis points to 3.47%. Cryptos jumped by +5.65% and Bitcoin raced higher by +6.58%.

NEXT UP

• Leading Economic Index (Dec) is expected to have slipped by -0.7% after falling by -1.0% in the prior month.
• The week ahead: Lots of earnings!! Additionally, flash PMIs, more regional Fed reports, GDP, Personal Income, Personal Spending, New Home Sales, Pending Home Sales, Durable Goods Orders, PCE Deflator, and University of Michigan Sentiment. Check out the attached earnings and economic calendars for details. I feature calendars for the week ahead every Monday. Inside, you will find that I highlight the ones that can have the most impact on YOUR portfolio, so take a look and get a jump on the competition.