Have a Minute? Investors Await Meeting Notes from Last FOMC Meeting for Clues on Fed's Thinking

(Wednesday market open) Following Wall Street’s worst day of 2023 to date, stock index futures ticked slightly higher ahead of this afternoon’s release of Federal Open Market Committee (FOMC) meeting minutes. A slight easing in Treasury yields appeared supportive, but the 10-year Treasury yield remains above 3.9%, near Tuesday’s three-month high.

Even with the overnight gains, keep in mind that major indexes closed yesterday near session lows. That could mean pressure early Wednesday from spillover selling. The Cboe Volatility Index® (VIX) remains elevated, which suggests there could still be some sizeable moves left in this market. Having the Fed minutes ahead could drive volatility. More on what to expect from the minutes below.

Morning rush

• The 10-year Treasury note yield (TNX) fell 2 basis points to 3.93%.
• The U.S. Dollar Index ($DXY) steadied at 104.12.
• Cboe Volatility Index® (VIX) futures continued to climb, reaching 23.12.
• WTI Crude Oil (/CL) slipped to $75.78 per barrel.

We’re more than 80% of the way through earnings season, and it’s been an “underwhelming” reporting period, said Charles Schwab Senior Investment Strategist Kevin Gordon, speaking on the TD Ameritrade Network yesterday. Gordon noted that companies beating on the top- and bottom-lines still had their shares punished if guidance was negative, something key to watch for with companies yet to report. He also noted negative overall earnings growth, saying, “We’ve entered the earnings recession.”

Eye on the Fed

Here are some key topics investors might want to look for this afternoon at 2 p.m. ET when the Fed releases minutes from its January 31 to February 1 meeting.

50 or 25? When the Fed last met, there were signs of inflation getting back under control, though the labor market and services price growth remained hot. The Fed decided to raise rates 25 basis points, the lightest hike since last March. Was there any talk at the meeting about potentially reverting back to half-point hikes down the road? Never say never, but it seems doubtful based on circumstances then. Things have changed dramatically in the last three weeks, with the CME FedWatch Tool now showing a 21% chance of a half-point hike next month.

Hawks and doves: Many investors read the statement from the Fed’s last meeting as dovish. Behind the scenes, were hawks making themselves heard? The minutes could show “if a few people are pushing for an aggressive pace going forward,” said Charles Schwab Fixed Income Strategist Collin Martin, speaking on the TD Ameritrade Network yesterday.

Credit check: In the December minutes (the last set we have), Fed officials seemed comfortable with the credit situation, saying credit quality for businesses and households appeared “healthy” at the time. Did anything change in the FOMC assessment six weeks later? If higher rates were beginning to bite in January, this is where it might show up.

Econ 101: Participants at the Fed’s December meeting observed “modest growth of spending and production” across the economy, accompanied by “robust” job growth. As we’ve seen in February, the data from January reflected what might’ve been a pickup in U.S. economic activity. Will the Fed minutes reflect that, and if so, did the participants have any worries about the economy not responding as much to tighter borrowing conditions? What did they suggest doing if that was the case?

Rate outlook for 2024: We already know that back in December, Fed officials for the most part expected rates to decline next year. That’s evident in the dot-plot of Fed projections released at that meeting. Did expectations move at all on this front at the last meeting that concluded February 1? We’ll see a revised dot-plot at the conclusion of the March 21-22 meeting.

Stocks in spotlight

Nvidia (NVDA), the semiconductor giant, reports after the close. Recent worries about higher rates slowing the global economy raise concerns for NVDA and the sector as a whole. The industry has already been struggling with slower demand, but NVDA’s exposure to the growing artificial intelligence (AI) market could be an advantage over some competitors, according to analysts. However, NVDA also has heavy exposure to the gaming industry, which has been weak, and to the slowing post-pandemic market for desktop and laptop computers.

Newmont (NEM), the gold mining leader, is expected to report tomorrow morning after shares dug a bit of a hole for themselves over the last month. The company is back near last fall’s levels before a short-lived December and January rally. NEM’s struggles reflect the recent gold market as the dollar and U.S. Treasury yields climbed with tighter Fed policy. Because gold is often seen as an inflation hedge, tighter U.S. monetary policy tends to hurt the shiny metal’s values. The challenging environment for mining companies could be one factor driving possible consolidation in the industry, highlighted by NEM’s recent $17 billion bid for Australia-based Newcrest Mining. That bid was rejected. Will it be the last we hear on this specific merger? Stay tuned.

Toll Brothers (TOL): Shares of the homebuilding company climbed 2% in premarket trading after it posted an earnings beat and said buyer confidence is improving.

Walmart (WMT) and Home Depot (HD) Redux: Soft outlooks from these mega-retailers yesterday set the market’s negative tone and reinforced worries about consumers. One advantage WMT may have if recession hits, however, is the grocery business. Food price inflation generally drives people away from restaurants and toward discount retailers. HD may benefit if, in fact, the bottom of the market is near for existing home sales (see below). One other thing to worry about: WMT has a price-earnings (P/E) ratio of 44, which might hurt the thesis about staples companies being “defensive” plays.

What to watch

Data docket: Thursday morning brings the government’s second estimate of Q4 Gross Domestic Product (GDP), followed Friday by January Personal Consumption Expenditures (PCE) price index, Personal Income, and Personal Spending. The PCE prices data puts inflation “front and center,” Gordon said.

GDP ahead: The government’s second estimate for Q4 GDP is expected to be unchanged at 2.9%, according to analyst consensus collected by Briefing.com. A 2.9% gain, if that’s what we get, might come as a relief amid worries that the economy got too hot recently. However, it’s not Q4 that investors really have their eyes on now. Instead, their focus is on recent economic data that implies Q1 growth continues to pop, putting more pressure on the Fed. The latest Atlanta Fed GDP Now estimate, released last week, is for 2.5% GDP growth in Q1, up slightly from its previous projection. The next update on that metric is due Friday.

Market minutes

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI) dropped nearly 700 points, or 2.06%, to 33,129.
• The Nasdaq Composite® ($COMP) fell 2.5% to 11,492.
• The Russell 2000® (RUT) declined nearly 3% to 1,889.
• The S&P 500 index (SPX) dipped 81 points, or 2%, to 3,997, the first close below 4,000 since January 20.

The market was already skittish entering the week thanks to rising rates and growing concerns about inflation. Poor outlooks Tuesday morning from retail giants Home Depot (HD) and Walmart (WMT) appeared to seal the deal. The SPX closed below 4,000 for the first time since January 20, and volatility skyrocketed.

The sell-off was broad, encompassing most sectors. Losing stocks far outnumbered winning ones. While it wasn’t a rush out the door, selling appeared steady most of the day, and there was little evidence of people stepping in to buy. Volatility reached the highest point in more than a month, and Treasury yields rallied to their highest levels since early November.

It appears the market is doing a bit of repricing—building in expectations that rates could be higher for longer. Yesterday’s rally in both 2-year and 10-year Treasury yields might’ve been a major factor keeping buyers away.

Talking technicals: The SPX dropped below the key psychological 4,000 level and now could face a test of the 50-day moving average near 3,978. Below that is the 200-day moving average around 3,940. The SPX has been trading above the 200-day moving average—usually a sign of positive technical conditions—since mid-January.

CHART OF THE DAY: LESS SHINE. The Fed might not have been able to tame inflation, but its latest jawboning about potential “higher and longer” rate hikes seems to be having an impact on gold (/GC—candlesticks). Typically, the gold market gains ground when investors worry about inflation, but the Fed’s aggressive stance and accompanying higher Treasury yields, along with a dollar ($DXY—purple line) that’s arrested its slide, appear to be keeping the wrapper on gold. Data sources: CME Group, ICE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Finding value: Though the average analyst estimate is for S&P 500 earnings per share (EPS) growth of just more than 4% in 2023, according to research firm FactSet, it’s a bit unsettling that some analysts now expect little to no EPS gain. If they’re correct, it’d put 2023 earnings at just more than $219, which would put the SPX price-earnings (P/E) above 18 even with Tuesday’s losses factored in. That may be down from peaks above 22 back when rates were zero, but it’s still well above the historic P/E level of around 16. Assuming a 16 P/E ratio, you get an SPX of 3,504 (16 times 219), which coincidentally corresponds roughly with the October 2022 low for the SPX.

Inflation’s bite: The current P/E for the SPX also seems high if you check its historic levels during inflation eras similar to now. Higher inflation appears to weigh on P/E, perhaps in part because when inflation swells, rates most often rise correspondingly. Higher borrowing costs suggest less growth potential for companies, meaning the market tends to downwardly adjust a company’s future value. Between 1958 and 2022, annual CPI of between 4% and 6% was the case 16% of the time, according to Charles Schwab data. During those times, the average SPX forward P/E was 15.1. Inflation of 6% to 8% coincided with an average P/E of 11.8. As of January, year-over-year consumer prices were up 6.4%, according to the latest Consumer Price Index (CPI) report. Stocks rallied in January in part based on ideas that inflation was coming down. Recent data shows signs of progress flagging, and that may make it hard to maintain elevated P/E levels if historic data have any credence.

Old home weak: January saw Existing Home Sales fall for the 12th month in a row, declining 0.7% to the lowest seasonally adjusted level since 2010. But there were some green shoots in the report from the National Association of Realtors (NAR). The association’s Chief Economist Lawrence Yun said inventory remains light, but buyers are beginning to have better negotiating power. Properties are staying on the market a bit longer, and first-time buyers accounted for 31% of all sales. That’s still historically low but up from a year ago. These buyers tend to be ones moving into cheaper homes. If Yun is right that “home sales are bottoming out,” that suggests yesterday’s soft guidance from Home Depot (HD) might be too pessimistic. Any uptick in existing home sales would likely raise demand for the types of products HD and competitor Lowe’s (LOW) have in stock on those towering shelves. LOW is expected to report March 1.

Calendar

Feb. 23: Q4 GDP second estimate and expected earnings from Alibaba (BABA) and PG&E (PCG)

Feb. 24: January PCE Prices, January Personal Income and Personal Spending, January New Home Sales, and final February University of Michigan Consumer Sentiment Index

Feb. 27: January Durable Goods Orders and Pending Home Sales

Feb. 28: February Chicago PMI, February Consumer Confidence, and expected earnings from Target (TGT), Ross Stores (ROST), and HP (HPQ)

March 1: February ISM Manufacturing Index, January Construction Spending, and expected earnings from Kohl’s (KSS) and Lowe’s (LOW)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

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