Headlines can be deceiving – not this one

Stocks rallied yesterday, led by tech shares, as investors dreamt up a soft-landing scenario. The S&P500 Index closed above its 200-day moving average, which is a positive signal… if it can stay there for a bit.

Who’s tough now? I try not to offer extremes in my writing. When it comes to investing, extreme behavior can lead to big gains, but more often lead to costly losses. News outlets make money by capturing your eye, and with so many news sources available to us these days, one can’t blame the media for using extremes to get your focus. That just makes your job, as an investor, that much more challenging. It’s not enough to just find solid investments through deep research and careful due diligence. Beyond that, today’s investor must then wade through a constant torrent of extreme information and determine if any of it will, in fact, impact those investments. Not an easy task.

As you might suspect, those extreme themes are more effective during times of stress. Last year, 2022, was one of those years. Stocks were struggling… BONDS were struggling, palatable inflation was blazing, and the Fed was slamming on the brakes… with both feet (that means hard, for those of you who are too young to know that brake pedals used to be big enough to do that – don’t try it). That environment seems ripe to capture attention by highlighting extremes like “big downside”, or “painful recession”, or “a ways to go with rate hikes.” Those headlines will certainly capture your attention when your nerves are on edge from watching your retirement account shrink. But who do those extreme statements actually serve?

If you have your money invested and you need access to some or all your capital in the near term, you should, of course, be highly focused on what may happen in the markets over the next several months. In other words, those extreme statements, can and will affect your degree of success or failure, despite the fact that the market may already be factoring in those possibilities. Where am I going with this? Well, inflation began to pick up in 2021. If you didn’t experience it directly, you surely read about it in my notes where I would wax philosophical, and sometimes even comical, about my nightly trips to the grocery store and the cost of all things edible. Inflation should not have been surprising. The Fed, though it may seem it, does nothing without first amply signaling its intentions. The Fed was signaling rate hikes through most of 2021 and it put the final stamp on them in the late fall, long before rates were actually hiked. How about the potential for recession? The economic indicators were all pointing to a decline in growth far before anyone even muttered the “R” word. Whether recession was official or not, the signs were clear. Rates were going higher, stocks would struggle, and the economy was going to cool off. Those things all occurred, and they didn’t happen overnight. That means that, plain and simple, if you needed access to your capital in the near term, the time to act was then, and not when markets were at their lows in response to extreme headlines.

If you are a long-term investor, the challenge is a bit different. Clearly, research, diligence, and discipline are paramount to your success, as in the case of short-term investors. For long-term investors, that biggest challenge is to not confuse near term issues with long-term ones. For example, if you have a target of 5-7 years, selling your stocks in a panic after a Fed Governor says “more rate hikes will be needed” may not necessarily be wise. However, if the strategic direction of one of your investments seems to be faltering, you should, indeed, consider seeking better alternatives.

We are at a very critical crossroads for the markets right now. It is not very clear if inflation is headed back to normal permanently. It is also unclear if the Fed will lay off its aggressive policy. Further, it is unclear whether the economy will enter a recession within the next year. Finally, it is uncertain just how much corporate profits will suffer over the next few quarters as interest rates and demand destruction (a fancy economic term describing less sales due to high prices) take effect. Nascent bulls have begun to graze on the edges of the markets and some extreme headlines like “soft landing” and “dovish shift” are starting to appear. Whether you are a long or short-term investor, you must try your hardest not to be reactive to the extreme headlines that are bound to pick up over the next few months. Stay focused on the facts, not the headlines, they will come in due time. They always do.

WHAT’S SHAKIN’

Halliburton Co (HAL) shares are higher by +0.81% in the premarket after it announced that it beat EPS and Revenue estimates by +7.98% and +0.02%. The company raised its dividend and increased its buyback plans. Halliburton has a forward PE of 13.83x which is cheaper than the 18.59x of its peers. Dividend yield: 1.57%. Potential average analyst target upside: +18.79%.

DR Horton Inc (DHI) shares are higher by +1.38% in the premarket after it announced that it beat EPS and Revenue estimates by +22.67% and +13.03% respectively. The company said that despite a downturn in sales resulting from higher mortgage rates and economic headwinds, supply of new homes remains tight, which should provide continued opportunity for the homebuilder. Dividend yield: 1.04% Potential average analyst target upside: +7.6%.

Verizon Communications Inc (VZ) shares are lower by -1.72% in the premarket after the company announced that it missed EPS estimates by -0.28%. The company offered full year guidance that was lower than analysts expected. Of the 33 analysts that cover the stock, 24.2% rate it a BUY, 69.7% rate it a HOLD, and 6.1% have a SELL rating on the stock. Dividend yield: 6.58% Potential average analyst target upside: +16.6%.

ALSO, this morning: Lockheed Martin (LMT), Danaher (DHR), and Invesco (IVZ) beat on both EPS and Sales, 3M (MMM) and Travelers (TRV) came up short on EPS, and General Electric (GE), Johnson & Johnson (JNJ), and Raytheon (RTX) missed revenue targets.

YESTERDAY’S MARKETS

Stocks rose yesterday as investors pondered rate-hike tapering and a soft landing. The S&P500 gained +1.19%, the Dow Jones Industrial Average climbed by +0.76%, the Nasdaq Composite Index jumped by +2.01%, and the Russell 2000 Index advanced by +1.25%. Bonds slipped and 10-year Treasury Note yields added +3 basis points to 3.5%. Cryptos gained +1.81% and Bitcoin climbed by +1.80%.

NEXT UP

• S&P Global Manufacturing flash PMI (January) is expected to come in at 46.0, slightly lower than December’s 46.2 read.
• S&P Global Services flash PMI (January) may have climbed to 46.4 from last month’s 45.0.
• After the closing bell earnings: Intuitive Surgical, Texas Instruments, Microsoft, and Capital One.