By Michael Lebowitz and Lance Roberts
Stocks rally nearly 1% higher yesterday despite a surprisingly hawkish tone from Fed Chair Jerome Powell teasing taper. Next on the horizon for the bulls is the 50-day moving average at 4435. With taper looming on the horizon will the moving average act as resistance?
If overnight trading is any indication we may answer that question this morning. The NASDAQ is leading the way, up .75% this morning with the S&P and Dow closely behind. S&P 500 futures are less than ten points below the key moving average. The dollar is weaker this morning as the currency markets appear to be taking Powell’s word that the Fed remains on course to start tapering in November and finish in mid-2022.
What To Watch Today
- 8:30 a.m. ET: Chicago Fed National Activity Index, August (0.50 expected, 0.53 in July)
- 8:30 a.m. ET: Initial jobless claims, week ended September 18 (320,000 expected, 332,000 during prior week)
- 8:30 a.m. ET: Continuing claims, week ended September 11 (2.600 million during prior week)
- 9:45 a.m. ET: Markit Manufacturing PMI, September preliminary (61 expected, 61.1 in August)
- 9:45 a.m. ET: Markit Services PMI, September preliminary (54.9 expected, 55.1 in August)
- 10:00 a.m. ET: Leading Index, August (0.7% expected, 0.9% in July)
- 7:00 a.m. ET: Darden Restaurants (DRI) is expected to report adjusted earnings of $1.65 per share on revenue of $2.24 billion
- 4:05 p.m. ET: Vail Resorts (MTN) is expected to report adjusted losses of $3.50 per share on revenue of $169.36 million
- 4:15 p.m. ET: Costco (COST) is expected to report adjusted earnings of $3.55 per share on revenue of $61.57 billion
- 4:15 p.m. ET: Nike (NKE) is expected to report adjusted earnings of $1.12 per share on revenue of $12.47 billion
Courtesy Of Yahoo!
Buy Stocks As The Fed Put Is Alive And Well
The Federal Reserve did exactly as expected yesterday and threaded the needle well on putting “taper on the table” and assuring markets the “punch bowl” wasn’t being taken away just yet.
“There has been a great deal of handwringing by some market participants over the potential market implications of the Fed’s eventual tapering of asset purchases, and a great deal of ink spilled on the topic too. But at the risk of merely contributing to the latter, we hope to assuage those who worry about the former.
In sum, we think that the tapering of Fed asset purchases (likely a $10 billion reduction in U.S. Treasury purchases and a $5 billion reduction in agency mortgages per month) is likely to have minimal market impact at this stage. This is partly because the Fed has done a decent job of telegraphing when tapering is likely to begin (most market participants believe the announcement will come this year), but more importantly it’s because the asset purchase reductions are likely to be trivial when seen in the context of how large the fixed income markets are today, and how overwhelming the demand for income has become.” – Rick Rieder, BlackRock’s CIO of Global Fixed Income
With stocks deeply oversold on a short-term basis, as noted yesterday, and the threat of “taper” largely baked into the recent decline, there is a decent entry point for traders to add exposure near term. As noted, the 50-dma is the only really challenge ahead but will likely be resolved today.
Powell Q&A Session: A More Hawkish Picture
Following a vague reference to taper in the FOMC statement, Jerome Powell made some hawkish comments during his press conference:
- With respect to progress towards taper, Powell commented, “In my own thinking, the test is all but met”.
- “I think if the economy continues to progress broadly in line with expectations and the overall situation is appropriate for this, we could easily move ahead [with taper] by next meeting, or not…”
- Again, with respect to a decision for November taper, “I don’t need to see a good employment report next month; I just need to see a decent employment report”. Powell is clearly signaling that Fed is likely to announce taper in November barring an unexpected deterioration in economic conditions.
- Powell commented that it may be appropriate for taper to conclude by mid-2022.
- As expected, Powell is leaving a back door open in case taper doesn’t go over well. “If necessary, we can accelerate or decelerate the taper”.
Taper Talk Continues
Changes to the FOMC statement are highlighted below. Of note, the Fed signaled taper could be around the corner, but did not drop any hints in the statement with respect to timing. “Since then, the economy has made progress towards these goals, and if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted”. However, in the FOMC press conference Q&A session, Powell noted that taper could come “as soon as the next meeting”.
The Fed reduced their projection for 2021 real GDP growth to 5.9% from 7%. Further, the Fed raised their core PCE inflation forecast for 2021 to 3.7% from 3.0%. The “dot plot” graph below shows the level of Fed Funds that each Fed member expects by year. There are now 9 FOMC members that think the Fed will hike rates as soon as next year, compared to only 7 in June. This represents an even split between members that see liftoff in 2022 and those who don’t, and could have implications for the pace of taper once initiated.
FOMC Pre-Taper Market Review
Adobe Q3 Earnings
ADBE reported earnings for the 3rd quarter yesterday after the close. GAAP EPS of $2.52 easily beat the consensus estimate of $2.29. Similarly, revenue of $3.94B (+22% YoY) beat expectations of $3.54B, driven by a 24% increase in subscription revenue. Management guided to Q4 revenue of $4.07B- slightly above the consensus of $4.05B. Guidance for non-GAAP EPS is also above consensus, at $3.18 vs. an expected $3.09. ADBE is down ~4% in pre-market trading despite beating expectations across the board and guiding above consensus for Q4. We hold a 1.5% position in the Equity Model.
FedEx is Raising Prices
Federal Express announced that effective January 2022, FedEx Express, FedEx Ground, and FedEx Home Delivery shipping rates will increase by an average of 5.9%. FedEx Freight rates will increase by an average of 5.9% to 7.9%. We suspect UPS and other carriers will take similar action. Given a large number of goods are now ordered online, the increase in shipping costs will inevitably work its way into higher prices next year.
Cash on the Sidelines
The graph below from Sentimentrader compares the amount of cash in money market funds to corporate equity issuance. Per Sentimentrader:
“During the pandemic panic, the ratio neared 30 and was the highest in 30 years. In other words, there was 28 times more cash available than shares offered in supply. There are ways to quibble with the technicals, but it’s simply meant as a reflection of sentiment.
Over the past year, the ratio has declined steadily as supply ramped up. Corporations are “feeding the ducks,” as the saying goes. Even though money market assets haven’t been drained much, the skyrocketing supply has caused the ratio to drop below 10 for the first time since the year 2000.”
Record buybacks have been a major support of asset prices this year.
Declining Earnings Confidence
The graph below, courtesy of the Market Ear, shows declining sentiment towards earnings expectations. Each line representing the four major global equity markets shows the number of earnings upgrades less the number of downgrades, divided by the total number of estimates. Each line is approaching zero but still above it, denoting net confidence remains positive but if falling.