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The Federal Reserve was so worried about not being hawkish enough that policymakers probably went overboard. The Fed emerged from Wednesday’s meeting with all guns blazing: rapid-fire 75-basis-point rate hikes, more hawkish forward guidance and an unprecedented pace of balance-sheet tightening. The barrage has spiked Treasury yields to their highest level in more than a decade and the U.S. dollar index to a 20-year peak, while sending the S&P 500 tumbling near bear market lows.
That’s an awful lot of stress to put on financial markets at any time. But the current global economic foundation seems especially brittle as central banks battle inflation; Russia wages military war against Ukraine and economic war against Europe; China struggles amid lockdowns and a hangover from a real estate boom; and governments are saddled with high debt levels that were further inflated by the pandemic.
Yet the Fed entered last week’s pivotal meeting with one goal: quashing any possible signal that would allow financial conditions to ease and the S&P 500 to rally.
By all accounts, the Fed had been caught off-guard by the financial market rally that followed its 75-basis-point hike on July 27. Building on a rally off mid-June lows, the S&P 500 had surged 17% by mid-August. The 10-year Treasury yield had backtracked nearly a full point over a six-week period.
Federal Reserve policymakers took umbrage at that rally, which seemed to cast doubt on their resolve to tame inflation. The consequence of thawing financial conditions this summer became all too clear with last week’s CPI report. A far-too-strong job market is still keeping inflation way too high. While the overall inflation rate eased to 8.3%, prices for core services, such as rent, health care and transportation, rose 0.6% on the month and 6.1% from a year ago, the fastest pace since February 1991.
The summer rally began to come undone on Aug. 26, when Fed chief Jerome Powell, in his Jackson Hole, Wyo., speech, ditched his earlier optimism that the U.S. economy could skirt recession. Instead, Powell signaled that the Fed will keep policy tighter for longer, grounding the economy so that the current inflation outbreak doesn’t turn into a chronic 1970s-style disaster.
Powell’s speech began a market repricing of the Fed policy outlook, undoing the dovish impression he gave with his July 27 news conference that had helped the S&P 500 cut its 24% loss by more than half, exiting a bear market.
August’s hot CPI reading jolted market interest-rate expectations still higher. As a result, the Fed’s hawkish policy signals on Wednesday mostly just confirmed the bad news Wall Street was already expecting. A third-straight 75-basis-point rate hike was fully priced in. Markets already had priced in odds slightly above 50% that the key federal funds rate would rise to a range of 4.25%-4.5% by the end of 2022 and reach 4.5%-4.75% in 2023.
So why the harsh market fallout since Wednesday’s Fed meeting? The tenor of the meeting ensured that investors won’t doubt the Fed’s resolve again. Markets now expect another 75-basis-point hike Nov. 2 and another half-point move in December. That’s coming as the Fed has doubled the pace of balance-sheet tightening to as much as $95 billion per month — nearly twice the $50 billion monthly rate that helped trigger a market meltdown and near bear market for the S&P 500 in late 2018.
Back then, inflation was too low, not too high, so Federal Reserve policy turned on a dime. Policymakers shelved their plan for a series of rate hikes to guard against the possibility of higher inflation. Balance-sheet tightening slowed, then stopped. By the fall of 2019, the Fed had begun cutting rates and buying up more assets. This time around, there’s little hope for a Fed reprieve until markets get much uglier.
The bigger problem may be that the tightening isn’t happening in a vacuum, but is creating waves in interconnected financial markets across the globe. As Treasury yields spiked following the Federal Reserve meeting, so did the U.S. dollar vs. foreign currencies. That provoked Japan to intervene to prop up the yen for the first time since 1998. Other currencies, including the euro and British pound also are breaching key long-term support levels vs. the dollar.
When the Fed’s need to tighten to meet its domestic inflation mandate creates problems for the rest of the world, markets can quickly come unglued, as they did in early 2016 and late 2018. In both cases, the Fed quickly pivoted away from aggressive tightening plans. This time will be different.
The Fed is sometimes regarded as the world’s central bank, partly because the dollar is the world’s reserve currency and key commodities such as oil are priced in dollars.
While the strong dollar will help tame inflation in the U.S. by lowering the price of imports, it will deepen problems for other countries struggling with inflation. A number of foreign central banks followed the Fed’s big hike on Wednesday with their own bigger-than-expected hikes on Thursday. But pushing up interest rates and weakening their economies can worsen debt sustainability issues, pressuring currencies.
Back on March 2, just after Russia’s invasion of Ukraine, Powell told Congress that he would support a quarter-point rate hike at the coming meeting, not a half-point. “We will use our tools to add to financial stability,” Powell said. “We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.”
It’s not clear that the Federal Reserve struck the right balance this week.
A soft September jobs report on Oct. 7 and less-troubling CPI reading a week later could potentially provide a respite for markets. But next week may be a wild ride.
After sliding 9.2% over the past two weeks, the S&P 500 is now down 23% from its all-time closing high on Jan. 3 and just 0.7% above its June 16 closing low. The Nasdaq composite is also close to its June lows, while the Dow Jones did hit a 22-month low on Friday.
Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
Please follow @IBD_JGraham on Twitter for coverage of economic policy and financial markets.
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Dow Jones futures will open on Sunday evening, along with S&P 500 futures and Nasdaq futures.
The stock market suffered heavy losses yet again in the past week as a hawkish Federal Reserve sent Treasury yields soaring yet again. The Dow Jones undercut June lows on Friday with the other major indexes getting close. The final growth leaders started breaking down.
With the market correction intensifying, it’s a time for investors to be on the sidelines, but looking for potential leaders. Some medical stocks are showing relative strength, including Eli Lilly (LLY). Chinese e-commerce giant Pinduoduo (PDD) is pulling back somewhat calmly. Apple (AAPL), Tesla (TSLA), Enphase Energy (ENPH) and Albemarle (ALB) are coming under increasing pressure, but are still worth watching for the future.
Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.
The stock market suffered intense losses yet again last week, closing near weekly lows despite a mini-bounce near Friday’s close.
The Dow Jones Industrial Average fell 4% in last week’s stock market trading. The S&P 500 index gave up 4.6%. The Nasdaq composite tumbled 5.1%. The small-cap Russell 2000 plunged 6.6%.
The 10-year Treasury yield spiked 25 basis points to 3.7%, capping an eighth straight weekly gain.
U.S. crude oil futures plunged 7.1% to $78.74 a barrel last week, hitting their lowest levels since January.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) plunged 10.8% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) skidded 6.5%. The iShares Expanded Tech-Software Sector ETF (IGV) fell 5.4%. The VanEck Vectors Semiconductor ETF (SMH) lost 5.7%.
SPDR S&P Metals & Mining ETF (XME) tumbled 8.3% last week. The Global X U.S. Infrastructure Development ETF (PAVE) shed 5.3%. U.S. Global Jets ETF (JETS) descended 9.1%. SPDR S&P Homebuilders ETF (XHB) retreated 4.2%. The Energy Select SPDR ETF (XLE) dived 10.15% and the Financial Select SPDR ETF (XLF) lost 6.1%. The Health Care Select Sector SPDR Fund (XLV) declined 3.6%
Apple stock closed near weekly lows, but finished down only 0.1% to 150.54. On Wednesday, AAPL stock hit resistance near its 10-week and 40-week lines and is back near recent lows. But the relative strength line hit a new high Friday. Apple stock still has a 176.25 handle buy point, but the first test will be reclaiming its 50-day and 200-day lines.
Eli Lilly stock actually rose 0.9% to 311.60 in the past week. Shares leapt nearly 5% on Thursday, following positive drug news and an analyst upgrade. LLY is stock is on the wrong side of its 50-day line, hitting resistance there Friday. But the RS line is racing higher. The drug giant has a 335.43 flat-base buy point, according to MarketSmith analysis. There’s a potential trendline entry slightly above the 50-day line, but it’s not a good time to be making any buys.
Enphase stock dived 12.1% last week to 279.49, undercutting its 50-day line modestly and just undercutting recent lows. Ideally, ENPH stock would consolidate for a time, perhaps forge a new base.
Pinduoduo stock sank 8.5% to 60.08, breaking below its 21-day line and nearing its 50-day. PDD stock has given up nearly all of its gains since the Chinese e-commerce giant reported blowout results in late August, briefly breaking out.
But the RS line is still near 52-week highs. A pullback to the 50-day line could be bullish, with a new base perhaps forming.
Of course, China risks are always high, while PDD stock is an outlier among e-commerce names or Chinese stocks in general.
Albemarle stock skidded 6.1% to 269.69 in the last week, but found support at its 50-day line on Friday. ALB stock is still above a 250.25 buy point from a tiny handle in early August, while round-tripping gains from a 273.78 alternate entry from a massive cup-with-handle base. There’s no clear entry for ALB stock right now.
Lithium prices are hot and will likely remain so indefinitely with EV demand rising and lithium production constrained. But there’s no question that ALB stock and other lithium plays can be very volatile, subject to big sell-offs.
Tesla stock tumbled 9.2% to 275.36, with even bigger losses from Wednesday’s peak. TSLA stock broke below its 200-day and 50-day lines, but held above recent lows. The EV giant now has a legitimate consolidation with a 316.74 buy point within a much deeper consolidation. On a weekly chart, Tesla stock has a handle entry of 313.90.
The RS line had been trending higher until late last week.
Weekly China sales data, likely out by Tuesday, may ease Tesla demand fears there or reinforce them. Third-quarter global production and deliveries data will follow in early October.
The stock market suffered yet another week of huge losses. The Dow Jones undercut its June lows on Friday, along with the NYSE Composite. The Nasdaq, S&P 500 and Russell 2000 have not done so, but just need one more bad day to break lower.
Could we get a bounce? Sure, the market seems oversold by various measures, while the June lows are a logical place for a rebound attempt. The CBOE Volatility Index rose to a three-month high on Friday, though the market fear gauge isn’t at extreme levels.
Of course, a bounce doesn’t have to come right away. And one or two good days won’t mean much if the indexes quickly resume selling.
Any stock market bounce would likely need Treasury yields and the U.S. dollar to pause or pull back.
In the past few weeks, market rallies, including intraday, have been lackluster, low-volume affairs, followed by heavy selling.
There’s a strong chance that the bear market stages yet another significant leg down. Even when the market finally does bottom, it could take a long time to power higher.
What could change the dynamic? On Sept. 30, the Federal Reserve will get the August PCE index, its favorite inflation gauge. The September jobs report will follow a week later. Positive readings would be a relief, but the Fed wants to see sustained declines in core inflation and job market weakness.
Meanwhile, expect big warnings over the next few weeks. High labor costs, supply chain woes, rising interest rates, a soaring dollar and a stalling economy is a recipe for earnings disappointment.
Some sectors are performing relatively well, but the emphasis is relative.
That includes drug giants such as LLY stock, as well as other medicals including certain biotechs and medical names. Pollution control is still looking OK. But even many stocks with RS lines that are rising or at new highs are faltering and on the wrong side of the 50-day and 200-day lines.
Just because a stock has been holding up doesn’t mean it will keep doing so in a market correction. A large number of resilient stocks suddenly sold off hard this past week. That includes growth holdouts that are starting to sell off hard, such as Enphase and TSLA stock.
If these stocks suffer significant further damage, that could mean extended repair time, at best. Then again, the same could be said about the overall market.
Investors should be on the sidelines. There are very few stocks holding up, with even relative winners reeling from the market correction.
Keep building your watchlists with an emphasis on relative strength. Nearly all the charts, with a few exceptions like LLY stock, will look terrible, but that’s OK for now.
If you’re looking for shorts, it’s probably best to wait for a bounce, with stocks or the major indexes running back up to key levels and hitting resistance. But work on those potential lists as well.
Remember, it’s very hard to make money in a bear market. The time for big gains will follow in the next strong market rally. Staying engaged and preparing for that uptrend is key.
Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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Four days of steady selling on the stock market sent the Dow industrials below 30,000, and to their lowest level since Q3 2020. The Nasdaq and S&P 500 stopped short of key levels, setting up a crucial challenge heading into the final week of September. Tesla’s AI day and Nike earnings are both key events. And another round of inflation data wraps the week on Friday, making the final trading day of September a wildcard session.
The stock market correction has intensified, with the major indexes at or near their June lows. It’s a time to be looking for relative strength, scouting out the next potential winners. Medical stocks, somewhat insulated from economic concerns, stand out. Eli Lilly (LLY), Vertex Pharmaceuticals (VRTX), Neurocrine Biosciences (NBIX), McKesson (MCK) and Humana (HUM) are all showing relative strength, though none are actionable right now. All have clear bases except for Humana, which recently topped a short consolidation before pulling back slightly.
Economic data in the coming week will feature an August update of the Federal Reserve’s favored inflation gauge, the personal consumption expenditures price index, out Friday at 8:30 a.m. ET. The core PCE price index, excluding food and energy, is expected to reaccelerate to a 4.8% annual gain. Hawkish projections released on Wednesday show the Fed’s key rate rising to 4.6% in 2023. The projections seem to indicate that rate cuts won’t be on the table until core PCE inflation falls to 3% or lower, which isn’t expected until 2024.
The PCE inflation figures are reported with the Commerce Department’s personal income and spending data, which will show how broad-based goods and services spending is proceeding in Q3 amid lower gas prices. At the moment, the Atlanta Fed’s GDPNow tracker indicates just a 0.3% growth rate for the U.S. economy in Q3.
On Thursday at 8:30, we’ll get the third update for Q2 GDP, which the government earlier estimated to have fallen 0.6%, after Q1’s 1.6% drop. With the housing sector in reverse, the economy is leaning more on business equipment investment. The durable goods orders report out Tuesday at 8:30 will show the latest trend.
The stock market’s correction deepened, with index losses of roughly 5%-6% the past week. The Dow Jones Industrial Average sank to the lowest level since November 2020. The Nasdaq and S&P 500 now test their June lows, where a reckoning of sorts could take place. A break below those levels would be another bearish sign for the stock market. The Innovator IBD 50 ETF, which tracks IBD’s signature index, undercut the 2020 lows and is at the lowest point since December 2016. The fund plunged more than 11% for the week as the energy stocks that had been holding up sold off en masse. Many broke below support levels or their bases became distorted with the latest wave of selling. To be sure, sell signals are appearing in multiple sectors. Several health care leaders that had held up also came under selling, leaving little worth a look.
Nike (NKE) stock is undercutting support and trading at its lowest levels since Q3 2020 as the company prepares to report fiscal first-quarter earnings Thursday afternoon. Analysts expect the sports apparel giant’s earnings to fall 20%. The revenue target is up slightly at $12.28 billion, vs. $12.25 billion a year ago. NKE has faced factory closures in China and Vietnam stemming from the coronavirus pandemic. In June’s Q4 report the company’s revenue from China dropped 19%. But Nike also made major strides in its digital and direct-to-consumer sales channels. Nike projected Q1 revenue will only be flat to slightly up, which is just below analyst targets. It expects fiscal 2023 revenue to rise in the low double digits.
Apple (AAPL) and Google parent-Alphabet (GOOGL) led all U.S. companies in stock buybacks during the second quarter, though overall repurchases fell nearly 22% from the previous quarter, according to S&P Dow Jones Indices. Overall, S&P 500 buybacks in Q2 were $219.6 billion, down 21.8% from the first quarter’s record $281 billion. Information technology companies continued to lead the way in buybacks. Buybacks by financial companies fell 61% to $21.2 billion. Health Care buybacks decreased 58% to $17.2 billion. Compared to the year-earlier period, Q2 in 2021, buybacks rose 10%. Apple repurchased $24.56 billion of its own shares, down about 4% from a year earlier. Alphabet repurchased $15.19 billion of Google stock, up about 19% from a year earlier.
Tesla‘s (TSLA) annual AI Day will showcase the global EV leader’s latest technology. The event will take place on Sept. 30, including live streams on the Tesla website and YouTube. Optimus, the humanoid robot, is likely to headline this year’s event. Also known as the Tesla bot, Optimus eliminates “dangerous, repetitive and boring tasks,” Tesla CEO Elon Musk has claimed. It could revolutionize factories and the service industry. Investors could also learn more about Tesla’s progress on self-driving technology, the Cybertruck and the Supercharger V4.
Almost 56% of the more than 10,000 stock ratings currently on S&P 500 stocks are buy ratings, according to FactSet. Less than 6% are sell ratings, and about 39% are hold ratings. The percentage of buy ratings is below the 10-year average, and down from a high of 57.4% in February. Prior to that peak, the last time the month-end percent of buy ratings topped 55% was in September 2011. Ratings are most optimistic (more than 62% buys) on energy, information technology and real estate sectors. Consumer staples and utilities have the lowest percentages of buy ratings.
Jabil (JBL) will release its fiscal fourth-quarter results early Tuesday. Analysts expect the contract electronics manufacturer to earn $2.15 a share, up 49% year over year, on sales of $8.39 billion, up 13%.
Cal-Maine Foods (CALM) reports first-quarter results Tuesday after the stock market closes. Wall Street forecasts earnings increasing from a loss of 37 cents per share last year to $2.55 per share in Q1 2023. Sales are expected to grow 86% to $617 million for the national egg distributor.
Thor Industries (THO) announces fourth-quarter earnings Wednesday morning. Analysts predict EPS will drop 7% to $3.82 per share while revenue is expected to grow 3% to $3.7 billion. Wall Street forecasts the RV camper and emergency vehicle manufacturer will earn $19.35 per share on sales of $16.2 billion for the full year.
Cintas (CTAS) reports first-quarter 2023 financials Wednesday before stock market action. Earnings are predicted to edge up 0.6% to $3.13 per share for the provider of corporate uniforms and business services. Revenue is projected to grow 9% to $2.1 billion. Cintas is coming off record full year revenue in 2022.
Early Wednesday, Paychex (PAYX) should see a 9% EPS gain to 97 cents on 9% revenue growth to $1.182 billion.
Jefferies Financial (JEF) is basing ahead of its Thursday afternoon earnings report. Wall Street predicts adjusted earnings will plummet 38% to 93 cents per share. And revenue is expected to drop nearly 30% to $1.36 billion.
Micron Technology (MU) will post its fiscal fourth-quarter results late Thursday. Wall Street is forecasting the memory-chip maker to earn $1.41 a share, down 42% year over year, on sales of $6.82 billion, down 18%.
Early Thursday, recent meme stock Bed Bath & Beyond (BBBY) is likely to lose $1.80 a share vs. EPS of four cents a year ago. Revenue is seen plunging 27% to $1.447 billion.
Also early Thursday, used-car retailer CarMax (KMX) is expected to reveal a 17% EPS decline to $1.43 despite an 8% sales gain to $8.614 billion.
Worthington Industries (WOR) reports first-quarter 2023 earnings before the stock market opens Thursday. Analysts expect the industrial manufacturing company to earn $1.63 per share, a 34% decrease year over year. Wall Street forecasts revenue growing 11% to $1.3 billion.
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NEW YORK — It’s a brutal moment for ed tech companies.
The stock market has been battered over the past few months, and the technology sector has been particularly hard hit. Meanwhile, colleges are experiencing enrollment declines at the same time their coronavirus relief funds are drying up, potentially constraining how much they can spend with vendors.
Still, ed tech CEOs and investors remained bullish about their own sector’s future during a conference in New York on Thursday held by HolonIQ, a market analysis firm. Here are three trends they say are coming down the pike.
Stocks have been trending downward for most of the year, reaching a new low Friday after the Federal Reserve raised interest rates again in a bid to fight soaring inflation.
Ed tech stocks have been feeling the squeeze. Shares for 2U, which owns MOOC platform edX, closed at $5.78 on Friday, down from about $35 a year ago. Shares of Coursera, a prominent MOOC platform, were also trading around $35 in September of last year. On Friday, they closed at $10.25.
These market trends have important implications for ed tech companies, especially those that had been weighing an initial public offering, according to investors who spoke on a HolonIQ panel Thursday.
“We see an IPO window that’s closed for quite a bit,” said Shoshana Vernick, managing director at Avathon Capital. “If you’re a company that is needing cash and has to go raise money right now, it’s very difficult.”
Still, speakers listed reasons to expect positive long-term trends. A little over 10 years ago, only about $500 million of venture and growth capital was flowing into the ed tech market, said Michael Cohn, partner at GSV Ventures.
That’s compared to more than $20 billion in 2021. Despite uncertainty about the future, Cohn predicts an “upward trajectory.”
Chip Paucek, CEO and co-founder of 2U, acknowledged the tough market conditions.
“I show up at cocktail parties right now, and people go, ‘How are you?’” he said. “Because, obviously, it’s not been pleasant lately. And we take that very seriously. Our shareholders are a critical community for the company.”
However, Paucek said 2U’s recent moves — which included acquiring edX last year to transform into a company with a consumer-facing platform — are setting it up for the long haul.
“This company is much, much stronger than it was when we were at our peak price,” Paucek said.
Chief executives at two large ed tech companies touted new microcredentials available on their platforms, stressing that these smaller offerings will be a key part of higher education’s future.
In May, Coursera launched Career Academy, a skills training academy where users can earn entry-level certificates from companies like IBM and Meta, Facebook’s parent. Coursera is selling the platform to colleges, which can make it available to their students.
Jeff Maggioncalda, Coursera’s CEO, likened Career Academy to Shopify, an e-commerce platform that enables merchants to quickly set up online stores. Colleges can use Career Academy to launch a skills academy with their own branding.
“When they graduate they have a college degree, and they have a professional certificate from Google,” Maggioncalda said. “That graduate is going to do better than one who just has a college degree, or someone who never went to college and just got a professional certificate.”
2U is also doubling down on microcredentials. The company announced Thursday two new credentials it calls Microbachelors, which are programs composed of a few classes that can lead to college credit from edX’s partner institutions.
The two new Microbachelors, which are both centered on statistics, will be offered through the London School of Economics and Political Science, part of the University of London. The school also launched a introductory math course on the platform that is free to audit.
Students who complete one of the Microbachelors and are accepted into certain programs at the University of London will be eligible to receive credit for two half courses. The programs are pending recognition for credit by New Jersey’s Thomas Edison State University, according to edX’s website.
“That is a perfect stacked pathway,” said Paucek, 2U’s CEO. “That is much harder to pull off than most people outside of higher ed would realize.”
Paucek described the offerings as “brilliant for business,” saying it will improve the marketing funnel for University of London’s online bachelor’s degrees offered on edX’s platform.
Ed tech companies and investors expect learning and working to become more intertwined in the future.
Coursera, for instance, sells access to its content libraries to companies, governments and other organizations that are interested in training their employees. In 2022’s second quarter, this segment of Coursera’s business brought in $43.7 million, up 55% from a year ago.
These efforts could help the company reach learners it might not otherwise attract, Maggioncalda said.
“There’s a lot of individuals who don’t know about Coursera. They’re not going to come to Coursera,” he said. “But they might be in a government workforce development program, where an institution can guide them to where the opportunities for jobs are and can guide them to use Coursera in a certain way.”
Cohn, of GSV Ventures, echoed those comments, saying he expects companies will continue to offer certain educational benefits. GSV Ventures has invested in Guild Education, a tuition benefits platform that connects employers to its platform for online colleges.
“If it is, ‘Oh, here’s $100 for MasterClass,’ that’s probably going away — you know, superficial, fluffy learning as a benefit.” Cohn said. “But if it’s learning that drives the future-proofing of an organization — the upleveling, the upskilling of the people in a way that is measurable, demonstrable against business objectives — we think that that’s going to be a long-term trend.”
Dingdong (Cayman) Ltd (DDL) stock is down 5.10% over the past week and gets a Bearish rating from InvestorsObserver Sentiment Indicator.
The U.S. Federal Reserve’s members’ projections for aggressive hikes and persistently high rates over the next year or so has unleashed another round of dollar buying that put other assets on the run.
The Nifty bank index was down 0.8%, while the finance index dropped 0.9%.
Shares of Mahindra and Mahindra Financial Services fell more than 8% after the Reserve Bank of India directed the company to stop using third-party services for loan recovery until further orders.
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India’s palm oil imports in 2022/23 could jump 23% from a year earlier to 9.5 million tonnes, the highest in eight years, as a rebound in consumption and competitive prices prompts refiners to increase purchases, the country’s top palm oil buyer said. “Palm is very attractive as prices are under pressure because of stocks,” Sanjeev Asthana, chief executive officer at Patanjali Foods Ltd said on the sidelines of Globoil conference.
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Asian stocks limped toward a fourth straight weekly decline on Friday and bonds nursed big losses as investors scrambled to catch up with the U.S. Federal Reserve’s interest rate outlook, while currency markets were on edge at the end of a wild week.
In an attempt to consolidate its metal business, the Tata Group on Friday announced the merger of seven of its metal companies into Tata Steel. The decision was taken at a board meeting of the company held yesterday, an exchange filing said.
Nifty futures on the Singapore Exchange traded 74 points, or 0.42 per cent, lower at 17,566, signaling that Dalal Street was headed for a negative start on Friday.
The Nifty50 recouped some losses as it staged a smart bounce back from its crucial support placed near 17,500-17,550 levels. It formed a small-bodied candle on the daily charts.
Australian shares hit a more than two-month low on Friday, as investors returning to trading after a one-day holiday exited riskier assets, following the U.S. Federal Reserve reiterating its hawkish monetary policy outlook to fight searing inflation.
Major Wall Street indexes ended lower on Thursday, falling for a third straight session as investors reacted to the Federal Reserve’s latest aggressive move to rein in inflation by selling growth stocks, including technology companies.
Oil prices rose in early Asian trade on Friday on the prospect that a stalled Iran nuclear agreement and Moscow’s new mobilization campaign in its invasion of Ukraine would further restrict global supplies.
The rupee plunged by 83 paise — its biggest single-day loss in nearly seven months — to close at an all-time low of 80.79 against the US dollar on Thursday after the US Federal Reserve’s interest rate hike and its hawkish stance weighed on investor sentiments.
Led by losses in banks and financials, and after the US Fed projections turned out to be harsher than expected, domestic indices ended in the red for the second day in a row on Thursday. While the Sensex ended 337 points lower, Nifty declined 0.5% to end the weekly expiry day above 17,600.
Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures. The stock market closed lower Thursday, with resilient growth leaders selling off as Treasury yields skyrocketed.
These stocks haven’t broken down, yet. It’s possible that the recent action will end up being bullish shakeouts and tests of key support. But anyone who bought these names in the prior couple of sessions is sitting on decent losses, with the risk that these holdouts will break down in the coming days.
FedEx (FDX) released official first-quarter results during Thursday’s session after last week announcing disastrous preliminary figures and pulling guidance amid global economic weakness. On Thursday, FedEx announced higher package rates and announced cost-cutting measures to save $2.2 billion to $2.27 billion in fiscal 2023. The shipping giant stuck with fiscal 2025 EPS and sales targets.
FDX stock rebounded to edge up 0.8% to 154.41, after hitting a fresh two-year low intraday.
Costco Wholesale (COST) reported earnings late Thursday.
Costco earnings and sales narrowly topped fiscal fourth-quarter views. The warehouse giant said there are no plans to hike membership fees right now, despite some speculation that an announcement could come Thursday. Most of Costco’s profit comes from membership fees.
COST stock fell modestly overnight. Shares dipped 1.2% to 487.17 in Thursday’s session, hitting a two-month low.
Dow Jones futures rose 0.2% vs. fair value. S&P 500 futures advanced 0.2% and Nasdaq 100 futures climbed 0.2%.
The stock market fell sharply intraday, led by techs and small caps, as Treasury yields spiked higher. The Dow Jones turned positive in the afternoon, but faded again into the close.
The Dow Jones Industrial Average slid 0.4% in Thursday’s stock market trading. The S&P 500 index lost 0.85%. The Nasdaq composite retreated 1.4%. The small-cap Russell 2000 skidded 2.3%.
U.S. crude oil prices edged up 0.7% to $83.49 a barrel, well off morning highs. U.S. natural gas prices tumbled 8.9% to a two-month low.
The 10-year Treasury yield spiked 20 basis points to 3.71%, the highest since February 2011.
Celsius stock tumbled 8.5% to 89.90, breaking below its 50-day line for the first time in three months and undercutting the low of its recent consolidation. That’s after CELH stock sank 3.9% on Wednesday. The energy drinks leader is entitled to take a breather after tripling from early May to late August. In another couple of weeks, CELH stock could have a new base, with a 118.29 buy point.
Its relative strength line is just below record highs. The risk is that this relative winner turns into an absolute loser.
SWAV stock plunged 9.1% to 258.84 on Thursday, sinking to its 50-day moving average. On Wednesday, shares of the medical products firm fell 1.85% after reversing lower from an intraday high 300.96. Perhaps this is where Shockwave stock can find support and rebound bullishly.
Enphase stock slumped 6.9% to 283.63, knifing below its 21-day line and testing its 10-week line for the first time since July. On Wednesday, shares dipped just 15 cents but after hitting 318.49 intraday. This could be a place for Enphase stock to find its footing. The RS line for Enphase stock has just dipped after hitting new highs for weeks.
On Semiconductor stock fell nearly 5% to 64.96, breaking below its 50-day line for the first time in two months and just undercutting recent lows. Intraday Wednesday, ON stock rose to 71.77, briefly flashing various buy signals before reversing lower for a 0.2% loss.
Tesla stock sank 4.1% to 288.59, below its 200-day line and finding support at its 50-day line. On Wednesday, shares sank 2.6%, reversing lower from 313.80 intraday. This could be a healthy shakeout, assuming TSLA stock can hold around current levels. At Friday’s close, its recent short consolidation will be a proper base within a much-larger pattern. The buy point would be 314.74, but on a weekly chart will have a handle with a slightly lower entry of 313.90.
Meanwhile, Tesla appears to be having demand issues in China, partly due to stepped-up Shanghai production. With the BYD Seal deliveries just a few weeks in and the Nio ET5 kicking off on Sept. 30, the China EV market bears close watching for TSLA stock investors.
The stock market correction continues to worsen, with the major indexes moving closer to their June lows, definitely losing sight of their 50-day moving averages.
Could the stock market get a bounce? Sure.
Treasury yields might need to cool off somewhat for equities to rebound. It wouldn’t be surprising for yields to pause or even pull back over a few days or even weeks. But the underlying forces pushing up Treasury yields remain.
The Fed is raising rates aggressively, and it’s going to keep raising rates and leave them high even as policymakers send stronger signals that the U.S. risks a clear-cut recession in 2023.
That’s just a difficult environment for stocks. Perhaps if inflation starts to rapidly cool, markets might start to back off rate hike forecasts. But that will be weeks away. And inflation might cool because the economy is weakening further.
The stock market correction is getting worse. There is a very real danger that the major indexes break to fresh lows. Holdout stocks such as Shockwave, Celsius, Tesla and Enphase are coming under growing pressure.
Investors should not get excited by a strong market open, an intraday rally, or even a day or two of solid gains. That can be hard, because some of the stocks mentioned in this article will likely make big moves when the market bounces.
Still, investors should wait for real signs of market strength via a follow-through day. Even then, there would be good reasons to be cautious.
Keep working on watchlists. Focus on relative strength, even if the charts look damaged.
Eli Lilly (LLY) and other drugmakers, along with some biotechs, are showing some strength.
Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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Stocks slipped on Thursday after the major averages came off a day of steep losses following another large rate hike from the Federal Reserve.
Stocks were mostly lower in early morning trading, with the Dow Jones Industrial Average last down 91 points, or 0.3%. The S&P 500 traded 0.74% lower and the Nasdaq Composite slid 1.4%.
Industrials and consumer discretionary were the worst-performing S&P 500 sectors, losing more than 1% each. Growth-oriented tech stocks and semiconductors also took a leg lower amid fears of a slowing economy.
“The markets feel they have to recalibrate valuations and when that happens, it happens in a linear fashion — shoot first ask questions later,” said Art Hogan, B. Riley Wealth’s chief market strategist.
Most analysts mispredicted where the fed funds rate finishes the year ahead of Wednesday’s central bank meeting — a misstep that’s likely weighing on stocks, he said.
Stocks dropped on Wednesday, continuing the recent sell-off trend as investors evaluated the Fed’s latest comments, with the Dow and S&P slumping to levels not seen since June 17 and June 30, respectively. The Nasdaq hits its lowest level since July 1.
The large drop in equities came during a volatile trading session following the Fed’s third consecutive 0.75 percentage point rate increase.
Policymakers on Wednesday pledged to continue raising rates as high as 4.6% in 2023 before pulling back in the fight against inflation, spurring fears on Wall Street that the economy could tip into a recession as the central bank aims to slow economic growth.
Some investors have grown increasingly concerned about the Fed’s aggressive hiking agenda and what it means for the economy going forward.
“The Fed’s paved the way for much of the world to continue with aggressive rate hikes, and that’s going to lead to a global recession, and how severe it is will be determined on how long it takes inflation to come down,” said Ed Moya, a senior market analyst at Oanda.
After several attempts to rein in the stock market, the Fed may have figured it out. The message was clear enough for a golden retriever (I have two) to understand. There was nothing cryptic or reading of the tea leaves to understand it.
Powell struck the point again, reiterating his stance at Jackson Hole about his commitment to reining in inflation, which would create below-trend growth rates and higher unemployment. What solidified this commentary was the FOMC summary of economic projections, which laid it all out very nicely.
There was nothing the equity market could cling to that it could twist and turn to make up some bullish narrative. It was what the Fed needed to deliver for financial conditions to tighten adequately and for the Fed to start to bring inflation down.
Of course, the equity market tried to play its implied volatility melt in the middle of the trading session game, with the S&P 500 managing to rally by more than 2% off its post-FOMC lows. But still, what became clear was that sellers were in the market, and they could offset that usually implied volatility melt and sink stocks.
The Fed’s plan to get rates to 4.4% this year was just too much for the stock market and not expected. Fed Fund Futures were only looking at 4% rates by December 2022. The Fed’s projections were 40 bps higher than the market and about 1.25% higher than the Fed Fund Rate following today’s 75 BPS rate hike. That means the market will need to price two additional rate hikes for the rest of 2022.
The Fed’s projections for 4.6% for 2023 have also shifted the Fed Funds Futures peak terminal rate to 4.62% from 4.48% yesterday. Additionally, that peak rate is expected to come in May 2023 instead of April. But more importantly, as time passes, we should see those Fed Funds Futures begin to take the shape of the Fed’s expected path.
The shift in the futures market should feed through to the Treasury curve. Treasuries are already beginning to rise further with the 2-Yr and 3-Yr gaining and now above 4%. Based on the Fed projections, they would suggest we’re likely to see the two and three-year Treasuries not only stay above 4% but well above 4%, potentially matching those peak terminal rates of 4.6% the Fed is forecasting.
The higher rates will help strengthen the dollar index, especially against Japan and China, which are clearly in much easier monetary policy positions. Additionally, with Europe’s energy crisis and on the brink of recession, the dollar is likely to strengthen further against the euro.
Rising rates and a stronger dollar also will help real yield rise, and together all of these things will work to tighten financial conditions even more in the coming weeks. While the Chicago Fed’s National Financial Conditions (NFCI) and Adjusted NFCI tightened some this week, they still need to see their index value get above zero. Tightening financial conditions will work to sink stocks as they usually do.
Additionally, corporate and high-yield credit spreads should widen further, which historically is directly tied to changes in the stock market volatility as measured by the VIX index. Plus, now that the VIX options expiration occurred on Sept. 21, the VIX will be able to move higher more freely and will not be tied to the lower levels due to option positioning.
All of this is bad for stocks because, on a relative basis, the S&P 500 already is expensive, with an equity risk premium over the 10-Yr of just 2.4%. That’s a historically low level since 2010 and 135 bps below the historical average of 3.76%. An increase of 135 bps in the S&P 500 earnings yield would send it to roughly 7.25% from around 5.9%. That would take the S&P 500 PE ratio of 16.9 to approximately 13.8, or an S&P 500 value of roughly 3,100. That would be an additional 18% lower than its closing price of about 3,790 on Sept. 21.
But that’s the thing – it all depends on where rates go because if rates do rise as the Fed suggests, and the 2-yr gets to around 4.5% and assuming the curve remains inverted by 50 bps, the 10-Yr would trade with a 4% yield, and then, of course, that would imply an even higher earnings yield for the S&P 500, and lower PE ratio.
The Fed is dead serious about raising rates. I have been warning about the end of QE and rate hikes and the consequence for about a year. As I also explained, the July and August 2022 rally was a giant head-fake, and it got many investors on the wrong side of things, believing the Fed would cave and pivot. This time is different; the Fed has a serious inflation problem for the first time in about 40 years. During the 2010s, the Fed only had to worry about the unemployment rate because inflation was nonexistent, so that it could pivot at the first signs of slowing growth.
But now inflation is job number one for the Fed, and everything else is a distant second.
By Adam Grossman, CFA Global Equity CIO, Co-Head of Investment Committee and Dan Zolet, CFA, Associate Portfolio Manager
In the book “Alexander and the Terrible, Horrible, No Good, Very Bad Day” by Judith Viorst, a favorite amongst RiverFront’s Investment Team (and some of our children), a central theme is that bad days (or weeks in this case) do occur and must be dealt with, but they do not define our long-term reality. Tuesday’s Consumer Price Index (CPI) print is a good opportunity to apply this wisdom to our investing methodology. The inflation data was a setback whose short-term impact was felt immediately; however, its longer effects are less obvious. When looking under the hood of the CPI report, there are some particularly concerning trends in the housing costs. We believe this number weighed heavily on markets because housing tends to be a stickier component of inflation, in our view. To make a bad week worse, logistics company  preannounced large earnings misses and withdrew its fiscal year outlook, citing high costs and a slowing global economy. While some of FedEx’s issues may be company-specific, we believe the miss could also be seen as a harbinger of global recession given FedEx’s status as one of the world’s largest shipping and logistics companies. The S&P 500 posted its worst week since June with a fourth decline in the past five , including weakness Friday that took the index slightly below the 3900 level of technical support we laid out in the Weekly View: The Fed, The Fears, and The Facts two weeks ago.
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Given that Jerome Powell and the Federal Reserve (Fed) have been perfectly clear that the inflation side of the Federal Reserve’s dual mandate is more important to them right now than full employment, last week’s CPI number meaningfully adjusted the market’s expectations for the Fed’s policy decision. Using Federal Fund Rate futures, we believe it is possible to calculate the market’s imbedded expectations for future Fed actions. Prior to last Tuesday’s August 2022 data release, the market’s prediction for the September 21st Federal Open Market Committee (FOMC) meeting was a hike of 75 with a probability of %. After last week, the market is now still expecting a 75-bps hike, but with only a 69% . The major difference between these two predictions is that prior to the data release, the market was expecting virtually no chance of a 100-basis-point hike, while now that number has climbed to 31%.
From the fixed income futures market reaction, we can begin to see the concerns behind the equity market’s drawdown. If the Fed follows a path which involves more hiking of their policy rate, growth-oriented securities such as equities tend to lose intrinsic value using the discount rate. Put simply, the discount rate is a measure of the opportunity cost of investing in a stock and is used when valuing equities to put future earnings power into current terms. Since this discount rate is highly correlated with interest rates, when the Fed increases the rate, they also put downward pressure on the equity market. The more that the intrinsic value of a particular stock is tied to long-term expectations of above-average growth, the more forceful the downward pressure is on valuation. Hence, speculative growth stocks have seen the strongest downside price momentum this year.
While the concerns stated above are very real and we believe will likely lead to volatility in both the fixed income and equity markets in the short term, it is important to not lose sight of long-term investment prospects. One way to monitor the fixed income market’s longer term inflation expectations is through something called US Treasury Inflation-Protected Securities (TIPS) breakeven rate. The TIPS breakeven rate is the difference in yield between the inflation protected security (the TIP) and the regular Treasury bond. This difference can be thought of as the bond market’s collective future expectation of inflation. Figure 1 is a 1- and 10-year view of inflation based on this metric. While the 1-year expectation for inflation (the blue line) ticked up on the August inflation print, its level is muted compared to earlier this year. Additionally, while long-term inflation expectations (the orange line) are above Chairman Powell’s stated goal of %, one can see that they remain relatively tame. We believe this signals that the bond market is expecting long term inflation to be brought under control through a combination of Fed actions already taken, as well as those that are already factored into Wall Street’s expectations. Additionally, we believe supply chain improvements will help ease inflationary pressures.
The bar chart (left) illustrates realized annual growth of sales and revenue by quarter through present time, as well as analyst expectations of future growth. While growth is expected to slow in the coming quarters vs 2021 (something we anticipate as well), its forcast remains positive for three out of the next four quarters. This comes despite significant revisions downward in recent months. In our 2022 Outlook we pointed to some analysis that suggests higher-than-average inflation historically has been correlated with higher-than-average corporate earnings, particularly for companies who can successfully pass higher costs onto their end markets. Thus, we believe that earnings in nominal terms will remain resilient in the back half of 2022. We would also point out that the current pessimism in the markets identified in last week’s Weekly View: Tactical Rules Are Mixed But Waving The Caution Flag means it is likely that extremely pessimistic sentiment is weighing on these estimates.
In conclusion, we believe that the negative sentiment caused by the Fed’s pivot earlier this year, COVID-19’s lingering effect on supply chains and the war in Ukraine has caused an environment where each bit of bad news can make it feel like the sky is falling. While the short-term inflation and growth data have been challenging, it is important to remember that a single data point is not necessarily predictive of future conditions. While we see some reasons for the market to remain bearish short-term, we think earnings are strong enough at present to make a further market pullback difficult to trade successfully.
For investors with a shorter time horizon, short-term volatility is a bigger concern. Therefore, our shorter horizon portfolios, which tend to be more risk-adverse, maintain a slight underweight positioning to both equities and interest rate sensitivity. The shorter-horizon portfolios also maintain a slight overweight to cash for tactical flexibility and as a risk ‘shock absorber’. We may look to reinvest cash opportunistically by extending maturities on the fixed income side.
For investors with a longer time horizon, short-term volatility cannot be ignored but should not trump long-term opportunities and themes. To this end, our longer horizon, more risk-tolerant portfolios are roughly neutral to equities with a higher portfolio yield than benchmarks. In these portfolios, we maintain a focus on security selection as well as risk mitigation through alternative yield strategies and foreign currency hedging. While currently a volatile asset class, we believe the yield advantages will outweigh this volatility over time. On the equity side, we maintain an underweight to consumer themes and an overweight to sectors such as energy and high-quality technology, very different business models whose earnings nonetheless we believe can continue to grow against an inflationary backdrop.
RiverFront does not have any exposure to FedEx (FDX) in any of its portfolios or sub-advised ETFs or mutual funds.
Important Disclosure Information:
The comments above refer generally to financial markets and not RiverFront portfolios or any related performance. Opinions expressed are current as of the date shown and are subject to change. Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.
Information or data shown or used in this material was received from sources believed to be reliable, but accuracy is not guaranteed.
This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.
Chartered Financial Analyst is a professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas such as accounting, economics, ethics, money management and security analysis. Four years of investment/financial career experience are required before one can become a CFA charterholder. Enrollees in the program must hold a bachelor’s degree.
All charts shown for illustrative purposes only. Technical analysis is based on the study of historical price movements and past trend patterns. There are no assurances that movements or trends can or will be duplicated in the future.
Standard & Poor’s (S&P) 500 Index measures the performance of 500 large cap stocks, which together represent about 80% of the total US equities market.
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. (bps = 1/100th of 1%)
Stocks represent partial ownership of a corporation. If the corporation does well, its value increases, and investors share in the appreciation. However, if it goes bankrupt, or performs poorly, investors can lose their entire initial investment (i.e., the stock price can go to zero). Bonds represent a loan made by an investor to a corporation or government. As such, the investor gets a guaranteed interest rate for a specific period of time and expects to get their original investment back at the end of that time period, along with the interest earned. Investment risk is repayment of the principal (amount invested). In the event of a bankruptcy or other corporate disruption, bonds are senior to stocks. Investors should be aware of these differences prior to investing.
Treasury Inflation Protected Securities (TIPS) are Treasury securities that are indexed to inflation in an effort to protect investors from the negative effects of inflation. The principal value of TIPS is periodically adjusted according to the rate of inflation as measured by the Consumer Price Index (CPI), while the interest rate remains fixed. TIPS will decline in value when real interest rates rise. Portfolios that invest in TIPS are not guaranteed and will fluctuate in value.
The federal funds rate is the target interest rate set by the Federal Open Market Committee (FOMC). This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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