Monetary policy – Page 3

This week's Fed meeting could slam brakes on year-end stock rally

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The rally lifting U.S. stocks to fresh 2023 highs in the year’s home stretch could be at risk if the Federal Reserve on Wednesday crushes expectations for interest-rate cuts in 2024.

U.S. central bankers and investors haven’t exactly been seeing eye-to-eye about when the Fed will start easing its monetary policy, according to Melissa Brown, senior principal of applied research at Axioma.

Traders also have been flip-flopping on their forecasts for rate cuts over the past few months, based on fed-funds futures data.

Oxford Economics/Bloomberg

Given the whipsaw of recent volatility, it isn’t hard to imagine a jittery market backdrop as investors wait to hear from Fed Chairman Jerome Powell on Wednesday, even though the central bank isn’t expected to change its range for short-term interest rates. Since July, the Fed funds rate rate has been at a 22-year high in a 5.25% to 5.5% range.

U.S. stocks advanced this year after a bruising 2022, adding big gains in November, as benchmark 10-year Treasury yields
BX:TMUBMUSD10Y
tumbled from a 16-year high of 5%. The Dow Jones Industrial Average
DJIA
closed on Friday only 1.5% away from its record close nearly two years ago. The S&P 500 index
SPX
booked its highest finish since March 2022, according to Dow Jones Market Data.

Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

“I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. It is mostly the expectation of Fed rate cuts next year that have supported stock and bond markets rallies recently, he said.

The Dow Jones closed 9.4% higher on the year through Friday, the S&P 500 was up 19.9% and the Nasdaq Composite advanced 37.6% for the same period, according to FactSet data.

“We have been a little skeptical of the market’s excitement over rate cuts early next year,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.

It takes a gradual process for the Fed to move away from its monetary policy tightening, Clissold told MarketWatch. The Fed is likely to pivot its tone from being very hawkish to neutral, remove the tightening bias, and then talk about rate cuts, noted Clissold.

The bond market on Friday already was again flashing signs of a potential rethink by investors about the path of interest rates in 2024.

Junk bonds
JNK

HYG,
often a canary in the coal mine for markets, hit pause on a rally that started in late October as benchmark borrowing costs fell, even though the sector has benefited from big inflows of funds in recent weeks.

Treasury yields for 10-year and 30-year
BX:TMUBMUSD30Y
bonds also shot higher Friday, echoing volatility that took hold in mid-October.

Read: Investors have fought a 2-year battle with the bond market. Here’s what’s next.

Mike Sanders, head of fixed income at Madison Investments, has been similarly cautious. “I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said. It is more likely that the Fed will start cutting rates in the second half of next year, he said.

“I think the biggest thing is that the continued strength in the labor market continues to make the services inflation stickier,” Sanders said. “Right now we just don’t see the weakness that we need to get that down.”

Friday’s U.S. employment report adds to his concerns. About 199,000 new jobs were created in November, the government said Friday. Economists polled by the Wall Street Journal had forecast 190,000 jobs. The report also showed rising wages and a retreating unemployment rate to a four-month low of 3.7% from 3.9%.

The U.S. central bank will likely “try their best to push back on the narrative of cuts coming very soon,” Sanders said. That could be accomplished in its updated “dot plot” interest rate forecast, also due Wednesday, which will provide the Fed’s latest thinking on the likely path of monetary policy. The Fed’s update in September surprised some in the market as it bolstered the central bank’s stance of higher rates for longer.

There’s still a chance that inflation will reaccelerate, Sanders said. “The Fed is worried about the inflation side more than anything else. For them to take the foot off the brake sooner, it just doesn’t do them any good.”

Ahead of the Fed decision, an inflation update is due Tuesday in the November consumer-price index, while the producer-price index is due Wednesday.

Still, seasonality factors could aid the stock market in December. The Dow Jones Industrial Average in December rises about 70% of the time, regardless of whether it is in a bull or bear market, according to historical data.

See: Stock market barrels into year-end with momentum. What that means for December and beyond.

“The overall market outlook remains constructive,” said Ned Davis’s Clissold. “A soft landing scenario could support the bull market continuing.”

Last week the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq rose 0.7%. All three major indexes went up for a sixth straight week, with the Dow logging its longest weekly winning streak since February 2019, according to Dow Jones Market Data.

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December 10, 2023

A Strong Jobs Report Makes Big Rate Cuts Unlikely in 2024

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By Randall W. Forsyth

Updated Dec 09, 2023, 12:13 pm EST / Original Dec 08, 2023, 6:30 pm EST

There’s good news and bad news on the U.S. economy.

Continue reading this article with a Barron’s subscription.

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December 9, 2023

The Sahm rule: What to know about the recession indicator that has Wall Street talking

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That was close.

After the U.S. unemployment rate climbed to 3.9% in October, stoking fears that the labor market might finally be starting to crack under the weight of the Federal Reserve’s interest-rate hikes, economic data released Friday showed that unemployment retreated to 3.7% in November.

That means the Sahm rule, an indicator devised to sniff out a recession long before one is officially declared, is now even further from triggering, after nearly brushing up against the threshold last month.

And according to the rule’s creator, former Federal Reserve economist Claudia Sahm, perhaps it won’t trigger, at least not during this cycle.

“I am more optimistic today that it doesn’t trigger,” Sahm told MarketWatch during a phone interview Friday.

What’s the Sahm rule, and why should we care about it?

Wall Street and social media were abuzz with talk of the Sahm rule last month as the rising unemployment rate sparked a debate about whether a recession had begun.

The increase brought the Sahm rule indicator to 0.30, according to data available on a Federal Reserve branch website, bringing it closer to triggering than at any time during the past two years. It also sparked a brisk conversation among professional economists and amateur market watchers about what the Sahm rule is, how it works and why investors should care about it.

After Sahm declared that the rule hadn’t triggered, some on social media accused her of misrepresenting her own rule, said the economist, who now runs her own consulting business.

She was surprised by this, she told MarketWatch, since she thought the rule’s simplicity was one of its most important features.

It was initially devised with lawmakers in mind, intended to become an automatic mechanism to send out stimulus checks more quickly as a recession begins, thus helping to shield workers from some of the worst financial consequences.

But the debate has helped her realize that perhaps the rule’s dynamics aren’t clearly understood by all.

To try to remedy this, she published a step-by-step guide explaining how the Sahm rule is calculated, or at least how Sahm and the Fed calculate it. Economists are free to devise their own variations on the rule. Here are some key points:

The Sahm rule uses the three-month average of the monthly unemployment rate, instead of taking the latest rate in isolation.
The current average is then compared with the lowest three-month average from the past year. Right now, that stands at around 3.5, Sahm said.
The 12-month low is subtracted from the current three-month average, and if the difference is 0.5 percentage point or greater, it means the rule has triggered. The rule is based on history and it has a strong precedent, meaning that almost every time unemployment has risen past this threshold, a recession has ensued.

The snowball effect

The logic undergirding the rule is pretty straightforward, Sahm said: The rule is grounded in the notion, supported by historical data, that once employment starts to rise, it often snowballs.

Typically it increases by anywhere between 4 and 6 percentage points during a recession, Sahm said.

But just because the rule has held in the past doesn’t mean it always will. Sahm has previously said that she wouldn’t be surprised if the rule were to break because of pandemic-related distortions in the global economy.

She affirmed on Friday that she still believes this to be the case, although she doubts the rule will trigger this cycle.

That is largely because, as Sahm sees it, the rise in the unemployment rate has been driven not only by slowing job creation, but by workers returning to the workforce, a sign that supply-and-demand dynamics in the U.S. labor market are coming back into balance, and that maybe employers won’t need to be as precious about hiring in the future.

“If [the rebalancing] happens fast enough, then we won’t trigger. But if it slows down, then maybe we’ll trigger, but we’ll likely see unemployment move sideways before coming back down,” Sahm said.

Labor Department data showed the U.S. economy added 199,000 jobs in November, surpassing economists’ expectations for 190,000 new jobs. The number was also higher than the 150,000 created during the previous month.

See: Job report shows gain of 199,000 in November. Wages are still hot.

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December 8, 2023

November's rally just erased two months of Fed tightening, economist says

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Financial conditions are now looser than in September, says economist

Financial conditions in the U.S. are looser than in September, says economist.

Getty Images

The feel-good tone gripping markets in the home stretch of 2023 may not be what the Federal Reserve had penciled in for the holidays.

The stock market in December, once again, has been knocking on the door of record levels, driven by optimism about easing inflation and potential Fed rate cuts next year.

But while the prospect of double-digit equity gains this year would be a reprieve for investors after a brutal 2022, the latest rally also points to looser financial conditions.

Ultimately, the risk of looser financial conditions is that they could backfire, particularly if they rub against the Fed’s own goal of keeping credit restrictive until inflation has been decisively tamed.

Read: Inflation is falling but interest rates will be higher for longer. Way longer.

Specifically, the November rally for the S&P 500 index
SPX
can be traced to the 10-year Treasury yield
BX:TMUBMUSD10Y
dropping to 4.1% on Thursday from a 16-year peak of 5% in October.

Falling 10-year Treasury yields from a 5% peak in October coincides with a sharp rally in the S&P 500 at the tail end of 2023.

Oxford Economics

The Fed only exerts direct control over short-term rates, but 10-year and 30-year Treasury yields
BX:TMUBMUSD30Y
are important because they are a peg for pricing auto loans, corporate debt and mortgages.

That makes long-term rates matter a lot to investors in stocks, bonds and other assets, since higher rates can lead to rising defaults, but also can crimp corporate earnings, growth and the U.S. economy.

Michael Pearce, lead U.S. economist at Oxford Economics, thinks the November rally may put Fed officials in a difficult spot ahead of next week’s Dec. 12 to 13 Federal Open Market Committee meeting — the eighth and final policy gathering of 2023.

“The decline in yields and surge in equity prices more than fully unwinds the tightening in conditions seen since the September FOMC meeting,” Pearce said in a Thursday client note.

The Fed next week isn’t expected to raise rates, but instead opt to keep its benchmark rate steady at a 22-year high in a 5.25% to 5.5% range, which was set in July. The hope is that higher rates will keep bringing inflation down to the central bank’s 2% annual target.

Ahead of the Fed’s July meeting, stocks were extending a spring rally into summer, largely driven by shares of six meg-cap technology companies and AI optimism.

From June: Nvidia officially closes in $1 trillion territory, becoming seventh U.S. company to hit market-cap milestone

Rates in September were kept unchanged, but central bankers also drove home a “higher for longer” message at that meeting, by penciling in only two rate cuts in 2024, instead of four earlier. That spooked markets and triggered a string of monthly losses in stocks.

Pearce said he expects the Fed next week to “push back against the idea that rate cuts could come onto the agenda anytime soon,” but also to “err on the side of leaving rates high for too long.”

That might mean the first rate cut comes in September, he said, later than market odds of a 52.8% chance of the first cut in March, as reflected by Thursday by the CME FedWatch Tool.

Stocks were higher Thursday, poised to snap a three-session drop. A day earlier, the S&P 500 closed 5.2% off its record high set nearly two years ago, the Dow Jones Industrial Average
DJIA
was 2% away from its record close and the Nasdaq Composite Index
COMP
was almost 12% below its November 2021 record, according to Dow Jones Market Data.

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December 7, 2023

Big bank executives will assure lawmakers the industry's crisis is over, KBW CEO Thomas Michaud predicts

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December 5, 2023

Wells Fargo unveils 2024 target, warns of ‘really, really sloppy’ first half for stocks

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Wells Fargo Securities is officially out with its 2024 stock market forecast.

Chris Harvey, the firm’s head of equity strategy, sees a volatile path to his S&P 500 to 4,625 year-end target.

“It’s really hard to get excited. If we have better [economic] growth, then the Fed doesn’t do anything,” he told CNBC’s “Fast Money” on Monday. “If we have worse growth, then numbers are going to come down and then the Fed will eventually cut. The second half will be better, but the first half is going to be really, really sloppy.”

Harvey’s target is just 75 points above Monday’s S&P 500’s close.

“Can we go higher from here? Sure, we can go a little bit higher. But I just don’t think you can go a ton higher,” he said. “People have talked about 5,000. I don’t see how you get to that level.”

In his official 2024 outlook note, Harvey told clients to brace for a “trader’s market” instead of a “buy-and-hold situation.” His early year strategy: Start with a risk-averse stance.

“The VIX [CBOE Volatility Index] is up 13. Every time we’ve gone into a new year with the VIX at 13, we’ve seen spikes. We’ve seen the equity market pull back, and it’s just not a great setup into 2024,” Harvey added.

He warns the higher cost of capital is an additional market problem because it prevents multiples from going higher.

“As long as the cost of capital stays higher, it’s really hard for me to get to a much higher price target,” Harvey said.

Yet, he still sees opportunities for investors.

“What we want to do is we want to go to the places that are oversold. We just upgraded utilities today. We upgraded health care,” Harvey noted. “Those are areas that have good valuations, decent fundamentals and most people really aren’t there at this point.”

‘I hate to say that as being head of equity strategy’

Harvey also sees Treasurys as an option.

“If you look at the alternatives, there are things that are pretty attractive. And, I hate to say that as being head of equity strategy, but you can park money at the front of the curve and make a pretty good rate of return and not put on a whole lot of risk,” said Harvey.

His 2023 S&P target is 4,420 — which implies a three percent drop from Monday’s close.

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November 27, 2023

Turkish interest rates jump to 40% as central bank gets tough on inflation

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Turkey’s central bank raised interest rates to 40% on Thursday, delivering a bigger-than-expected hike that sparked a rally in the lira.

Battling inflation that it sees running at an annual pace of 65% by the end of the year and 36% by the end of 2024, the Monetary Policy Committee (MPC) increased its one-week repo rate by 500 basis points from 35%.

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November 23, 2023

How financial conditions might play into Fed’s thinking after October’s CPI

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Financial markets were jubilant over Tuesday’s data showing that U.S. consumer prices eased by more than expected in October, with Treasury yields plummeting on expectations the Federal Reserve will refrain from raising interest rates further and might even lower borrowing costs.

In a nutshell, financial conditions suddenly became looser, with the benchmark 10-year yield
BX:TMUBMUSD10Y
at 4.46% in New York afternoon trading or down by more than half a percentage point from its October peak. Right now, conditions are “much more accommodative” than when Fed officials first suggested higher long-term yields could do the work of tighter monetary policy and take the place of a rate hike, according to Will Compernolle, a macro strategist for FHN Financial in New York.

The jury is out on how much a continuation of looser financial conditions will matter to central bankers. At one point in Tuesday’s session, both the 10-year yield and the policy-sensitive 2-year yield
BX:TMUBMUSD02Y
were heading for their biggest one-day declines in more than six months as traders revved up expectations for at least four Fed rate cuts in 2024.

Tuesday’s October CPI inflation report “will be very welcome to the Fed, though it will inevitably make the Fed’s challenge of restraining market optimism and financial conditions more difficult too,” according to New York-based advisory firm Evercore ISI.

In a note, Evercore’s Vice Chairman Krishna Guha and others wrote that “the Fed’s challenge is that the market sees this and is trying to jump to the endgame, risking a larger/sooner easing in financial conditions than the Fed itself would like to see under prudent upside inflation risk management principles. So expect Fed officials to maintain a very cautious and relatively hawkish tone.”

Indeed, there’s plenty of reasons to remain careful about reading too much into one report.

After Tuesday’s data, Federal Reserve Bank of Richmond President Thomas Barkin said he’s not convinced inflation is on a clear path toward 2% despite recent progress in curbing price pressures.

Some economists also said October’s CPI report isn’t the game changer that markets think it is. And FHN’s Compernolle said that if the Fed’s favorite inflation gauge, the personal consumption expenditures index (PCE), shows “horizontal momentum” when the October data is released later this month, there could be some on the Federal Open Market Committee “who feel the lower bond yields necessitate a higher fed funds rate.”

Read: Economists in hawkish camp don’t surrender in wake of October consumer-inflation print

At Hirtle Callaghan & Co., a West Conshohocken, Pa.-based firm which manages $18.5 billion in assets, Brad Conger, deputy chief investment officer, said that October’s CPI readings validate the Fed’s “wait-and-see” approach and that “it will take a rather long series of this order of magnitude to give them confidence to ease policy.”

Meanwhile, “we worry that the recent easing of financial conditions and energy prices could easily start to counter the restraint,” Conger wrote in an email on Tuesday.

In addition to a broad-based decline in Treasury yields, all three major U.S. stock indexes
DJIA

SPX

COMP
were higher as of Tuesday afternoon. The Dow Jones Industrial Average surged almost 500 points on a buying frenzy as investors also cheered Tuesday’s low “supercore” inflation figure that acts as a proxy for labor costs.

Just last week, Fed Chairman Jerome Powell said that the Fed is wary of “head fakes” from inflation, or temporary improvements that only reverse over time.

If Tuesday’s CPI data for October isn’t a “head fake,” “the Fed may be able to accept a loosening of financial conditions in order to prevent a recession,” said Lawrence Gillum, a Charlotte, North Carolina-based fixed-income strategist for broker-dealer for LPL Financial. “If it is a head fake, then the Fed will talk up the need for higher long-end yields. It will probably take a couple more months of this type of report or better to see whether that plays out.”

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November 14, 2023

This week’s October inflation data looms large on Washington’s economic radar

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Inflation data, a Fed speech and a government-shutdown deadline are on the calendar this week.

MarketWatch photo illustration/iStock

U.S. inflation data for October is clearly the economic highlight for markets, economists and policymakers this coming week. That’s because if price pressures continue their cooling trend from the summer, the Fed might be able to refrain from any more interest-rate hikes.

Here’s a preview of the inflation report and other critical data and events that will have the markets’ attention this week.

See: MarketWatch’s comprehensive economic calendar

October consumer inflation

Tuesday, 8:30 a.m. Eastern

No economic reports matter more for the Federal Reserve’s interest-rate policy outlook than consumer inflation data. Inflation has been trending down since the summer, but many economists are wary that most of the progress was low-hanging fruit, and that it will take a lot to get back to the Fed’s 2% target. Fed Chairman Jerome Powell raised this concern in remarks on Thursday, saying the central bank was concerned about inflation “head fakes.”

Economists polled by the Wall Street Journal expect headline CPI to moderate to a 0.1% rise in October, down from a 0.4% gain in the prior month, and the smallest increase since May.

Over the past year, inflation is expected to rise at a 3.3% rate, down from 3.7% in the prior month.

The improvement is expected to come mainly from gasoline prices.

Core CPI, excluding volatile food and energy prices, is expected to rise 0.3%, matching a 0.3% gain in the prior month. The year-over-year rate is seen holding steady at a 4.1% annual rate.

October retail sales

Wednesday, 8:30 a.m. Eastern

Economists expect retail sales to be weak, falling 0.1% in October after a 0.7% jump in September and a 0.8% gain in August.

The outlook for consumer spending is one of the most intriguing questions about the outlook.

Will the strong spending seen in the late summer fade away? With above-trend job growth and incomes rising, there seems no reason for consumers to pull back sharply. But many economists think that consumers are running out of excess spending power built up during the pandemic.

Also see: Retail earnings begin this week. ‘It’s getting worse,’ an analyst says.

Chicago Fed President Austan Goolsbee’s speech to the Detroit Economic Club

Tuesday at 12:45 p.m. Eastern

There are just under 20 public remarks from Fed officials scheduled this week. One of the highlights will be Chicago Fed President Austan Goolsbee’s moderated question-and-answer session before the Detroit Economic Club.

Goolsbee, who joined the Fed at the beginning of the year, is comfortable speaking in public and on television from his days in the Obama administration, and afterwards as a pundit. His views also carry weight because he will be on any short list of potential replacements for Powell if President Joe Biden wins a second term.

Goolsbee has looked prescient so far. In his first public speeches this summer, he suggested that there could be an improvement in inflation without a big rise in unemployment.

Biden-Xi to meet at APEC summit

Wednesday

Biden and Xi will meet for the first time in a year at the Asia-Pacific Economic Cooperation summit in San Francisco, amid struggles in the Chinese economy and the recent strengthening of ties between XI and Russian Vladimir Putin.

Derek Scissors, a senior fellow at the American Enterprise Institute, said investors should not expect anything market-moving from the talks. The Biden administration simply wants to get face time with Xi, he said.

“The goal is to find out how to reach him, who are you supposed to talk to [to reach him in the future], and then have a good conversation with him where Biden can say a few things that we think he really needs to hear from us,” Scissors said.

Gone are the days when the U.S. and China cooperated on economic issues, he said.

Xi simply doesn’t care that much about the economy, Scissors said. He is more focused on “really strict party control of everything,” he added.

Threat of a government shutdown

Friday, midnight deadline

The federal government will run out of money late Friday unless Congress passes legislation to keep the lights on.

It is the first test for new House Speaker Mike Johnson. He has proposed a two-step government spending plan to keep the government open until early next year, but it remains uncertain whether this will break the logjam.

Late Friday, Moody’s Investors Service lowered its outlook on the U.S. credit rating to “negative” from “stable.”

This is actually positive for the prospects of a congressional deal, said Terry Haines, founder of Pangaea Policy, a political forecasting firm.

Haines said he has lowered the odds of a government shutdown to 30% from 40% before the Moody’s move.

“The last thing House Republicans should want to do…is show newly skeptical markets that they can’t even handle a continuation of government funding,” Haines said, in a note to clients.

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November 12, 2023

One paycheck not enough: Digital bank Current finds almost half its customers have multiple jobs

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The need for second — and often third — incomes is mounting, according to a top digital bank executive.

Current CEO Stuart Sopp finds almost half of the firm’s payment customers have more than one job.

“If you’re having a paycheck over the past year, 20, 25% of paycheck depositors have at least one extra job. A further 20% incremental from there have two jobs,” Sopp told CNBC’s “Fast Money” on Thursday. “They’re trying to make that money go further because of inflation.”

From DoorDash to Shopify to side businesses, Sopp finds the number is higher than prior years because money doesn’t go as far.

“Wage inflation is moderating quite substantially,” he said. “America has a sort of tail of two cities right now. Two groups: The wealthy and less affluent.”

Sopp launched Current, which provides mobile banking without monthly fees and offers secured credit cards, in 2015. It originally focused on helping medium to lower income customers. His company Current reports almost five million members.

He’s particularly concerned about less affluent consumers spiraling into debt to pay for basic necessities.

“They’re being forced into risks like risky credit cards,” noted Sopp, a former Morgan Stanley trader. “Unsecured credit cards… are not suitable for everyone.”

The Federal Reserve Bank of New York found credit card debt topped $1 trillion for the first time ever in the second quarter.

“It’s going to be way bigger this year,” Sopp said.

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November 2, 2023

Zombie firms are filing for bankruptcy as the Fed commits to higher rates

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In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales.

“The share of zombie firms has been increasing over time,” said Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental effects on healthy firms who compete in the same sector.”

Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they can turn their trend of sinking sales around.

“A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up,” said Kathryn Judge, a professor of law at Columbia University.

Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit.

The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.

“The biggest implication of the rapid rise in interest rates that we’ve seen the last five or six quarters, actually, is that it reestablished cash,” said Lotfi Karoui, chief credit strategist at Goldman Sachs. “That actually puts some constraints on risk assets.”

The Fed says it thinks interest rates will remain higher for longer. “Given the fast pace of tightening, there may still be meaningful tightening in the pipeline,” Fed Chair Jerome Powell said at an Economic Club of New York speech Oct. 19.

Watch the video above to learn more about the Fed’s battle with unviable zombie firms in the U.S.

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October 31, 2023

How the Fed fights zombie firms

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Share

Some firms sustain their businesses by taking on more debt that they can repay. Economists call them zombie companies. When compared to their peers, zombies are smaller in size and deliver lower returns to investors. These companies distort markets, keeping resources from their fundamentally sound competitors. Banks and governments keep zombie firms alive with bailout loans. As the Federal Reserve resets the economy with higher interest rates, many zombie firms are filing for bankruptcy.

10:01

Tue, Oct 31 20236:00 AM EDT

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October 31, 2023

HSBC Holdings 3Q Net $5.62B Vs. Net $2.00B >0005.HK

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By Sherry Qin

HSBC Holdings PLC’s third-quarter net profit more than doubled as the London-based banking giant continued to benefit from higher interest rates and sharply higher non-interest income.

The Asia-focused lender posted net profit of $5.62 billion for the three months to Sept. 30, up from $2.00 billion in the year-earlier period, it said Monday. HSBC’s pretax profit, the bank’s preferred profit measure, rose to $7.71 billion from $3.23 billion.

The bank’s quarterly revenue rose 40% compared with the same period a year earlier to $16.2 billion. It attributed the growth to the higher interest rate environment, which supported growth in net interest income in all of their global businesses and higher non-interest income.

Its non-interest income rose 97% on year to $6.9 billion, primarily due to the sale of its retail banking operations in France.

The bank’s net interest income, its main source of income, reached $9.25 billion, from $8.01 billion in the same period last year. Its net interest margin increased by 19 basis points to 1.70% from the year-earlier period.

“We have had three consecutive quarters of strong financial performance and are on track to achieve our mid-teens return on tangible equity target for 2023,” HSBC Chief Executive Noel Quinn said.

HSBC reiterated its guidance for 2023 net interest income to be above $35 billion, it said.

The board has approved a third interim dividend of $0.10 per share. It also intends to initiate a further share buyback of up to $3 billion after announcing three share buybacks in 2023 totaling up to $7 billion.

Write to Sherry Qin at sherry.qin@wsj.com

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October 29, 2023

GDP bonanza: U.S. economy may have grown 5% in the third quarter

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The U.S. economy has not only defied widespread predictions of a sharp slowdown. It’s grown even faster.

But that doesn’t mean a recession is far away. The U.S. has often experienced fast growth shortly before the bottom fell out.

Let’s start with the good news.

Gross domestic product, the official scorecard of the economy, looks likely to top 4% or even 5% annual growth in the third quarter. The government will release its preliminary estimate on Thursday morning.

Economists polled by The Wall Street Journal predict 4.7% GDP in the third quarter.

Other top forecasters see even faster growth. S&P Global estimates 5.6% GDP and the Atlanta Federal Reserve GDPNow forecast projects 5.4%.

How fast is that? GDP only topped 5% once from 2010 to the start of the pandemic in early 2020.

This is not what was supposed to happen.

After solid 2%-plus growth in the first and second quarters, the economy was widely expected to slow down in response to rapidly rising interest rates.

The Federal Reserve has jacked up borrowing costs in the past year and a half to try to tame inflation, a strategy that typical depresses consumer spending and business investment. Those are the dual engines of the economy.

To some extent the Fed has succeeded. Home sales and construction, for instance, have tumbled due to the highest mortgage rates in decades. And manufacturers have taken a hit as customers curtailed purchases of goods and big-ticket items.

The annual rate of inflation, meanwhile, has tapered to 3.7% as of September from a 40-year high of 9.1% in 2022.

Still, spending and investment have not dropped off nearly as much as expected. And there are two reasons for that.

The first is a strong and ultra-tight labor market, with unemployment hovering just below 4%. Most Americans who want a job have one, and as a result, they have been able to keep spending. Travel, recreation, leisure and hospitality have been the big winners.

S&P Global estimates a flush of consumer spending in the third quarter will account for just over half of the growth.

The industrial side of the economy, for its part, has been the beneficiary of tens of billions of dollars in subsidies from the Biden administration to support green energy and bring home more manufacturing.

The U.S. has also ramped up military aid to Ukraine and has to replace outgoing equipment, weapons and ammunition.

All the government money has helped to keep manufacturers from falling too far down the well. Government outlays could add as much as 0.6 percentage points to third-quarter GDP.

Making the third quarter look even better, the U.S. trade deficit fell sharply and is likely to add 1.0 percentage point or more to GDP.

A small rebound in the production of inventories, or unsold goods, would be the icing on the cake.

So the economy is doing great, right? Maybe not.

Consumers probably can’t keep spending at their current pace since their incomes are barely rising faster than inflation. Businesses are proceeding cautiously because of higher borrowing costs. And banks are more reluctance to lend.

Other restraints on the economy include higher gasoline prices and a surge in long-term interest rates that make it far more expensive to buy houses, cars, appliances and the like.

That’s why many forecasters believe the economy start to soften in final months of 2023. S&P Global, for instance, initially projects 1.7% growth in the fourth quarter.

Nor does the third quarter’s heady growth rate suggest there is no reason to worry about a recession. The economy has expanded rapidly just before the onset of prior recessions.

The economy grew at solid 2.5% pace right before the 2007-2009 Great Recession, for example. And GDP grew a frothy 4.4% in the first quarter of 1990 just several months before a recession started.

Many of the same economic headwinds, it turns out, are still in place that led to widespread Wall Street predictions of recession earlier in the year.

Indeed, some forecasters such as the Conference Board still insist a short recession is likely in 2024. Other economists are also on guard.

“I still believe a recession is coming — though far less severe than the 2008-2009 event,” said chief economist Steve Blitz of TS Lombard.

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October 24, 2023

U.S. home sales fell in September to the lowest level since the Great Recession

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The numbers: Home sales in September fell to the lowest level since 2010, as high mortgage rates continue to hammer the housing market.

Aside from low inventory, rising rates are eroding buyers’ purchasing power, and drying up demand. Sales of previously owned homes fell by 2% to an annual rate of 3.96 million in September, the National Association of Realtors said Thursday.

That’s the number of homes that would be sold over an entire year if sales took place at the same rate every month as they did in September. The numbers are seasonally adjusted.

The drop in sales was slightly better than what Wall Street was expecting. They forecasted existing-home sales to total 3.9 million in September.

Compared to September 2022, home sales are down by 15.4%.

Key details: The median price for an existing home in September rose for the third month in a row to $394,300. Prices are up 2.8% from a year ago. That was the highest price for the month of September since NAR began tracking the data.

Home prices peaked in June 2022, when the median price of a resale home hit $413,800.

Around 26% of properties are being sold above list price, the NAR noted.

The total number of homes for sale in September fell by 8.1% from last year, to 1.13 million units. Housing inventory for the month of September was the lowest since 1999, when the NAR began tracking the data.

Homes listed for sale remained on the market for 21 days on average, up from the previous month. Last September, homes were only on the market for 19 days.

Sales of existing homes rose only in the Northeast in September, as compared with the previous month, by 4.2%. The median price of a home in the region was $439,900.

All-cash buyers made up 29% of sales, highest since January 2023. The share of individual investors or second-home buyers was 18%. About 27% of homes were sold to first-time home buyers.

Big picture: The U.S. housing market is in the midst of a serious slowdown that is primarily driven by high mortgage rates. High rates spook home buyers, drying up demand, and high rates also deter homeowners from selling since they may have to purchase another home. For a homeowner with a 3% mortgage rate for the next few decades, there’s little incentive to move.

And the residential sector is likely to see sales fall further in October’s data, as the 30-year mortgage inches even higher. Demand for mortgages has collapsed, and some outlets like Mortgage News Daily are quoting a rate of 8% for the 30-year.

Existing-home sales in 2023 could fall to the slowest pace since the housing bubble burst in 2008, real-estate brokerage Redfin said on Thursday, at a 4.1 million pace.

What the realtors said: “Mortgage rates and limited inventory has been the story throughout this year — no different this month, other than the fact that interest rates are moving higher,” said Lawrence Yun, chief economist at the National Association of Realtors.

“The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains,” he added. “We don’t want the Fed to overdo it and cause great harm to real estate.”

Yun also questioned whether there will be a “fundamental change” or a temporary one to the “American way of life” due to the slowdown in sales.

Market reaction: Stocks were down in early trading on Thursday. The yield on the 10-year note
BX:TMUBMUSD10Y
rose above 4.9%.

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October 19, 2023

Retail sales rise on strong car sales and Internet buying. Economy not slowing much.

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Developing story. Check back for updates.

The numbers: Sales at U.S. retailers jumped a bigger-than-expected 0.7% in September in a sign households have enough buying power to keep the economy expanding.

The increase was spurred by strong demand at auto dealers and Internet stores. Higher gas prices also played a role, however.

Economists polled by The Wall Street Journal had forecast a 0.2% increase in sales.

Retail sales represent about one-third of all consumer spending and usually offer clues on the strength of the economy.

Yet September also falls between the busy back-to-school and holiday-shopping seasons and tends to reveal less about how consumers are doing.

Key details: Auto dealers posted a 1% gain in sales and helped to inflate the headline number. Auto sales account for about 20% of all retail sales.

Receipts at gas stations also rose nearly 1%, but that largely reflected higher gas prices. That’s not a good thing for households.

Retail sales advanced a still-robust 0.6% when car dealers and gas stations are set aside, which gives a better idea of consumer demand.

Sales at internet retailers stayed on a hot streak. They rose 1.1%.

Sales climbed 0.9%% at bars and restaurants. Restaurant sales tend to rise when the economy is healthy and Americans feel secure in their jobs. Sales decline during times of economic stress.

Over the past year, restaurant sales have surged 9.2% — more than twice as fast as inflation.

On the negative side of the ledger, sales fell at big-box electronics stores, clothing stores and home centers such as Home Depot
HD,
+1.85%
and Lowe’s
LOW,
+1.28%.

Sales in August were also revised up to show a 0.8% increase instead of 0.6%.

Big picture: The retail sales report is the latest to suggest the economy is still expanding at solid pace and perhaps not decelerating as much as the Federal Reserve would like to help slow the rate of inflation.

Consumer spending has stayed fairly healthy because of rising wages and the lowest unemployment rate in decades. What’s more, incomes are finally increasing faster than inflation for the first time in a few years.

Yet higher interest rates are pinching households and businesses and are bound to slow the economy in the months ahead. If so, retail spending is also likely to soften.

Looking ahead: “Consumer spending shows little sign of flagging, especially when purchases increased on everything from durable goods, such as autos, to the least durable goods, food and drink at bars and restaurants,” said Robert Frick, corporate economist at Navy Federal Credit Union.

“As long as the jobs market remains healthy, consumers should have the cash and confidence to maintain spending.”

Market reaction: Before the markets opened, the Dow Jones Industrial Average
DJIA
and S&P 500
SPX
were set to open lower in Tuesday trades.

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October 17, 2023

Why Treasurys could give the U.S. stock market a green light for a year-end rally

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The volatility in the world’s biggest bond market in recent weeks has been too much for U.S. stocks to handle as investors come to terms with the likelihood that interest rates will remain high deep into 2024 until underlying inflationary pressures ease.

The U.S. Treasury market, the bedrock of the global financial system, has been hammered by repeated selling since late September, sending the yields on the 10-year and 30-year Treasurys to levels last seen when the economy was moving toward the financial crisis in 200, before yields fell again in the past week.

Back in September a bond market selloff was fueled by a hawkish outlook from the Federal Reserve, along with mounting concern about the U.S. fiscal deficit and federal debt amid the potential for a government shutdown if a budget for the 2024 fiscal year is not settled by mid-November.

Earlier this week though, increased uncertainty about the conflict in the Middle East propelled demand for safer assets and caused longer-term bond prices to jump and their yields to fall.

Then, on Thursday, a Treasury bond auction which saw a pullback in demand despite notably higher yields, sent longer-term rates higher again while investors were already digesting inflation data that showed consumer prices remained elevated in September. The U.S. stocks fell and booked their worst day in five sessions on Thursday.

Investors are now wondering what it will take for interest rates and bond yields to fall in the months ahead and whether a retreat in yields could eventually push stocks higher to rally into the year-end.

Tim Hayes, chief global investment strategist at Ned Davis Research, said “excessive pessimism” in the bond market is setting up for a relief rally both in stock and bond prices as “there’s not as much inflationary pressures as the market has been pricing in,” he told MarketWatch in a phone interview on Thursday.

Hayes said his team found the bond sentiment data has started to reflect a “decisive reversal” away from too much pessimism in the Treasury market which could send bond yields lower and boost equities given the inverse correlations between the S&P 500
SPX
and the 10-year Treasury note yield
BX:TMUBMUSD10Y.

See: Here is what needs to happen for the S&P 500 to hold on to this year’s gains

Meanwhile, some analysts said disinflation may not be enough for the Federal Reserve to drop its “higher-for-longer” interest rate narrative which was primarily responsible for the big spike in yields since September.

The economy needs a slowdown in the consumer sector for some relaxation in the Fed’s “higher-for-longer” narrative and to maybe push policymakers to adopt a more flexible outlook for its long-term guidance, said Thierry Wizman, global FX and interest rates strategist at Macquarie.

“Of course, the Fed right now is certainly not saying anything that’s remotely suggestive of ‘high-for-long’ being taken away or being removed or negated, so I don’t expect yields to fall a lot unless we start to get reasons to believe the Fed is going to remove that narrative based on the economic data,” Wizman told MarketWatch via phone.

However, Wizman said he is confident that the U.S. consumption data will weaken over the next few months when major consumer-product and -service companies start to provide guidance for the fourth quarter, and when U.S. consumers, which have been trapped in a web of conflicting signals on the health of the economy, open their wallet for the holiday shopping season.

“This will produce some weakness on the consumer side of the market and there’s no doubt the slowdown will be more pronounced than most people expect in the economy, [but] that will be the positive scenario for bonds,” said Marco Pirondini, head of U.S. equities at Amundi U.S., in an interview with MarketWatch.

However, that also means investors should not be “too anxious to buy dips in the stock market” because it would be very unusual if the stock market doesn’t see “multiple compression” with Treasury yields at 16-year highs, Wizman said. “Stocks would still look too rich even if the Fed drops the ‘higher-for-longer’ narrative in the first quarter of 2024.”

See: Fed skips rate hike for now, but doesn’t rule out another increase this year

The “higher-for-longer” mantra is an idea Fed officials have tried to get the market to absorb in recent months, with Fed Chair Powell hardening his rhetoric at the September FOMC meeting, pointing potentially to more rate hikes or, more importantly, interest rates that stay higher for longer.

Fed officials saw interest rates coming down to 5.1% in 2024, higher than June’s outlook for rates to finish next year at 4.6%, according to the latest Summary of Economic Projections at the September policy meeting.

See: Stock-market moves show bond traders are still in charge as yields renew rise

However, Wizman characterized the “higher-than-longer” narrative as a “publicity stunt,” as he thought Fed officials simply wanted to signal to the market that they were frustrated that financial conditions hadn’t measurably tightened enough in 2023, so they utilized the narrative to get rising Treasury yields to do some of the “heavy lifting.”

“… Fed officials are not really serious about ‘higher-for-longer’ – they just did it to drive long-term yields higher for now,” he added.

If a slowdown in the consumer sector of the economy and ongoing disinflation are powerful enough to sap Fed’s rate expectations, Treasury yields could continue to decline without having to have a calamity or big recession in the U.S. economy to drive investors back to the safe-haven assets like Treasurys, strategists said.

See: U.S. stock-market seasonality suggests a potential rally in the fourth quarter. Why this time might be different.

Meanwhile, stock-market seasonality may also help lift sentiment. Historically, the fourth quarter has been the best quarter for the U.S. stock market, with the large-cap S&P 500 index up nearly 80% of the time dating back to 1950 and gaining more than 4% on average.

The S&P 500 has risen 0.9% so far in the fourth quarter, while the Dow Jones Industrial Average
DJIA
is up 0.5% and the Nasdaq Composite
COMP
has advanced 1.4% in October, according to FactSet data.

“So you have this situation where sentiment got stretched and now sentiment is reversing with more confidence that bond yields have reached their peak, so equities can rally moving into the end of the year, and that should start to become increasingly evident,” said Hayes.

The yield on the 10-year Treasury note dropped 8.2 basis points to 4.628% on Friday, while the yield on the 30-year Treasury
BX:TMUBMUSD30Y
declined by 9.2 basis points to 4.777%. The 30-year yield fell 16.4 basis points this week, its largest weekly drop since the period that ended March 10, according to Dow Jones Market Data.

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October 15, 2023

The IMF sees greater chance of a ‘soft landing’ for the global economy | CNN Business

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London
CNN
—

The International Monetary Fund (IMF) sees better odds that central banks will manage to tame inflation without tipping the global economy into recession, but it warned Tuesday that growth remained weak and patchy.

The agency said it expected the world’s economy to expand by 3% this year, in line with its July forecast, as stronger-than-expected growth in the United States offset downgrades to the outlook for China and Europe. It shaved its forecast for growth in 2024 by 0.1 percentage point to 2.9%.

Echoing comments made in July, the IMF highlighted the global economy’s resilience to the twin shocks of the pandemic and the Ukraine war while warning in its World Economic Outlook that risks remained “tilted to the downside.”

“Despite war-disrupted energy and food markets and unprecedented monetary tightening to combat decades-high inflation, economic activity has slowed but not stalled,” IMF chief economist Pierre-Olivier Gourinchas wrote in a blog post. “The global economy is limping along,” he added.

The IMF’s projections for growth and inflation are “increasingly consistent with a ‘soft landing’ scenario… especially in the United States,” Gourinchas continued.

But he cautioned that growth “remains slow and uneven,” with weaker recoveries now expected in much of Europe and China compared with predictions just three months ago.

The 20 countries using the euro are expected to grow collectively by 0.7% this year and 1.2% next year, a downgrade of 0.2 percentage points and 0.3 percentage points respectively from July.

The IMF now expects China to grow 5% this year and 4.2% in 2024, down from 5.2% and 4.5% previously.

“China’s property sector crisis could deepen, with global spillovers, particularly for commodity exporters,” it said in its report

By contrast, the United States is expected to grow more strongly this year and next than expected in July. The IMF upgraded its growth forecasts for the US economy to 2.1% in 2023 and 1.5% in 2024 — an improvement of 0.3 percentage points and 0.5 percentage points respectively.

“The strongest recovery among major economies has been in the United States,” the IMF said.

The agency expects that inflation will continue to fall — bolstering the case for a “soft landing” in major economies — but it does not expect it to return to levels targeted by central banks until 2025 in most cases.

The IMF revised its forecasts for global inflation to 6.9% this year and 5.8% next year — an increase of 0.1 percentage point and 0.6 percentage points respectively.

Commodity prices pose a “serious risk” to the inflation outlook and could become more volatile amid climate and geopolitical shocks, Gourinchas wrote.

“Food prices remain elevated and could be further disrupted by an escalation of the war in Ukraine, inflicting greater hardship on many low-income countries,” he added.

Oil prices surged Monday on concerns that the latest conflict between Israel and Hamas could cause wider instability in the oil-producing Middle East. Brent crude prices were already elevated following supply cuts by major producers Saudi Arabia and Russia.

High oil and natural gas prices, leading to skyrocketing energy costs, helped drive inflation to multi-decade highs in many economies in 2022. The latest jump in oil prices could cause a fresh bout of broader price rises.

Bond investors are already on edge. They dumped government bonds last week in the expectation that the world’s major central banks would keep interest rates “higher for longer” to bring inflation down to their targets.

The IMF also pointed to concerns that high inflation could become a self-fulfilling prophecy. If households and businesses expect prices to go on rising, that could cause them to set higher prices for their goods and services, or demand higher wages.

“Expectations that future inflation will rise could feed into current inflation rates, keeping them high,” the IMF noted.

It added that the “expectations channel is critical to whether central banks can achieve the elusive ‘soft landing’ of bringing the inflation rate down to target without a recession.”

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October 10, 2023

Fed’s Mester says further rate hikes will depend on incoming data

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Federal Reserve Bank of Cleveland President Loretta Mester said Friday’s jobs report didn’t change her view that the labor market remains strong, and that further interest-rate hikes will depend on additional incoming data.

“The inflation rate is still too high, the level of inflation remains high, but at least we’re seeing progress on it,” Mester said Friday during an interview with CNN International. “And whether we need to tighten monetary policy a bit further or not is really going to depend on all the data that we get between now and our next meeting.”

Despite the continued strength, Mester said the labor market is gradually cooling, with employers in her district telling her they’re not having as much trouble finding workers. She also pointed to the cooldown in wages in Friday’s report as further evidence of slowing inflation.

Mester said also policymakers’ discussion is moving to how long the Fed should hold its benchmark rate high for now that rates are either at or near their peak.

“I thought it was pretty likely we might need to do another rate hike this year, but I’ll make that decision once I get into the room in November, at our next meeting,” she said.

Fed officials last month left the target range for their benchmark rate unchanged at 5.25% to 5.5%, a 22-year high. Projections published at the same time showed 12 out of 19 policymakers expected one more rate increase for this year, and that officials see fewer rate cuts in 2024 than previously anticipated.

US employers added a whopping 336,000 jobs in September, far above economists’ projections ahead of Bureau of Labor Statistic’s release Friday. Average hourly earnings increased 0.2% last month and were up 4.2% from a year earlier, the smallest annual advance since mid-2021. Earnings for nonsupervisory employees, who make up the majority of workers, posted the smallest back-to-back monthly increases since 2020.

Mester said growth is “strikingly strong,” and reiterated she would like the Fed to reach its 2% inflation target by the end of 2025.

Mester said earlier this week that she would support another interest-rate increase at the Fed’s next policy meeting if the economy is performing about the same as at the time of the September gathering, adding that the decision will be based on incoming data. The Cleveland Fed chief does not vote on monetary policy decisions this year.

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October 7, 2023

These 20 stocks in the S&P 500 are expected to soar after rising interest rates have pushed down valuations

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Two things investors can be sure about: Nothing lasts forever and the stock market always overreacts. The spiking of yields on long-term U.S. Treasury securities has been breathtaking, and it has led to remarkable declines for some sectors and possible bargains for contrarian investors who can commit for the long term.

First we will show how the sectors of the S&P 500

have performed. Then we will look at price-to-earnings valuations for the sectors and compare them to long-term averages. Then we will screen the entire index for companies trading below their long-term forward P/E valuation averages and narrow the list to companies most favored by analysts.

Here are total returns, with dividends reinvested, for the 11 sectors of the S&P 500, with broad indexes below. The sectors are sorted by ascending total returns this year through Monday.

Sector or index	2023 return	2022 return	Return since end of 2021	1 week return	1 month return
Utilities	-18.4%	1.6%	-17.2%	-11.1%	-9.6%
Real Estate	-7.1%	-26.1%	-31.4%	-3.0%	-8.8%
Consumer Staples	-5.4%	-0.6%	-6.0%	-2.2%	-4.4%
Healthcare	-4.2%	-2.0%	-6.1%	-1.7%	-3.3%
Financials	-2.5%	-10.5%	-12.7%	-2.5%	-4.7%
Materials	1.3%	-12.3%	-11.2%	-1.9%	-7.0%
Industrials	3.5%	-5.5%	-2.1%	-1.8%	-7.3%
Energy	4.0%	65.7%	72.4%	-1.9%	-1.4%
Consumer Discretionary	27.0%	-37.0%	-20.0%	-0.6%	-5.2%
Information Technology	36.5%	-28.2%	-2.0%	0.8%	-5.9%
Communication Services	42.5%	-39.9%	-14.3%	1.1%	-1.3%

S&P 500	13.1%	-18.1%	-7.4%	-1.1%	-4.9%
DJ Industrial Average	2.5%	-6.9%	-4.5%	-1.7%	-4.0%
Nasdaq Composite Index COMP	28.0%	-32.5%	-13.7%	0.3%	-5.1%
Nasdaq-100 Index	36.5%	-32.4%	-7.7%	0.5%	-4.2%
Source: FactSet

Returns for 2022 are also included, along with those since the end of 2021. Last year’s weakest sector, communications services, has been this year’s strongest performer. This sector includes Alphabet Inc.
GOOGL
and Meta Platforms Inc.
META,
which have returned 52% and 155% this year, respectively, but are still down since the end of 2021. To the right are returns for the past week and month through Monday.

On Monday, the S&P 500 Utilities sector had its worst one-day performance since 2020, with a 4.7% decline. Investors were reacting to the jump in long-term interest rates.

Here is a link to the U.S. Treasury Department’s summary of the daily yield curve across maturities for Treasury securities.

The yield on 10-year U.S. Treasury notes

jumped 10 basis points in only one day to 4.69% on Monday. A month earlier the 10-year yield was only 4.27%. Also on Monday, the yield on 20-year Treasury bonds

rose to 5.00% from 4.92% on Friday. It was up from 4.56% a month earlier.

Market Extra: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007

The Treasury yield curve is still inverted, with 3-month T-bills

yielding 5.62% on Monday, but that was up only slightly from a month earlier. An inverted yield curve has traditionally signaled that bond investors expect a recession within a year and a lowering of interest rates by the Federal Reserve. Demand for bonds pushes their prices down. But the reverse has happened over recent days, with the selling of longer-term Treasury securities pushing yields up rapidly.

Another way to illustrate the phenomenon is to look at how the Federal Reserve has shifted the U.S. money supply. Odeon Capital analyst Dick Bove wrote in a note to clients on Friday that “the Federal Reserve has not deviated from its policy to defeat inflation by tightening monetary policy,” as it has shrunk its balance sheet (mostly Treasury securities) to $8.1 trillion from $9 trillion in March 2022. He added: “The M2 money supply was $21.8 trillion in March 2022; today it is $20.8 trillion. You cannot get tighter than these numbers indicate.”

Then on Tuesday, Bove illustrated the Fed’s tightening and the movement of the 10-year yield with two charts:

Odeon Capital Group, Bloomberg

Bove said he believes the bond market has gotten it wrong, with the inverted yield curve reflecting expectations of rate cuts next year. If he is correct, investors can expect longer-term yields to keep shooting up and a normalization of the yield curve.

This has set up a brutal environment for utility stocks, which are typically desired by investors who are seeking dividend income. In a market in which you can receive a yield of 5.5% with little risk over the short term, and in which you can lock in a long-term yield of about 5%, why take a risk in the stock market? And if you believe that the core inflation rate of 3.7% makes a 5% yield seem paltry, keep in mind that not all investors think the same way. Many worry less about the inflation rate because large components of official inflation calculations, such as home prices and car prices, don’t affect everyone every year.

We cannot know when this current selloff of longer-term bonds will end, or how much of an effect it will have on the stock market. But sharp declines in the stock market can set up attractive price points for investors looking to go in for the long haul.

Screening for lower valuations and high ratings

A combination of rising earnings estimates and price declines could shed light on potential buying opportunities, based on forward price-to-earnings ratios.

Let’s look at the sectors again, in the same order, this time to show their forward P/E ratios, based on weighted rolling 12-month consensus estimates for earnings per share among analysts polled by FactSet:

Sector or index	Current P/E to 5-year average	Current P/E to 10-year average	Current P/E to 15-year average	Forward P/E	5-year average P/E	10-year average P/E	15-year average P/E
Utilities	82%	86%	95%	14.99	18.30	17.40	15.82
Real Estate	76%	80%	81%	15.19	19.86	18.89	18.72
Consumer Staples	93%	96%	105%	18.61	19.92	19.30	17.64
Healthcare	103%	104%	115%	16.99	16.46	16.34	14.72
Financials	88%	92%	97%	12.90	14.65	14.08	13.26
Materials	100%	103%	111%	16.91	16.98	16.42	15.27
Industrials	88%	96%	105%	17.38	19.84	18.16	16.56
Energy	106%	63%	73%	11.78	11.17	18.80	16.23
Consumer Discretionary	79%	95%	109%	24.09	30.41	25.39	22.10
Information Technology	109%	130%	146%	24.20	22.17	18.55	16.54
Communication Services	86%	86%	94%	16.41	19.09	19.00	17.43

S&P 500	94%	101%	112%	17.94	19.01	17.76	16.04
DJ Industrial Average	93%	98%	107%	16.25	17.49	16.54	15.17
Nasdaq Composite Index	92%	102%	102%	24.62	26.71	24.18	24.18
Nasdaq-100 Index	97%	110%	126%	24.40	25.23	22.14	19.43

There is a limit to how many columns we can show in the table. The S&P 500’s forward P/E ratio is now 17.94, compared with 16.79 at the end of 2022 and 21.53 at the end of 2021. The benchmark index’s P/E is above its 10- and 15-year average levels but below the five-year average.

If we compare the current sector P/E numbers to 5-, 10- and 15-year averages, we can see that the current levels are below all three averages for four sectors: utilities, real estate, financials and communications services. The first three face obvious difficulties as they adjust to the rising-rate environment, while the real-estate sector reels from continuing low usage rates for office buildings, from the change in behavior brought about by the COVID-19 pandemic.

Your own opinions, along with the pricing for some sectors, might drive some investment choices.

A broader screen of the S&P 500 might point to companies for you to research further.

We narrowed the S&P 500 as follows:

Current forward P/E below 5-, 10- and 15-year average valuations. For stocks with negative earnings-per-share estimates for the next 12 months, there is no forward P/E ratio so they were excluded. For stocks listed for less than 15 years, we required at least a 5-year average P/E for comparison. This brought the list down to 138 companies.
“Buy” or equivalent ratings from at least two-thirds of analysts: 41 companies.

Here are the 20 companies that passed the screen, for which analysts’ price targets imply the highest upside potential over the next 12 months.

There is too much data for one table, so first we will show the P/E information:

Company	Ticker	Current P/E to 5-year average	Current P/E to 10-year average	Current P/E to 15-year average
SolarEdge Technologies Inc.	SEDG	89%	N/A	N/A
AES Corp.	AES	66%	75%	90%
Insulet Corp.	PODD	18%	N/A	N/A
United Airlines Holdings Inc.	UAL	42%	50%	N/A
Alaska Air Group Inc.	ALK	51%	57%	N/A
Tapestry Inc.	TPR	39%	49%	70%
Albemarle Corp.	ALB	39%	50%	73%
Delta Air Lines Inc.	DAL	60%	63%	21%
Alexandria Real Estate Equities Inc.	ARE	59%	68%	N/A
Las Vegas Sands Corp.	LVS	96%	78%	53%
Paycom Software Inc.	PAYC	61%	N/A	N/A
PayPal Holdings Inc.	PYPL	33%	N/A	N/A
SBA Communications Corp. Class A	SBAC	27%	N/A	N/A
Advanced Micro Devices Inc.	AMD	58%	39%	N/A
LKQ Corp.	LKQ	92%	44%	78%
Charles Schwab Corp.	SCHW	75%	54%	73%
PulteGroup Inc.	PHM	94%	47%	N/A
Lamb Weston Holdings Inc.	LW	71%	N/A	N/A
News Corp Class A	NWSA	93%	73%	N/A
CVS Health Corp.	CVS	75%	61%	67%
Source: FactSet

Click on the tickers for more about each company or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

News Corp
NWSA
is on the list. The company owns Dow Jones, which in turn owns MarketWatch.

Here’s the list again, with ratings and consensus price-target information:

Company	Ticker	Share “buy” ratings	Oct. 2 price	Consensus price target	Implied 12-month upside potential
SolarEdge Technologies Inc.	SEDG	74%	$122.56	$268.77	119%
AES Corp.	AES	79%	$14.16	$25.60	81%
Insulet Corp.	PODD	68%	$165.04	$279.00	69%
United Airlines Holdings Inc.	UAL	71%	$41.62	$69.52	67%
Alaska Air Group Inc.	ALK	87%	$36.83	$61.31	66%
Tapestry Inc.	TPR	75%	$28.58	$46.21	62%
Albemarle Corp.	ALB	81%	$162.41	$259.95	60%
Delta Air Lines Inc.	DAL	95%	$36.45	$58.11	59%
Alexandria Real Estate Equities Inc.	ARE	100%	$98.18	$149.45	52%
Las Vegas Sands Corp.	LVS	72%	$45.70	$68.15	49%
Paycom Software Inc.	PAYC	77%	$260.04	$384.89	48%
PayPal Holdings Inc.	PYPL	69%	$58.56	$86.38	48%
SBA Communications Corp. Class A	SBAC	68%	$198.24	$276.69	40%
Advanced Micro Devices Inc.	AMD	74%	$103.27	$143.07	39%
LKQ Corp.	LKQ	82%	$49.13	$67.13	37%
Charles Schwab Corp.	SCHW	77%	$53.55	$72.67	36%
PulteGroup Inc.	PHM	81%	$73.22	$98.60	35%
Lamb Weston Holdings Inc.	LW	100%	$92.23	$123.50	34%
News Corp Class A	NWSA	78%	$20.00	$26.42	32%
CVS Health Corp.	CVS	77%	$69.69	$90.88	30%
Source: FactSet

A year may actually be a short period for a long-term investor, but 12-month price targets are the norm for analysts working for brokerage companies.

Don’t miss: This fund shows that industry expertise can help you make a lot of money in the stock market

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October 3, 2023

Tag: Monetary policy

What’s the Sahm rule, and why should we care about it?

The snowball effect

Financial conditions in the U.S. are looser than in September, says economist.

Falling 10-year Treasury yields from a 5% peak in October coincides with a sharp rally in the S&P 500 at the tail end of 2023.

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Inflation data, a Fed speech and a government-shutdown deadline are on the calendar this week.

October consumer inflation

Tuesday, 8:30 a.m. Eastern

October retail sales

Wednesday, 8:30 a.m. Eastern

Chicago Fed President Austan Goolsbee’s speech to the Detroit Economic Club

Tuesday at 12:45 p.m. Eastern

Biden-Xi to meet at APEC summit

Wednesday

Threat of a government shutdown

Friday, midnight deadline

Screening for lower valuations and high ratings