|Dow ||29299.06 ||-779.65 || (-2.59%) |
|Nasdaq ||10752.38 ||-314.39 || (-2.84%) |
|SP 500 ||3653.71 ||-104.35 || (-2.78%) |
|10-yr Note ||+2/32 ||3.69 || |
|NYSE ||Adv 374 || Dec 2666 || Vol 1.1 bln |
|Nasdaq ||Adv 931 || Dec 2907 || Vol 5.1 bln |
|Strong: -- |
|Weak: Energy, Materials, Consumer Discretionary, Communication Services |
Moving the Market
|-- Treasury market volatility and rapid pace of increase in yields |
-- Goldman Sachs cut its year-end price target to 3,600 from 4,300, acknowledging it sees potential downside to 3,150 in the event of a hard landing
-- UK announced fiscal stimulus plan, financed through issuing more debt at a time of rising interest rates
23-Sep-22 16:30 ET
Dow -486.27 at 29592.44, Nasdaq -198.99 at 10867.78, S&P -64.76 at 3693.30
[BRIEFING.COM] It was another rough showing for the stock market today. It was a rough showing for the bond market, too, which was the main driver of stock market action.
The S&P 500 and Dow Jones Industrial Average both fell below their June 16th closing lows (3,666.77 and 29,688.78, respectively) and the DJIA broke below its intraday low (29,653.29) from the same day. The DJIA closed below the June low while the S&P 500 was able to climb above its June low by the close.
Treasury market volatility was the biggest headwind for equities today, followed by recession concerns. The level yields hit was worrying, but the pace at which they got there was the bigger concern. The 2-yr note yield rose as high as 4.26% (it began the week at 3.85%) and the 10-yr note yield went as high as 3.82% (it began the week at 3.45%). They settled at 4.21% and 3.70%, respectively.
A policy move out of the UK acted as another headwind today. The Prime Minister announced the biggest package of tax cuts since 1972 in order to help drive stronger economic growth. That news pushed the 10-yr UK gilt yield up 36 basis points to 3.85%, as market participants recognize it will be financed through the issuance of more debt at a time of rising interest rates. Also, there were concerns that efforts to spur stronger growth will keep inflation rates elevated.
The aforementioned policy move sent the British Pound plummeting (GBP/USD -3.4% to 1.0868 ) and the US Dollar Index on tear, up 1.5% to 112.96.
Another factor in play for participants today was Goldman Sachs cutting its year-end price target for the S&P 500 to 3,600 from 4,300, and acknowledging it sees potential downside to 3,150 in the event of a hard landing.
Price action today brought many stocks down. The advance-decline line reflected a strong selling bias. Decliners led advancers by a 7-to-1 margin at the NYSE and a 3-to-1 margin at the Nasdaq.
Small and mid cap stocks suffered heavier losses than their larger peers. The Russell 2000 closed down 2.5% and the S&P Mid Cap 400 closed down 2.1%.
All 11 S&P 500 sectors logged losses that ranged from 0.5% (health care) to 6.8% (energy). Energy fell far behind its peers as energy complex futures suffered sharp losses on concerns about a global slowdown. WTI crude oil futures fell 5.7% to $78.69/bbl. Unleaded gasoline futures dropped more than 7.0% to $2.32/gal.
Looking ahead to Monday, there is no U.S. economic data of note.
Today's economic data was limited to the preliminary September IHS Markit Manufacturing PMI reading, which came in at 51.8 (prior 51.5), and IHS Markit Services PMI reading, which was 43.7 (prior 43.7).
Dow Jones Industrial Average: -18.6% YTD
S&P Midcap 400: -21.21% YTD
S&P 500: -22.5% YTD
Russell 2000: -25.2% YTD
Nasdaq Composite: -30.5% YTD
Market lifts somewhat ahead of close
23-Sep-22 15:35 ET
Dow -567.92 at 29510.79, Nasdaq -225.14 at 10841.63, S&P -75.12 at 3682.94
[BRIEFING.COM] The stock market is attempting to lift from its lows ahead of the close, but maintains sizable losses.
Small and mid cap stocks are set to log the heaviest losses on the week. The Russell 2000 is down 7.2% for the week and the S&P Mid Cap 400 is down 6.4% for the week.
The 2-yr note yield rose seven basis points on the day, and 36 on the week, to 4.21%. The 10-yr note yield fell one basis point on the day, and rose 25 on the week, to 3.70%.
Looking ahead to Monday, there is no U.S. economic data of note.
Market sticks to narrow range
23-Sep-22 15:00 ET
Dow -779.65 at 29299.06, Nasdaq -314.39 at 10752.38, S&P -104.35 at 3653.71
[BRIEFING.COM] The major averages are confined to a narrow range near session lows.
The risk-off mentality today has the S&P 500 utilities (-2.4%) and health care (-1.7%) sectors showing the smallest losses. Notably, the defensive-oriented sectors also show the "smallest" weekly losses. Utilities is down 4.3% for the week, health care is down 4.5% for the week, and consumer staples is down 3.2% for the week.
The CBOE Volatility Index continues to rise, up 17.0% (4.65) to 32.00.
Generac outperforms as storms brew in the Caribbean
23-Sep-22 14:25 ET
Dow -720.74 at 29357.97, Nasdaq -287.66 at 10779.11, S&P -96.00 at 3662.06
[BRIEFING.COM] The major averages have continued to fall to session lows in the last half hour, the benchmark S&P 500 (-2.55%) still in second place.
S&P 500 constituents APA Corp. (APA 32.50, -4.61, -12.42%), Marathon Oil (MRO 21.84, -2.75, -11.18%), and DXC Technology (DXC 23.59, -2.71, -10.30%) pepper the bottom of the standings. Energy stocks, like APA and MRO, fall on Friday in the wake of eye-catching losses from commodities, while DXC might be seeing pressure from reports that private equity write-downs are drawing SEC scrutiny; for context, as of Sept. 21 DXC was rumored to be the target of private equity firms.
Meanwhile, generator manufacturer Generac (GNRC 174.03, +2.95, +1.72%) is near the top of the index amid reports of another tropical depression forming over the Caribbean Sea, one which is likely to become the next tropical storm of the season.
Gold pressured on Friday by rising yields, dollar
23-Sep-22 14:00 ET
Dow -609.51 at 29469.20, Nasdaq -248.79 at 10817.98, S&P -82.36 at 3675.70
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-2.25%) remains the worst-performing index.
Gold futures settled $25.50 lower (-1.5%) to $1,655.60/oz, pressured by earlier strength in bond yields and solid gains in the dollar.
Meanwhile, the U.S. Dollar Index is up about +1.5% to $113.01.
DocuSign's new CEO is a step in the right direction to ignite a turnaround (DOCU)
With the initial excitement gone, shares of DocuSign (DOCU -4%) struggle to ink any meaningful gains today after the cloud-based eSignature company named a new CEO. DOCU tapped former Google (GOOG) executive Allan Thygesen to take the reins starting October 10 after its former CEO Dan Springer agreed to part ways in late June.
Shares of DOCU have endured a lengthy downward trend since December 2021 after the stock took a beating following disappointing OctQ earnings, which showed demand that was pulled forward during the pandemic was slowing down considerably. Shares currently sit over 65% lower on the year and over 80% from record highs.
Clearly, Allan Thygesen is taking the helm during a tumultuous time for DOCU. However, if his previous experience at Google is any indication, he may be what DOCU needs to turn the ship around.
DOCU has a lot of work ahead of it to get its shares back up to 2021 levels. However, as a market leader in the eSignature business, DOCU remains well-positioned for a turnaround, and we see a CEO shakeup as a step in the right direction. By leading Google's ad business for half a decade, Thygesen has insight into market trends, which could help steer DOCU in a direction to boost billings growth, which has fallen off a cliff lately, expected to grow only 6% yr/yr in FY23 compared to +37% in FY22 and +56% in FY21.
- Starting in 2017, Thygesen was President, Americas & Global Partners, at Google, where he led the company's advertising business in North and South America, which make up over half of Google's total revs. During Thygesen's tenure, Google's overall advertising business exploded, shooting up over 100% from FY17 to FY21, partly a reflection of solid leadership.
- As an outsider stepping into the leadership role at DOCU, Thygesen may also be more adept at making difficult decisions that might have to be done to spark a turnaround.
- That is not to say former CEO Dan Springer, which was in the head position since 2017 and took the company public, scaling it to handle the unprecedented demand in 2020, did not have to make tough choices. However, Thygensen's marketing background could bring a fresh perspective and a different take on the path DOCU should be undergoing, possibly setting the stage for a more significant shakeup than Springer may have been willing to endure.
Costco's Q4 report leaves investors wanting for more, including a membership fee increase (COST)
Costco's (COST) 4Q22 results showed that the company is still performing better than most retailers, including Target (TGT) and Walmart (WMT), as its more affluent customer base flocks to its stores to find better values. Bolstered by a record high membership renewal rate of 92.6%, and a 6.5% yr/yr increase in cardholders, COST edged past EPS expectations and generated revenue just north of $72 bln, which was essentially in line with estimates. However, the company may be a victim of its own success based on the negative reaction in the stock.
Investors have come to expect solid results from COST. Additionally, the company provides total and comparable sales reports on a monthly basis, removing some of the surprise factor from its earnings reports. Therefore, COST's impressive Q4 adjusted comparable sales increase of 10.4% is getting brushed aside. Instead, a couple other issues have become focal points: namely, COST's plans to raise membership prices, and its margin performance.
There are plenty of positives, though. On the inflation front, COST is seeing some small improvements in certain areas, including for commodities such as gas, steel, beef, and plastics. Container ship pricing has also eased somewhat, but rising wages are still a pressure point. Encouragingly, demand for hardline product categories, like lawn and garden and toys, held up well during the quarter.
- Although COST's customers are probably relieved to hear that there's no immediate plan to increase membership prices, investors are less enthused about the idea. After Walmart-owned Sam's Club bumped membership prices higher last month, many believed that COST would follow suit -- especially since it's nearing the end of its typical 5.5-year cycle for price increases. When CFO Richard Galanti stated, "there are no specific plans regarding a fee increase at this time," investors' hopes were transformed into disappointment.
- Galanti added that it's a question of when, not if, COST implements a price increase. However, given the inflationary pressures and the growing concerns about a recession, he believes that staying the course for now is the right move.
- Some may argue that consumers are clearly seeing a value proposition at COST (as illustrated by its record high renewal rate), giving the company some wiggle room to nudge membership fees higher.
- Additionally, with the company contending with rising commodity and wage costs, a membership price increase would help alleviate the pressure on margins and EBIT.
- On a reported basis, gross margin slipped by 74 bps yr/yr to 10.18%. It's important to note that the decline is mainly due to a product mix shift since gasoline sales represented a larger portion of total core sales compared to a year ago. Core-on-core merchandise margin was only down by 26 bps, which is on par with COST's recent performance.
- Still, the lack of improvement for margins is a major reason why COST is barely beating earnings expectations now. With a pricey forward P/E of about 34x, compared to 23x for WMT, COST's modest beats are leaving some investors dissatisfied.
Overall, it was another good quarter for COST, especially relative to other big box retailers, but the company has a high bar to hurdle. Consequently, its slight earnings beat, combined with disappointment regarding its lack of a membership fee increase, is weighing on shares.
FedEx delivers in-line with last week's poor guidance; focus now is on cutting costs (FDX)
FedEx (FDX -2%) delivered pretty much as expected with its Q1 (Aug) report late yesterday. Last week, FDX preannounced Q1 results that were well below analyst expectations and the final numbers were in-line with that. FDX also reaffirmed the Q2 (Nov) guidance it provided last week, which also was below expectations at the time.
Overall, the results were generally in-line with last week's guidance, so no big surprises. We were glad to see Q2 guidance getting reaffirmed. The cost reduction plan seems pretty substantial to us and should act as a tailwind, especially in the second half of the fiscal year. The rate increase should also help. More broadly, it does make us nervous about the economy generally and earnings season next month because FDX delivers for all types of businesses. However, we also think some of this weak performance may have been caused by FDX's own missteps because UPS has been putting up much better numbers.
- The company saw a saw a decline in volumes in Q1, which accelerated in the final weeks. Softening volumes in Asia and the US were predominantly due to the economy, while the shortfall in Europe was both economic and service-related. As a result, FDX says it had costs in the system for volumes that did not materialize. Furthermore, US consumer spending has slowed due to inflation and consumption is being skewed more toward services and away from goods, which is not great for a delivery company.
- The main focus of the call last night was FedEx's efforts to reduce costs, including a plan to save $2.2-2.7 bln in FY23, of which, about $1 bln will be permanent. The biggest cost actions will be taken at FedEx Express, where it expects to drive $1.5-1.7 bln in savings, mostly from reducing global flight hours. FedEx Ground savings are expected to be $350-500 mln, driven by rationalizing operations and cancelling several planned ground network capacity projects.
- So when will these cost reductions benefit the P&L? FDX realized nearly $300 mln in cost savings in Q1 with another $700 mln expected in Q2, then the remaining $1.2-1.7 bln in 2H23. So it is going to take some time, but they should have a real impact later in the fiscal year. Another thing that should help is a 6.9% general rate increase planned for January 1 plus FDX is adding various surcharges.
- Something that jumped out at us on the call was FDX saying it had ample liquidity. Importantly, it remains committed to its plan to repurchase $1.5 bln of stock in FY23. And it sounds like FDX is going to take advantage of the drop in its share price as it plans to step on the gas with $1 bln in buybacks in Q2 alone.
Qualcomm detailed solid Automotive numbers, but a deeper look lets some air out of the tires (QCOM)
During Qualcomm's (QCOM -2%) 2022 Automotive Day yesterday, the chip supplier outlined a few milestones and optimistic automotive-related financial projections. The big headline number was QCOM's $30 bln automotive design-win pipeline, an $11 bln expansion from its most recent earnings call in July. Other significant numbers included QCT (Qualcomm CDMA Technologies) Automotive revs climbing to roughly 33% yr/yr by the end of FY22 (Sep), growing to over $4 bln in FY26 (~33% CAGR from FY22) and $9 bln in FY31 (~24% CAGR).
When CEO Cristiano Amon took the helm in July of last year, one of his primary areas of focus was on expanding 5G beyond mobile, putting QCOM at the center of the digital transformation of many industries as they connect to the cloud. The automotive industry was a vital component of this, boasting a design-win pipeline of $10 bln at the time. Mr. Amon commented that automotive industry trends such as further connected vehicle growth and electrification position QCOM as a leading partner in the industry. After yesterday's announcements, it is clear these trends have only accelerated.
Nevertheless, the market is mostly yawning at QCOM's developments. Part of this has to do with the broader market sell-off. However, we believe another aspect can be attributed to some minor details within QCOM's numbers that paint a less rosy picture.
Overall, QCOM's Automotive Day contained plenty of positive headline figures. However, when digging deeper, its numbers and projections are not overly exciting, especially given the current headwinds in the automotive industry. If the economy deteriorates further, QCOM's automotive partners may be staring at reduced production of its relatively expensive electrified and ADAS-packed vehicles, hindering QCOM's forecasts.
- There are still risks associated with QCOM's $30 bln design-win pipeline. Although QCOM did not break down the specific numbers, it stated that advanced driver assistance systems (ADAS) make up a large portion of it. ADAS includes vehicle autonomy, which is still facing issues toward the higher driverless levels, i.e., L3, L4, and L5. Regulatory hurdles are also likely to pose a minor setback in the future.
- Recurring revenue is not factored into QCOM's revenue targets. Although this could be considered a plus since QCOM noted that it thinks of services and cloud revenue as upside to its revenue forecasts, it does take some steam out of these headline numbers.
- As of Q3 (Jun), QCOM's annualized automotive revenue run rate stood at over $1 bln.
- QCOM does not expect its Automotive business to be accretive to QCT margins until FY26. In May, the company noted that applying the same chips it sells into phones into cars is "highly" accretive from a margin perspective. Therefore, investors may be surprised by the length of time until Automotive positively impacts margins.
Still, we think QCOM's relatively attractive valuation of 10x forward earnings, its dividend yield of 2.5%, and its stickiness in the semiconductor industry make it a solid choice for the long term.
The bond of friendship between the Fed and stock market is broken
It is a gift to have a best friend in life. They are someone you can lean on in a time of need or just hang out with to make the fun times even more fun.
A best friend can support you with positive feedback or sometimes support you with tough love by giving you the feedback you don't want to hear but need to hear.
What a best friend won't do is abandon you. They will stick with you through thick and thin. All friendships, though, have their challenges -- even the best of friendships.
The stock market finds itself dealing with such a challenge right now. Its best friend -- the Fed -- is breaking the bond it formed with the stock market for the better part of the last 14 years and it isn't apologizing for doing so.
A Dickensian Age
The bond of friendship between the Fed and the stock market was forged on the persistence of rock-bottom interest rates. It was strengthened by the introduction of quantitative easing and a willingness to provide stimulative monetary policy when the times got tough.
The times got pretty tough, too, in the last 14 years.
There was the global financial crisis, which was the worst of its kind since the Great Depression. There was the eurozone debt crisis. And there was the first global pandemic in one-hundred years.
The response in all instances was to cut policy rates sharply (or at least not raise them from rock-bottom levels), to buy copious amounts of Treasury and agency mortgage-backed securities, and/or introduce emergency lending facilities to keep the flow of credit going.
It has been a Dickensian age alright, replete with the best of times and the worst of times. Practically speaking, it was the worst of times for the real economy and the best of times for the stock market. Granted there were a few bouts of pain for the stock market along the way, but the chart below conveys how the Fed's friendship during these tough times greatly benefited the stock market.
One can see on the right side in the chart above, however, that the fed funds rate has moved up rapidly this year. One can also see how the stock market has turned lower with that rapid shift in the fed funds rate. The chart below provides a better snapshot of the correlation that otherwise speaks to a frayed relationship.
Legacy on the Line
If you want to understand why the stock market is acting so poorly, all you need to do is to understand this: the Fed is no longer interested in being the stock market's best friend. It doesn't even want to be its friend.
The Fed can't be the stock market's friend, not with the inflation rate near a 40-year high and the Fed's inflation-fighting credibility on the line.
At the same time, Fed Chair Powell's legacy is on the line. Don't think he doesn't know that, as he continues to point to the inflation-fighting work former Fed Chair Volcker did back in the day as a template for what must be done today to restore price stability.
Fed Chair Powell has gone so far as to admit that the Fed's (new) policy approach will lead to pain for some families, tacitly asserting that if it leads to a hard landing, so be it. The only objective right now is to get inflation back down to the 2.0% target and to restore price stability.
That mission will be accomplished with higher interest rates that weaken demand. The new median estimate for the Fed's terminal rate is 4.60%, up from 3.80% in June, which is to say it is a moving target. Fed Chair Powell sounded quite confident, too, that the Fed will get to that rate relatively quickly.
The unknowns are whether that will indeed be the terminal rate and how long the Fed will sit at the terminal rate (whatever it proves to be) when it gets there.
There has been a sharp adjustment in the Treasury market to account for the higher interest rate projections and a sharp adjustment in the stock market to account for the increased uncertainty about the economic outlook because of the higher interest rates.
And the stock market is not used to these higher rates.
The current target range for the fed funds rate is 3.00-3.25%, the current 2-yr note yield is 4.19%, and the current 10-yr note yield is 3.68%. Over the last 14 years, the average effective fed funds rate is 0.54%, the average 2-yr note yield is 0.96%, and the average 10-yr note yield is 2.32% (and that includes the spikes seen this year).
Truly, market participants should not be surprised by how high rates have gone. They should be astounded that they were kept as low as they were for as long as they were.
The added problem today, though, isn't how high rates have gone. It is how quickly they have risen. When the year began, the fed funds rate was at the zero bound, the 2-yr note yield stood at 0.73% and the 10-yr note yield stood at 1.52%.
The pace of change has been a destabilizing force for stocks, as market participants have found reason to fret over liquidity constraints, quantitative tightening, offsides positioning, and the possibility of other central banks selling Treasury securities to support their weak currencies.
In brief, the pace of change has been disarming and it has reduced equity investors' willingness to take on risk. At the same time, the higher interest rates have created newfound valuation pressures for stocks and newfound competition that hasn't existed for the better part of the last 14 years.
What It All Means
It is easy to think that the last 14 years are what "normal" looks like in terms of interest rates. Nothing could be further from the truth. It has been an abnormal period and what a long, strange trip it has been.
That trip is ending and a return to "normal" is materializing. That will take some getting used to.
Transitions like this can be rough, especially when they happen abruptly like this one has. Reduced equity values -- greatly reduced in many instances -- are an unfortunate consequence of higher interest rates.
That's because expectations need to be reset to account for slower growth, and a potential recession, in an environment of restrictive monetary policy.
Call it climate change, only in this case things are cooling down after a heated era of rock-bottom interest rates provided by a market-friendly Fed. Well, the Fed is no longer the stock market's friend and that reality bites.
The Fed's friendship with the stock market will be rekindled one day, but that day is a mystery at this point. Right now, the Fed is providing tough love that the stock market clearly does not want to hear and hasn't heard for a long time.
-- Patrick J. O'Hare, Briefing.com
Rising interest rates the center of attention
The stock market is going to lose more ground at today's open, principally because Treasuries are losing more ground.
Currently, the S&P 500 futures are down 55 points and are trading 1.4% below fair value, the Nasdaq 100 futures are down 160 points and are trading 1.4% below fair value, and the Dow Jones Industrial Average futures are down 421 points and are trading 1.4% below fair value.
The crux of the matter, though, is that the 2-yr note yield raced to 4.26% earlier while the 10-yr note yield raced to 3.82%. They have settled back some, with the 2-yr note yield currently at 4.14% and the 10-yr note yield at 3.73%.
The issue for market participants isn't specifically the level to where yields have risen. It is more the pace at which they have gotten there.
The rapid unwinding in the Treasury market is fostering concerns about liquidity that have been layered on top of concerns about quantitative tightening and speculation that other central banks might be moving to sell Treasuries in a bid to defend their weakening currencies.
It's a messy situation in the Treasury market to be sure and that is creating a messy situation for stocks. However, it's not just a U.S. situation. Things are messy elsewhere.
The 10-yr UK gilt yield is up 26 basis points today to 3.75% after the UK announced its biggest tax cut since 1972, according to CNBC. The fiscal stimulus package there, however, isn't paid for, so it will require deficit financing at a time when interest rates are rising.
Another point of contention is that interest rates are rising (rapidly) because inflation is way too high. Central banks have been raising policy rates rapidly to try to control inflation. So, now you have the UK government introducing a huge fiscal stimulus plan that will presumably bolster consumer spending and presumably keep inflation elevated.
One can see why the UK debt market isn't too fond of the idea.
In any case, the UK's plan has been an added source of upset for sovereign debt markets and that is spilling over to equities. Asian markets traded lower today and European bourses are down approximately 2.0%.
The open for the U.S. market won't be as bad, but it isn't going to be good either. A separate weight is Goldman Sachs cutting its year-end price target to 3,600 from 4,300, and acknowledging that it sees potential downside to 3,150 in the event of a hard landing.
There is a good bit of negative headline volatility in the early mix, including the recognition that the Dow looks poised to take out its June closing low at today's open.
In brief, the negative bias is being driven by the confluence of fundamental, technical, and sentiment drivers that continue to move in a negative direction and rising interest rates are at the center of it all.
-- Patrick J. O'Hare, Briefing.com