Macrosynthesis  

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Last Week's Recap

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Just Hold On

On Wednesday, the Federal Reserve maintained the federal funds rate within the range of 5.25%-5.5% - a level not seen in 22 years. They noted their consideration of the aggregate effects of prior interest rate increases, the delayed impact of monetary policy on economic activity and inflation, and ongoing developments in the economic and financial sectors. Put plainly, they said they are cautious and market indexes rose in response.

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Chairman Powell, during his press conference, indicated potential deviations from the September predictions, which initially suggested an additional rate hike within the year. He clarified that discussions about rate reductions have not yet occurred, affirming that the central focus continues to be on evaluating the necessity for future interest rate elevations.

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Shortly after the announcement, new reports showed rising unemployment and a slower pace of wage growth in the U.S. These reports, combined with high bond yields and the fact capital is more expensive and harder to obtain, has likely sealed the fact that the Fed is done with rate hikes. The backdrop of two wars should also make anyone cautious about intentionally breaking the back of the U.S. economy.

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BOE Follows Suit

Echoing the Fed's cautious approach, the Bank of England maintained its key interest rate at 5.25%, a 15-year high, for the second straight meeting. The decision balances concerns of the UK’s slowing economy with persistent inflation, highlighting a split vote within the committee and signaling a prolonged period of tight monetary policy.

Labor Costs Decline

In the U.S., the nonfarm business sector saw a 0.8% decline in unit labor costs in the third quarter, contradicting expectations of an increase and following a significant rise in the previous quarter. This unexpected shift, coupled with increases in hourly compensation and productivity, indicates adjustments in the labor market, potentially influenced by broader economic conditions and monetary policy decisions.

Consumer Health

The U.S. is experiencing financial stress as citizens face increasing interest payments, dwindling savings, and multiple Federal Reserve rate hikes. JPM Morgan CEO Jamie Dimon noted that the savings of low-income consumers amassed during COVID was now gone.

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Delinquencies across credit card, mortgage, and auto loans are rising, particularly for those with poor credit. Credit card debt has surpassed $1 trillion. The Federal Reserve Bank of San Francisco highlights that excess savings from the pandemic are nearly exhausted, impacting consumer behavior and business activities. Additionally, the Consumer Financial Protection Bureau notes a rise in persistent credit card debt, connecting these financial strains to reduced real income and higher borrowing costs.

Consumer well-being is further challenged by rising living costs. Grocery prices have risen 2.4%, and dining out is now 6% more expensive, with takeout and sit-down restaurant prices seeing significant year-over-year increases.

Rising mortgage rates have caused home prices to fall. As prices fall, so does the equity amassed in homes - equity that is often used for home equity lines of credit to support large expenditures like repairs and medical bills.

It's not all bad though, as those in higher wealth brackets are doing quite well and continuing to spend on travel, dining, and experiences. Likewise, the unemployment rate is at 3.9% and business are reporting relatively strong earnings despite slower or negative revenue growth.

We are seeing the economy slow and the cracks beginning to show - cracks which will adversely impact businesses, especially those with lower income clients (e.g. BIG, WMT, COF).

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Notable Quotes:

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Starbucks CEO Howard Schultz (10/27/23):

"We are seeing some signs of pressure on the consumer, particularly in the lower-income bracket."

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Jamie Dimon, CEO of JPMorgan Chase (10/14/23):

"The consumer is still in good shape, but we are seeing some signs of stress."

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Mary Barra, CEO of General Motors (11/1/23):

"The consumer is still spending, but we are seeing some signs of caution."

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Market Moves

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US stock markets ended higher on Friday, led by gains in the S&P 500 and Nasdaq, each up over 1%, and the Dow Jones, which rose more than 250 points. This surge was spurred by a jobs report that showed the employment market cooling more than expected, with fewer jobs added, a small rise in unemployment, and wage growth slightly below projections, hinting that the Federal Reserve may pause rate increases for good. Real estate, utilities, and finance were the biggest gainers, whereas some big tech stocks lagged, notably with Apple’s shares dropping 1.5 percent.

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For the week, the markets saw robust growth, with the Dow Jones marking its best weekly performance since October of the previous year, climbing 4.3%, while the S&P 500 and Nasdaq also had their strongest week since last October, increasing by 5% and 5.3%, respectively.

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Commodity Movers

Coal

-19% (1W Chg)

-32.4% (YoY Chg)

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Crude Oil

-2.58% (1D Chg)

-6.22% (1W Chg)

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Steel

+3.48% (1W Chg)

+6.17% (YoY Chg)

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Coffee

+96.18% (1W Chg)

16.77% (1M Chg)

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Top Bullish Events Last Week (1D move)

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Noteworthy Events    

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Apple

Apple's stock fell slightly, by nearly 1% Thursday, following a report of its fourth straight quarterly sales decline of 1%. Despite outperforming analysts' forecasts for the fiscal fourth quarter, the company's cautious revenue forecast for the December quarter, typically its peak season, dampened investor sentiment.

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DraftKings

DraftKings' stock rose over 14% Friday following a third-quarter earnings report where the company's revenue of $790 million exceeded analyst forecasts. This represents a 57% surge in revenue for the quarter and a year-over-year increase of 40% in monthly unique paying customers.

Block

Block, Inc.'s stock increased by 12% Friday following the announcement of its third-quarter earnings, which exceeded expectations. This performance was significantly supported by increased revenues from its CashApp and Square business divisions.

Starbucks

Starbucks' stock rose 9.5% Thursday following a fiscal fourth-quarter report where both earnings and revenue exceeded expectations. The company also experienced stronger-than-anticipated results in China, which is its second-biggest market.

Shopify

Shopify's stock price surged 22.4% Thursday following the company's third-quarter earnings report, which exceeded expectations on revenue and profit. The company, known for providing e-commerce solutions, also provided a positive forecast for the year's end. This financial success follows a period in which Shopify concentrated on cost management.

Moderna

Moderna's stock value fell by 6.5% following a report of a significant loss in their third-quarter earnings, which was attributed to a reduced demand for its Covid vaccine, leading to a considerable write-down due to excess vaccines that went unused.

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CASE STUDY: Rayonier +13.51%

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On Wednesday evening, Rayonier announced that they had appointed Mark McHugh as President and CEO. After being down -24% YTD before the announcement, the news brought hope to investors, resulting in a one-day return of +13.51% and a one-week return of +18.75.

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Subscribers were notified about this development in the "CEO Hired" scenario Wednesday evening.  

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Historical patterns, such as those seen with Dollar General earlier last month, suggest that the appointment of a new CEO can often precede a turnaround for companies previously experiencing a downturn, with improvements typically observed following the announcement.

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Upcoming Catalysts:

It's now earnings season again, and that brings more events, more price moves, and more fun. Here's the lineup this week.
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Notable Earnings

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Monday

Affiliated Managers (AMG)
Diamondback Energy (FANG)
CoreCivic (CXW)
Vertex Pharmaceuticals (VRTX)

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Tuesday

Bumble (BMBL)
Axon (AXON)
Devon Energy (DVN)
Ebay (EBAY)
KKR (KKR

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Wednesday

ARM Holdings (ARM)
Disney (DIS)
Biogen (BIIB)
Diodes (DIOD)
Ralph Lauren (RL)

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Thursday

AstraZeneca (AZN)
Fiverr (FVRR)
Li Auto (LI)

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Friday

Stone Co (STNE)

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The LevelFields Team