Stocks are behaving weirdly right now, here’s why
Stocks: Investors told Before the Bell they had no problems with the Federal Reserve’s commitment to continue aggressively fighting decades-high inflation before the central bank announced another supersized interest rate hike on Wednesday.
This delighted them, as it indicated that the Federal Reserve was finally taking its job seriously after a long delay.
The seemingly dovish turn by Fed Chair Jerome Powell put Wall Street on high alert, so why did it cheer? After reaching its peak in early June, the S&P 500 gained 2.6% on Wednesday.
The expectation came first. It would have been unthinkable just six months ago if the Fed had raised rates by three-quarters of a percentage point. It will be the highest rate since December 2018, ranging between 2.25% and 2.5%.
It was, however, what came next that captured the attention of investors. According to Powell, as the US economy slows, the central bank could start to ease monetary policy.
This evidence seemed to be based on two factors:
- Powell explained that the Fed is no longer providing forward guidance, which hints at what the market about what it is going to do next. In his remarks, he noted that the Fed would carefully analyze the data as it came in before making decisions.
- Powell said that if economic growth slows and recession risks increase, rate hikes could be smaller going forward. The pace of increases will likely need to slow as monetary policy tightens further, he explained.
Based on the information investors digested, they concluded that a tough Fed had been priced in and that it may pivot sooner than expected. The Fed relaxed a bit despite fears that inflation would not be controlled if it relaxed a bit.
Stefan Koopman, the senior macro strategist at Rabobank, said the market needed just a hint of dovishness to price in slightly looser credit conditions.
Well, no, not so fast. Wall Street has decided a more relaxed Fed won’t hurt corporate earnings down the road, which could generate a positive financial outlook. Powell’s remarks are now being debated as to whether that was the right interpretation.
“All Powell could do today was address inflation’s high levels, the Fed’s determination to lower them, and (implicitly) that he would tolerate a recession as long as it was necessary to accomplish his mission,” Piper Sandler’s Roberto Perli and Benson Durham told clients. It was a hawkish press conference.”
They are right. It might even be appropriate to increase rates again by an unusually large amount in September if the data supports it. It all boils down to uncertainty. Hawks are seen by some, doves by others.
We have given up trying to figure out what constitutes good news and what constitutes bad news. In the meantime, markets will remain hypersensitive to any commentary in the interim as the Fed tries to figure out what it will do next.
What’s happening: The second quarter’s GDP was released on Thursday. From April through June, GDP dropped by 0.9% over last year. A recession can be defined as two consecutive quarters of shrinking output.
Given the strength of the job market, Powell stressed that he doesn’t see the US economy contracting just yet.
The reason, he added, is that too many areas of the economy are performing well, so I don’t think the US is in a recession right now.
As a publicly traded company, Facebook reports its first revenue decline
Having grown rapidly for years, Facebook’s trajectory is clear. Facebook is in decline.
According to Meta (FB), the company reported $28.8 billion in revenue between April and June, a one percent drop compared with the same period last year; this is the first year-over-year revenue decline since Meta went public in 2012.
Almost $6.7 billion in profits fell 36% compared to the same period a year ago. Its profit doubled in 2021, a huge reversal. Premarket trading on Thursday showed shares down 4%.
What gives? As companies readjust their budgets in anticipation of a possible recession, Meta faces a slowdown in advertising spending. Snap is also being battered by this trend. Likewise, Google and Microsoft have shown it in their results.
Compared to last year, Meta’s average price per ad declined by 14%.
During a conference call with analysts, CEO Mark Zuckerberg said that the digital advertising industry has entered an economic downturn. I would say that the situation seems worse than it did a quarter ago, but it’s always hard to predict how deep or long these cycles will last.”
Compared to March, Facebook had 1.97 billion daily active users in June. But TikTok is posing greater competition for the company.
One of TikTok’s greatest strengths is recommending content based on artificial intelligence. On Facebook and Instagram, algorithms now surface content from non-followed accounts around 15% of the time. By next year, those numbers will have more than doubled.
However, users such as Kim Kardashian and Kylie Jenner have complained they want to see photos of their friends. According to Zuckerberg, Meta will continue to be a social company as it develops its “discovery engine.”
Meta’s ability to build out a robust virtual reality business will determine its success in the future. This task is made more difficult by US regulators. Meta’s acquisition of virtual reality company Within was blocked by the Federal Trade Commission this week, alleging that the company has an illegal plan to expand into virtual reality.
Spirit Airlines is acquired by JetBlue
Finally, JetBlue has succeeded in buying Spirit Airlines after months of campaigning.
Spirit and Frontier stopped their months-old tie-up on Wednesday after months of talks. JetBlue (JBLU), which claimed the fifth largest US airline in a $3.8 billion deal, was able to step in quickly.
Earlier today, my CNN Business colleague Chris Isidore reported that JetBlue plans to purchase Spirit for $33.50 per share in cash, which is 38% more than Wednesday’s closing price. Frontier’s stock rose 6% on Friday, while Spirit’s rose 4%.
The CEO of JetBlue, Robin Hayes, said in a statement that Spirit and JetBlue will continue to disrupt the industry together to decrease fares for consumers.
Spirit management has long doubted whether regulators will approve the merger – a long-standing concern.
As a result of any delay in closing Spirit after December of this year, JetBlue will pay its shareholders an additional 10 cents a month. Spirit will receive $70 million if JetBlue’s deal is blocked. A $400 million bonus would be paid to its shareholders.