@theMarket: Corporate Guidance Sends Stocks Lower
Across several industries, corporate executives are guiding investor's expectations lower during this fourth-quarter 2021 earnings season. To me, it is just added another nail in the coffin of bullish sentiment.
Pick your poison. The money center banks earnings beat on the bottom line, but it was the commentary and nuanced forward guidance that dismayed investors. Airlines did OK, but also warned of tough times ahead due to higher fuel costs, and the Omicron variant. Companies in other sectors (such as Netflix) warned of thinner profit margins ahead due to higher costs, less demand and/or supply chain issues.
None of this should come as a surprise to my readers. I expected a mounting chorus of woeful predictions (real and imagined) by executives, who are eager to cover their butts in the event things don't go their way over the next quarter or two. Lower guidance is one, but not the only reason, I am expecting further downside in the markets ahead.
The U.S. 10-year Treasury bond yield is another reason. This week, the bond yield hit 1.86 percent, which was a 40 percent increase since the beginning of December 2021. I expect the yield to hit 2 percent, which is another 7 percent gain from here. Is it any wonder, given that fixed income analysts are outdoing themselves (like lemmings) in predicting more rate hikes this year and sooner? "Four or more," says one analyst from a big brokerage house. "I'll see you four and raise you eight," says another.
Bottom line — a 7 percent inflation rate is a real problem. Even President Biden, in his televised two-hour press conference this week, had to remind all of us that "it is the Fed's job to fight inflation." Anyone (and there are many) who may have been hoping that a stock market decline would cause President Biden to pressure the Fed into backing off from raising interest rates has been put on notice — there is no longer a Fed put under the stock market. It would take a 20 percent decline or more, I believe, before the Fed might have change of heart, if then.
Another of my forecasts slower growth is starting to unfold. The economy is beginning to feel the back up in interest rates. Take the housing sector, for example. A 30-year conventional fixed rate mortgage traded at 3 percent a few short weeks ago. Today, that rate is 3.7 percent on average.
Since mortgage rates are super sensitive to even a small rise in interest, I would expect existing home sales to begin to falter. And as mortgage rates climb higher, less people may be willing to stand in line and pay up for that house. The housing sector is a huge segment of U.S. GDP. But it won't collapse. I'm not expecting the housing market to do more than slow a tad, but that is enough to scare investors. The good news, I suppose, is that over time prices will come down. That should help reduce the overall inflation pressure. But the key word here is time.
Unfortunately, markets aren't about to wait for this kind of scenario to unfold. About the longest investors can wait in today's markets is until the next Fed meeting, which just happens to be next week. On Wednesday, Jan. 26, 2022, traders are expecting an announcement from the Fed spokesmen that there could be as many as four interest rate hikes (of 25 basis points each) in 2022.
That won't exactly be good news, but at least it is expected, or at least I hope so. Anything more, and I would say "look out below." A hawkish comment or two from Federal Reserve Bank Chairman, Jerome Powell, could easily swing the market up or down 75 to 100 points on the S&P 500 Index.
We have already passed the start date (Jan. 15, 2022) of the correction I predicted several weeks ago. I have been warning readers of a 10-20 percent decline between that date and the end of February. So far, the NASDAQ has fallen more than 10 percent, the consumer discretionary sector is down 8 percent, healthcare down 6.5 percent, real estate down 8.6 percent, and materials down 5 percent. The S&P 500 Index is only down 7 percent while the Dow has done the best only falling 5 percent.
I was hoping that readers took advantage of the few rally attempts we had this past week to reduce positions further and get more conservative. I advise you to do the same in the coming week, if we get another bounce or two. It is not the time to "buy the dips", but rather my advice is to sell the rips. Once the S&P 500 Index has hit my 10 percent target, we will reassess for further downside.
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The Retired Investor: A New Female Fed
|Lisa D. Cook, left, and Sarah Bloom Raskin have been nominated to join Michele Bowman and Lael Brainard to the Federal Reserve Bank Board, making women the majority for the first time.|
Lisa Cook and Sarah Bloom Raskin, if confirmed, would join Lael Brainard, who President Biden picked as vice chair, and Michelle Bowman, who is already a board member. In addition, Lisa Cook would be the first Black woman on the board. Women are still in the minority, however, if you include all the Federal Reserve Bank's regional presidents, but the board is where the voting power resides. All-in-all, I say hip-hip hurrah for women!
Don't get the idea that women have been excluded from Fed membership in the past. Plenty of women have served on the central bank's policy-making team and Janet Yellen, the present U.S. Secretary of the Treasury, held the top spot between 2014 to 2018. Secretary Yellen, in commenting about the president's picks, remarked that the U.S. economy has "never really worked" for Black Americans, "or really for any American of color."
In my opinion, the proposed composition of the board would better reflect the actual population of the United States. Women, for example, account for 80 percent of all consumer spending decisions in the U.S., including 93 percent of the decisions on food purchases and 65 percent of automobile purchases. They are the ones who notice inflation, price changes, the cost of day care, and how badly rising prices can stretch the family budget.
If we do see a new composition of the Fed board, don't expect any big changes to monetary policy any time soon. The Fed is still bound and determined to quell inflation, even if that means tighter monetary policy during the next several months. However, the two women nominees for board governors, plus Phillip Jefferson, the third of President Biden's nominations, are expected to place their focus on a healthy labor market.
All three would have a permanent vote on monetary policy (unlike regional Fed presidents who rotate) and their influence over the economy could outlast the administration that appoints them. All three nominees have in the past articulated their commitment to assist workers and to forge greater racial equality. In order to do so, I am betting that the three would be reluctant to push interest rates higher once the inflation scare is resolved.
In the case of Sarah Bloom Raskin, who would be the Fed's top regulator, the Fed's growing focus on climate change could also be strengthened. Raskin, who served as a Fed governor from 2010 to 2014, has advocated the need for financial regulators to prevent climate change from becoming a systemic risk to the banking system.
She sees a need for financial regulatory agencies, like the Fed, to go beyond analysis and planning and face the danger of climate change head on. She argues that the Fed and others should be assisting firms in addressing the risks of climate change, and also play an active role in reducing emissions.
Getting past the U.S. Senate will not be an easy task for the president's picks. The top Republican on the Senate banking Committee, Pat Toomey, has already expressed ‘serious concerns' about the Raskin nomination. It remains to be seen what opposition forms in the coming days over President Biden's remaining nominees.
One can be sure, however, that if by some miracle all three successfully survive the U.S. Senate gauntlet, the future Fed will be more explicitly pro-worker and probably far more attune to the country's needs than ever before.
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@theMarket: Beware the Hikes of March
There is a more than an even chance that the Federal Reserve Bank hikes interest rates at least 25 basis points by the end of March 2022. Several analysts expect another three hikes by the end of the year. As an equity investor, this should concern you.
This week, both the Consumer Price Index (CPI), and the Producer Price Index (PPI) came in as expected. But "expected" does not mean anything like good on the inflation front. On a year-over-year basis CPI was up 7 percent, while PPI hit 9.7 percent for all of 2021.
And while economists debate whether inflation and economic growth will subside over the course of this year, the Omicron variant is throwing a big kink into those forecasts.
In my Jan. 13, 2022, column "No Shows Threaten Economy," I pointed out the millions of workers in the global labor force who have been forced to stay off the job while recovering from this highly contagious variant. It has also created additional delays in the supply chain. Container and cargo congestion is building among the world's 20 largest ports.
Since much of the inflation rise has been caused by supply chain problems, the short-term impact of more delays indicates to me, a higher rate of inflation going forward. As such, the Fed seems honor-bound to raise rates faster (and maybe at 50 basis points, instead of the expected 25) in order to deliver on their promise to contain inflation.
But the bond vigilantes over in the fixed income markets have already taken matters into their own hands. They have bid up the U.S. Ten-Year Bond yield to 1.72 percent. At one point this week, it climbed to above 1.8 percent. Most bond traders are now expecting yields to rise to 2 percent through the next few months.
As such, foreign investors, who usually line up to buy U.S. Treasury bonds in the government's frequent auctions, have not been as eager to do so. This week's 10- and 30-year auctions were meh, at best. None of this has been good for the stock market.
If you have been reading my columns, you know that technology companies do not do well in an environment of rising interest rates. The high-flyers, that is stocks with little or no earnings but huge price gains, have been bearing the brunt of the downward pressure. But even the big guys are feeling the pressure at this point, with the NASDAQ 100 down 10 percent from its highs.
Every time these market favorites try to get up off the floor, they are pounded down again. Investors, trained to "buy the dip," are getting their fingers chopped off. In fact, underneath most indexes, everything that qualifies as speculative, whether it's crypto, electric vehicles, marijuana stocks, Fintech, etc. have been all been taken to the woodshed.
Those readers who have followed my advice have hopefully avoided much of the carnage. If you haven't acted to reduce the leverage in your portfolios, there is still time. I am expecting that we will see an oversold bounce in the stock market on Tuesday next week for a few days. Why?
Earnings season is now upon us. Most investors eagerly anticipate the "FANG" companies' results and usually buy stocks in anticipation of that event. Since they are such a large weighting in the overall market, great FANG earnings usually buoy the entire market. As such, I would expect the same thing will happen again.
The fly in that ointment is that while earnings may be stellar, guidance won't be. Between the omicron variant, supply chain issues, inflation, and the Fed's tightening stance on interest rates, the near-term future that FANG executives see, I'm guessing may not be as rosy as many investors expect.
If I am right, and the markets do bounce, take that opportunity to reduce exposure to the overall market. I am still looking for a serious correction in the weeks ahead. If the correction is steep enough, chances are that the Fed might back off on further tightening, but at this point that is just a supposition based on past Fed behavior. In any case, we'll cross that bridge when we come to it.
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The Retired Investor: No-Shows Threaten Economy
Last week, economists calculated that almost 5 million workers failed to show up at their jobs. Given the present upsurge in cases of the Omnicom variant, that should come as no surprise. However, it clearly has Wall Street economists reducing their estimates of first quarter 2022 GDP.
Slower economic growth normally has a negative impact on everything from the stock and bond markets, interest rates and employment. How this will ultimately affect the economy in the months ahead is a question worrying every trader and portfolio manager in the financial markets.
The first warning sign that this wave of coronavirus infection was impacting business came during the holidays. Thousands of flights, we thought, were canceled due to weather-related concerns and maybe some no shows due to the holidays. It soon became apparent that employees from pilots to baggage handlers and everyone in between were getting sick, or forced into quarantine, by the omicron variant.
Since then, a wave of omicron infections has decimated the working forces of supermarkets, shipping ports, transportation hubs, and a variety of factories and food processors throughout the country. I am starting to notice this personally. Just Wednesday, as I stood in a long line at my local supermarket, I noticed the lines seemed to be getting longer, even though holiday shopping is long over.
First, my concern was simply maintaining the 6 feet of spacing since most shoppers were ignoring the footprint markers behind me. Masked, gloved, and behind a plexiglass partition, my turn finally came. I asked the clerk why the lines were so long.
"A lot of people are out sick," said the weary, masked clerk. "So why not hire more people?" I asked. In response, she just laughed, nodding towards the "help wanted" signs behind her. I noticed her nose was poking out from the top of her mask. I held my breath.
The clerk also lamented that her schedule was in chaos, since no one knew which employees would be sent home tomorrow to quarantine, or who would be sick and how long it would be until they returned. "It's the same kind of thing you normally see when there is a big snowstorm. Some make it in, most don't."
And what is happening stateside is also developing throughout the globe. Europe has been struggling with the same issues. China, due to their strict isolation policies, has been managing somewhat better than most countries — until recently. This week, China's Zhejiang Province, home to one of the country's key ports, has suspended or greatly reduced the transportation of manufactured goods and commodities into Ningbo port, thanks to an outbreak of omicron last week.
Unfortunately, Ningbo is one of a handful of the world's largest container ports and an integral link in the world's supply chain connecting producers in East China with buyers of everything from automobiles, electronics, semiconductors, heavy equipment, machines, clothes and even toys. A second major port city, Dalian, a city of 7 million, announced its first cases of omicron Jan. 12, threatening the closure of its port. As a result, ships are heading for Shanghai's huge container port, which is causing congestion and delaying shipments by at least a week.
In August 2021, the port was shut down for a couple of weeks because of COVID-19. Analysts estimated it cost the world about $4 billion a week during that shut down. As it stands, global shipping ports have been working to reduce the congestion that has stranded an armada of container ships along their shores. Here in the U.S., the government has made efforts to relieve the port congestion in Los Angeles. On the East Coast, the New Jersey and New York ports have until recently managed to keep up with port congestion. However, omicron is steadily reducing the number of longshoreman available. As a result, the line of ships building off the coast of Long Island is increasing daily.
During the course of the last week, several economists have downgraded their forecasts for the first quarter 2022 GDP. Some are simply postponing growth, pushing it out to the second quarter. Economists are arguing that while Omicron may hurt growth in the short-term, the variant will flare out, and growth will resume in time to show higher by May or June. Let's hope they are right.
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@theMarket: Fed Meeting Notes Throw Markets a Curve
Investors were set back on their heels this week after reading the latest member comments from the Federal Open Market Committee's December 2021 meeting. It suggests that the Fed is prepared to tighten far sooner than most expected.
Members seem to say that the Federal reserve bank central bank was prepared to shrink its $9 trillion balance sheet "much sooner and faster" than anyone expected. This is in addition to the already announced plan to reduce its asset purchases faster than they first planned. Couple that with expectations that we could see three interest rate hikes this year and one can understand why stocks dropped this week.
The U.S. Ten-Year Treasury Bond yield spiked to the highest level seen in months at 1.74 percent. That sent technology shares plummeting, especially those of high-price stocks with little or no earnings prospects. The prospect of monetary tightening raised fears of a coming recession and with it a declining stock market.
This caused a stampede into "old economy" stocks that actually earn money and boast a strong balance sheet with little debt. Value stocks suddenly found their mojo again but when the markets take a nosedive like they did on Wednesday, Jan. 5, few stocks escaped the carnage.
The risk I see is that a handful of stocks hold the key to overall market performance and most of them are technology stocks of some sort. Higher interest rates are like kryptonite to the technology sector and pose a real threat to the markets overall.
Apple, Microsoft, Nvidia, Tesla, Amazon, Facebook, and Google are included in the majority of mutual or exchange traded funds, and most of the large cap equity indexes. I would venture to say that they represent at least 25 percent of most indexes. If for any reason these stocks begin to falter, they could take the entire market down with them. I think that is a real possibility, if the Fed carries out its new program of tightening and I believe they will.
There is a healthy debate among investors over whether the Fed, in the face of a large market sell-off caused by their actions, would have the stomach to carry out their plans. That is understandable given how long the Fed has had our back. In times past, most notably in 2018, the Fed has come to the rescue when markets suffered a severe decline.
The problem in that belief is that it places the Fed between a rock and a hard place. Inflation is impacting the nation, especially Main Street, (where America's voters live). It is an election year as well, and President Biden and the Democrats are hurting in the polls. The president wants something done about inflation and Jerome Powell, the Federal Reserve Bank's Chairman, has been tasked to do just that.
The dilemma is how does he cool inflation, and at the same time avoid precipitating a whoosh down in the stock markets by raising interest rates. I really can't see how Powell is going to accomplish that without hurting the markets in the process. However, I believe the circumstances of higher inflation, possible slower economic growth, and the present surge in the latest coronavirus variants will pass by mid-year, but in the meantime, prepare for more stock market turmoil ahead.
Next week, I expect more volatility with gains and losses depending upon the day, but the trend should be up, at least slightly ... I have been predicting a 15-20 percent decline ahead in the stock market in the first quarter of 2022. It could begin as early as the end of next week. Nothing in the market's behavior this week has changed my mind about that.
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