The Fed will have the final word on your summer holiday

Stocks rallied from sizable early losses yesterday to close just about at breakeven as investors bought the dip. Investors are paying close attention to earnings and just beating estimates may not be enough to satisfy.

Uneasy is the head that wears the crown. It’s coming up fast. The FOMC will have its first meeting of the year next week and it will announce its policy decision on Wednesday. Wait, are we in a new year… is it still just January? It doesn’t feel like it, does it? Next week’s Fed decision, if the market is right, will mark the Fed’s first +25 basis-point rate hike since March of last year. Imagine that there would be a time where markets would be happy to get a mere quarter-percentage-point bump. Well, that time is now. Futures and Overnight Swaps both put a 100% chance of the small hike with a 2% probability of something bigger. The FOMC will meet once again in March at which time the market is pointing to another small hike with an 82% probability. After that, it’s anybody’s guess. Futures start to assign a meaningful chance of rate cuts in September. Why might the futures traders make those bets?

Well, the Fed has been working overtime for these past, let’s call it, 18 months fighting inflation, using extraordinary measures. Fed members are due for a summer break, don’t you think? Ah, summer, just 146 days away… sunshine, green leaves waving in the warm breeze, the rich smell of blooming flowers permeates the air, a bee buzzes by, has a look, and zips off into the distance… [insert alarm clock ringing here]. WAKE UP, we are still in the clutches of winter! Focus.

The Bulls have been certainly bulling around the market as of late. We have had several sessions in which we have closed higher than the open, which indicates that investors are buying the dips. The S&P500 and the Nasdaq are up year-to-date by +4.6% and +8.1% respectively. Even bonds are up some +3.3% year-to-date. That should make everyone feel good. Everyone except the Fed! The Fed would like us to remain nervous and keep our pocketbooks tightly closed. Because lower demand pushes inflation lower, which we are all, especially the Fed, hoping for. If markets continue to rally and consumers get their moxie back, they just might start YOLO-spending again and cause slowly subsiding inflation to reignite (YOLO means You Only Live Once, a millennial invention). No, that would be good for no one. The FOMC may not be so pleased with the markets’ recent bullish twist.

On the other hand, Fed members have made it clear that they are watching the labor market really closely, and for good reason. The labor market has been quite tight. Unemployment remains right around multi-decade lows and job openings remain plentiful… at least according to the most recent economic numbers. However, the news headlines seem to be telling a different story lately. It is earnings season, a time when CEOs and CFOs have to answer directly to investors and analysts. It is the moment when everything said will have an impact on a company’s stock price. If sales are slipping or margins are contracting, management better have a good reason why along with a solution to the problem. Well, for the most part, sales at many companies reporting to date ARE, indeed slipping, and margins ARE, indeed contracting. There is only one viable solution to quell investors’ fears… LAYOFFS. Layoff announcements are mounting, and investors are liking what they are hearing. I saw a meme post on Instagram the other day that read “layoffs are the new stock buybacks.” It is true that most companies that have announced layoffs have experienced bumps in their stock prices (at least initially) similar to bumps after buybacks are announced. Once all these layoffs actually take place, we can expect the labor-related economic releases to start reflecting a slacking of the labor market. That should satisfy the Fed. It may even come in time for summer holiday… just 146 days away.

WHAT’S SHAKIN’

Seagate Technology Holdings PLC (STX) shares are higher by +8.43% in the premarket after it announced that it beat EPS and Revenue estimates by +28.7% and +2.9% respectively. The company expects the current quarter to come in strong with the high-end of guidance exceeding average analyst estimates. Dividend yield: 4.49%. Potential average analyst target upside: +6.9%.

Tesla Inc (TSLA) shares are higher by +6.97% in the premarket after it announced that it beat EPS and Revenue estimates by +6.05% and +1.05% respectively. The company further says that it is on track to deliver some 1.8 million vehicles this year. In the past 30 days, 62% of analysts have changed price targets, 1 up, 26 down, 15 unchanged, and 1 dropped. Potential average analyst target upside: +32.1%.

Chevron Corp (CVX) shares are higher by +3.19% in the premarket after it announced a plan to buy back $75 million worth of shares as well as raise its dividend payments. Shareholders like that. The company will announce its Q4 earnings tomorrow. Dividend yield: 3.37%. Potential average analyst target upside: +6.9%.

The Sherwin-Williams Co (SHW) shares are lower by -9.34% in the premarket after it announced an EPS beat for last quarter while missing sales targets. The company offered full year 2023 guidance which was below analyst estimates. Dividend yield: 0.97%. Potential average analyst target upside: +5.3%.

ALSO, this morning: Tractor Supply (TSCO), Valero Energy (VLO), Northrop Grumman (NOC), Comcast (CMCSA), Rockwell Automation (ROK), JetBlue (JBLU), and Archer-Daniels-Midland (ADM) all beat on EPS and Revenues. Virtu Financial (VIRT), Dow Inc (DOW), and McCormick (MKC) came up short.

YESTERDAY’S MARKETS

Stocks erased early losses to close around breakeven on a dip-buying session. The S&P500 Index slipped by -0.02%, the Dow Jones Industrial Average gained +0.03%, the Nasdaq Composite Index declined by -0.18%, and the Russell 2000 Index advanced by +0.25%. Bonds gained and 10-year Treasury Note yields fell by -11 basis points to 3.44%. Cryptos fell by -1.30% and Bitcoin added +3.03%.

NEXT UP

• Annualized Quarterly GDP (Q4) is expected to be revised down to +2.6% from +3.2%.
• Initial Jobless Claims (Jan 21) is expected to come in at 205k, slightly higher than last week’s 190k claims.
• Durable Goods Orders (Dec) are expected to have risen by +2.5% after falling by -2.1% in November.
• New Home Sales (Dec) may have fallen by -4.4% after climbing by +5.8% in the prior month.
• After the close earnings: Weyerhaeuser, Visa, Intel, KLA Corp, Knight-Swift Transportation, ResMed, Eastman Chemical, and L3Harris Technologies.