Category: Markets

Rising Housing Costs Drive Consumer Inflation Even Higher in September

Posted on by slightbourne@noblecapitalmarkets.com

Consumer inflation accelerated more than expected in September due largely to intensifying shelter costs, putting further pressure on household budgets and keeping the Federal Reserve on high alert.

The consumer price index (CPI) increased 0.4% last month after rising 0.1% in August, the Labor Department reported Thursday. On an annual basis, prices were up 3.7% through September.

Both the monthly and yearly inflation rates exceeded economist forecasts of 0.3% and 3.6% respectively.

The higher than anticipated inflation extends the squeeze on consumers in the form of elevated prices for essentials like food, housing, and transportation. It also keeps the Fed under the microscope as officials debate further interest rate hikes to cool demand and restrain prices.

Source: U.S. Bureau of Labor Statistics

Surging Shelter Costs in Focus

The main driver behind the inflation uptick in September was shelter costs. The shelter index, which includes rent and owners’ equivalent rent, jumped 0.6% for the month. Shelter costs also posted the largest yearly gain at 7.2%.

On a monthly basis, shelter accounted for over half of the total increase in CPI. Surging rents and housing costs reflect pandemic trends like strong demand amid limited supply.

“Just because the rate of inflation is stable for now doesn’t mean its weight isn’t increasing every month on family budgets,” noted Robert Frick, corporate economist at Navy Federal Credit Union. “That shelter and food costs rose particularly is especially painful.”

Energy and Food Costs Also Climb

While shelter led the inflation surge, other categories saw notable increases as well in September. Energy costs rose 1.5% led by gasoline, fuel oil, and natural gas. Food prices gained 0.2% for the third consecutive month, with a 6% jump in food away from home.

On an annual basis, energy costs were down 0.5% but food was up 3.7% year-over-year through September.

Used vehicle prices declined 2.5% in September but new vehicle costs rose 0.3%. Overall, transportation services inflation eased to 0.9% annually in September from 9.5% in August.

Wage Growth Lags Inflation

Rising consumer costs continue to outpace income growth, squeezing household budgets. Average hourly earnings rose just 0.2% in September, not enough to keep pace with the 0.4% inflation rate.

That caused real average hourly earnings to fall 0.2% last month. On a yearly basis, real wages were up only 0.5% through September—a fraction of the 3.7% inflation rate over that period.

American consumers have relied more heavily on savings and credit to maintain spending amid high inflation. But rising borrowing costs could limit their ability to sustain that trend.

Fed Still Focused on Inflation Fight

The hotter-than-expected CPI print keeps the Fed anchored on inflation worries. Though annual inflation has eased from over 9% in June, the 3.7% rate remains well above the Fed’s 2% target.

Officials raised interest rates by 75 basis points in both September and November, pushing the federal funds rate to a range of 3-3.25%. Markets expect another 50-75 basis point hike in December.

Treasury yields surged following the CPI report, reflecting ongoing inflation concerns. Persistently high shelter and food inflation could spur the Fed to stick to its aggressive rate hike path into 2023.

Taming inflation remains the Fed’s number one priority, even at the risk of slowing economic growth. The latest CPI data shows they still have work to do on that front.

All eyes will now turn to the October and November inflation reports heading into the pivotal December policy meeting. Further hotter-than-expected readings could force the Fed’s hand on more supersized rate hikes aimed at cooling demand and prices across the economy.

IMF Economic Outlook: U.S. Growth Revised Up, Europe Down

Posted on by slightbourne@noblecapitalmarkets.com

The International Monetary Fund (IMF) recently released its updated World Economic Outlook report, providing insights into global economic projections. A key theme is diverging fortunes for major economies like the United States and Europe.

The IMF upgraded its 2023 GDP growth forecast for the U.S. to 2.1%, up 0.3 percentage points from its prior estimate. The upbeat revision reflects resilience in areas like business investment and consumer spending despite high inflation and interest rates. However, growth is still seen slowing in 2023 and 2024 as the impacts of tightening policy kick in.

Meanwhile, the IMF downgraded the euro zone 2023 outlook to 0.7% growth, 0.2 percentage points lower than previously expected. Slowing trade and higher rates are severely impacting Germany, while other euro economies face varied challenges. The IMF predicts gradual euro zone growth recovery to 1.2% in 2024, though still below pre-pandemic levels.

For the U.K., the IMF upgraded near-term growth slightly to 0.5% in 2023 but lowered its 2024 forecast on expectations of lingering damage from energy price shocks. The U.K. faces a difficult road ahead.

Overall, the IMF kept its global growth outlook unchanged at 3% for 2023. This sluggish pace reflects myriad headwinds including inflation, tight monetary policy, supply chain issues, and the war in Ukraine. IMF Chief Economist Gourinchas described the global economy as “limping along” below its pre-pandemic trend.

Positives like easing supply chain bottlenecks, lower Covid impacts, and stabilizing financial conditions will provide some uplift. But manufacturing and services slowdowns, synchronized central bank tightening, and China’s property crisis will constrain growth.

For investors, the IMF outlook sends mixed signals. U.S. economic resilience and continued consumer strength provide room for cautious optimism. But Europe’s downward revision and pervasive global headwinds like inflation suggest ongoing volatility and potential bumps ahead.

This outlook underscores the importance of defensive positioning and safe haven assets to balance riskier equities. Key takeaways for investors include:

  • Focus on U.S. sectors and stocks benefitting from higher business and consumer spending.
  • Tread carefully in Europe as weaker growth hits markets. Emphasize quality multinationals with less cyclical dependence.
  • Inflation and interest rates will remain challenges influencing markets and consumer behavior.
  • China’s faltering growth and property bubble pose threats worth monitoring.
  • Pay close attention to recession signals that could shift IMF forecasts and alter market psychology.

While the global economy is still expanding, momentum is slowing with many obstacles to navigate. Investors should build resilient portfolios capable of withstanding volatile conditions, while staying alert for any deterioration that could change the IMF’s cautious optimism.

Middle East Tensions Move the Global Markets

Posted on by slightbourne@noblecapitalmarkets.com

The escalating conflict between Israel and Hamas has sent shockwaves around the world, with major implications for global financial markets. This past weekend, Hamas militants launched a deadly attack in Israel, killing over 700 people. Israel has retaliated with airstrikes in Gaza and a blockade, leading to rising casualties on both sides. As the violence continues, here is how the clashes could impact the stock market and oil prices.

Stocks Tumble Over 2%

Major US stock indexes fell sharply on Monday in early trading, with the Dow Jones Industrial Average dropping over 700 points, or 2.1%. The S&P 500 declined 2.2% while the Nasdaq Composite sank 2.5%. The declines came amid a broader sell-off as investors fled to safe haven assets like bonds, but stocks trimmed losses as the day progressed.

By early afternoon, the Dow Jones Industrial Average was down just 0.7% after falling over 700 points earlier. The S&P and Nasdaq posted similar reversals after opening sharply lower.

Energy and defense sector stocks bucked the downward trend, rising on expectations of higher oil prices and military spending. But the prospect of further violence dragged down shares of transportation, tourism, and other cyclical firms that benefit from economic growth. Stock markets in Europe and Asia also posted sizable losses.

Prolonged Instability Adds Downside Risks

While markets often rebound after initial geopolitical shocks, an extended conflict between Israel and Hamas could lead to a deeper, sustained selloff. Investors fear that rising tensions in the Middle East could upend the post-pandemic economic recovery. Supply chains already facing shortages and logistical bottlenecks could worsen if violence escalates. US fiscal spending could also spike higher if military involvement grows.

Surging oil prices feeding into already high inflation may spur the Federal Reserve to tighten policy faster. This risks hampering consumer spending and growth. Elevated uncertainty tends to erode business confidence and curb capital expenditures as well. From an earnings perspective, prolonged fighting dents bottom lines of various multinationals operating in the region. The potential economic fallout from persistent Middle East unrest weighs heavily on investors.

Oil Jumps Over 4%

Brent crude oil surged above $110 per barrel, gaining over 4% on Monday before paring some gains. West Texas Intermediate also vaulted over 4% to above $86 per barrel. The jump in oil prices came amid worries that supplies from the Middle East could be disrupted if violence spreads.

The Middle East accounts for about one-third of global oil output. While Israel is not a major producer, heightened regional tensions tend to lift crude prices. Oil markets fear that unrest could spill over into other parts of the region or lead oil producers to curb supply.

Prolonged Supply Issues

If the Israel-Hamas conflict draws in more countries or persists in disrupting regional stability, crude prices could head even higher. Any supply chain troubles that keep oil from reaching end markets will feed into rising inflation. High energy costs are already squeezing consumers and corporations worldwide.

Organizations like OPEC could decide to take advantage of conflict-driven oil spikes by reducing output further. Constraints on Middle East oil transit and infrastructure damage could also support higher prices. From an economic perspective, pricier crude weighs on growth by driving up business costs and crimping consumer purchasing power. Prolonged oil supply problems due to Middle East unrest would prove corrosive for the global economy.

Hope for Swift Resolution

With oil surging and equities declining, investors hope the clashes between Israel and Hamas wind down rapidly. Markets are likely to remain choppy and risks skewed to the downside in the interim. But a quick de-escalation and return to stability could spark a relief rally.

Energy and defense sectors may give back some gains while cyclical segments would likely rebound. Still, the massive human toll and damage already incurred will weigh on regional economic potential for years to come. The attacks also shattered a delicate effort to broker ties between Israel and Saudi Arabia. Hopes for a durable resolution between Israelis and Palestinians have once again been dashed. The economic impacts already felt across global markets are only a glimpse of the long-term consequences of deepening conflict.

Will Cathie Wood’s ARKK Fund Bounce or Break Down Further?

Posted on by slightbourne@noblecapitalmarkets.com

Cathie Wood’s leading ARK Innovation ETF is exhibiting increasing technical weakness that threatens to push shares lower. The fund, known for its disruptive growth stocks, is flashing multiple sell signals after a sharp slide from summer highs.

ARKK delivered incredible gains through much of the past two years as Wood’s pandemic picks like Zoom, Teladoc and Roku surged. But the ETF has stumbled hard since peaking in February 2021, giving back almost 75% of its value.

After showing some resiliency this year, ARKK is now facing its most ominous setup yet. The ETF hit a 52-week high in mid-July but has trended steadily lower since, carving out a series of lower highs and lower lows.

This price action forms a textbook downtrend, with each bounce failing at lower levels. ARKK just sank to its weakest point since May after rejecting its 200-day moving average as resistance.

Adding to the woes, the 50-day moving average has been bending lower in a negative slope. The ETF closed Tuesday a stark 11% below its 50-day line, a clear sell signal in technical analysis. ARKK is also nearing its 2021 low just above $35, presenting major support.

Bearish momentum is apparent across indicators. The relative strength line has plunged sharply since August, reflecting severe underperformance versus the S&P 500. The on-balance volume line is also heading decisively lower.

Plus, the Accumulation/Distribution Rating, which gauges institutional buying and selling activity, sits at a dismal D- for ARKK. The up/down volume ratio shows selling swamping buying to the tune of a 0.6 ratio over the past 50 days.

ARKK’s top components have crumbled in tandem. Major positions Tesla, Zoom, Roku, Coinbase and Block are all deeply in the red over the past month. The lone bright spot is Exact Sciences, maker of a colon cancer screening test, up over 30%.

But weak action in former stars like Tesla and Zoom is a big weight, compounding growing doubts over their long-term growth outlooks. ARKK’s 11% allocation to struggling Tesla looks increasingly problematic.

Of course, periods of underperformance are inevitable even among top growth managers. ARKK still shows a solid 21% gain in 2022 when many indexes remain negative. So this could prove just a dry spell for Wood’s strategy.

However, with the economy potentially rolling over, the prospects for unprofitable growth stocks look even more precarious. This environment may lead investors to shift focus towards more defensive small and micro caps as well as emerging growth names.

ARKK’s technically damaged chart highlights the perils of sticking with high-valuation names in a deteriorating macro climate. For now, it continues to exhibit a troubling technical breakdown as it retests the 2021 lows. Given the backdrop, its chart damage signals additional volatility is still ahead.

Cathie Wood forged a glowing reputation in 2020’s frenzied rebound but is undergoing a brutal reality check. With ARKK flashing multiple sell signals, the next leg lower could further test the resilience of Wood’s innovation approach.

Jobs Report Rockets Past Wall Street Estimates

Posted on by slightbourne@noblecapitalmarkets.com

The September jobs report revealed the U.S. economy added 336,000 jobs last month, nearly double expectations. The data highlights the resilience of the labor market even as the Federal Reserve aggressively raises interest rates to cool demand.

Economists surveyed by Bloomberg had forecast 170,000 job additions for September. The actual gain of 336,000 jobs suggests the labor market remains strong despite broader economic headwinds.

The unemployment rate held steady at 3.8%, unchanged from August and still near historic lows. This shows employers continue hiring even amid rising recession concerns.

Wage growth moderated but still increased 0.3% month-over-month and 5.0% year-over-year. Slowing wage gains may reflect reduced leverage for workers as economic uncertainty increases.

The report reinforces the tight labor market conditions the Fed has been hoping to loosen with its restrictive policy. Rate hikes aim to reduce open jobs and slow wage growth to contain inflationary pressures.

Yet jobs growth keeps exceeding forecasts, defying expectations of a downshift. The Fed wants to see clear cooling before it eases up on rate hikes. This report suggests its work is far from done.

The September strength was broad-based across industries. Leisure and hospitality added 96,000 jobs, largely from bars and restaurants staffing back up. Government employment rose 73,000 while healthcare added 41,000 jobs.

Source: U.S. Bureau of Labor Statistics via CNBC

Upward revisions to July and August payrolls also paint a robust picture. An additional 119,000 jobs were created in those months combined versus initial estimates.

Markets are now pricing in a reduced chance of another major Fed rate hike in November following the jobs data. However, resilient labor demand will keep pressure on the central bank to maintain its aggressive tightening campaign.

While the Fed has raised rates five times this year, the benchmark rate likely needs to go higher to materially impact hiring and wage trajectories. The latest jobs figures support this view.

Ongoing job market tightness suggests inflation could become entrenched at elevated levels without further policy action. Businesses continue competing for limited workers, fueling wage and price increases.

The strength also hints at economic momentum still left despite bearish recession calls. Job security remains solid for many Americans even as growth slows.

Of course, the labor market is not immune to broader strains. If consumer and business activity keep moderating, job cuts could still materialize faster than expected.

For now, the September report shows employers shaking off gloomier outlooks and still urgently working to add staff and retain workers. This resiliency poses a dilemma for the Fed as it charts the course of rate hikes ahead.

The unexpectedly strong September jobs data highlights the difficult balancing act the Fed faces curbing inflation without sparking undue economic damage. For policymakers, the report likely solidifies additional rate hikes are still needed for a soft landing.

Bond Market Signals Recession Warning As Yields Invert

Posted on by slightbourne@noblecapitalmarkets.com

The bond market is sounding alarm bells about the economic outlook. The yield on the 2-year Treasury briefly exceeded the 10-year yield this week for the first time since 2019. Known as a yield curve inversion, this phenomenon historically signals a recession could be on the horizon.

While not a guarantee, yield curve inversions have preceded every recession over the past 50 years. Here is what is happening in the bond market and what it could mean for investors.

Why Did Yields Invert?

Yields on short-term bonds like 2-year Treasuries tend to track the Federal Reserve’s policy rate. With the Fed aggressively hiking rates to combat inflation, short-term yields have been rising quickly.

Meanwhile, long-term yields like the 10-year are influenced by investors’ growth and inflation expectations. As optimism over the economy’s trajectory wanes, investors have been driving down long-term yields.

This dynamic inversion, where short-term rates exceed longer-duration ones, reflects mounting concerns that the Fed’s rate hikes will severely slow economic activity. Markets increasingly fear rates may cause a hard landing into recession.

Image credit: Cnbc.com

Growth and Inflation Concerns Intensify

The yield curve has flashed the most negative signal since the lead up to the pandemic recession. This suggests investors see a lack of catalysts for growth on the horizon even as inflation remains stubbornly high.

Ongoing supply chain problems, the war in Ukraine putting pressure on food and energy prices, and fears of a housing market slowdown are all weighing on outlooks. There is a sense the Fed lacks effective tools to bring down inflation without crushing the economy.

Meanwhile, key economic indicators like manufacturing surveys have weakened significantly. This points to activity already slowing ahead of when rate hikes would take full effect.

Implications for Investors

The risks of a recession are rising. Yield curve inversions have foreshadowed every recession since the 1950s. However, they have also sometimes occurred 1-2 years before downturns start.

This suggests investors should prepare for choppiness, but not panic. Rotating toward more defensive stocks like healthcare and consumer staples can help portfolios better weather volatility. At the same time, cyclical sectors like tech and industrials could face more pressure.

In fixed income, short-term bonds may offer opportunities as the Fed potentially cuts rates during a downturn. But credit-sensitive sectors like high-yield bonds and leveraged loans could struggle if defaults rise.

While uncertainty abounds, the inverted yield curve highlights the delicate balancing act ahead for the Fed and concerns over still-high inflation. Investors will be closely watching upcoming data for signs of how quickly the economy is slowing. For now, caution and safe-haven assets look to be in favor as recession worries cast a long shadow.

Crisis Averted: Government Stays Open

Posted on by slightbourne@noblecapitalmarkets.com

By averting a government shutdown, Congress has avoided rocking both the economy and financial markets. Shutting down federal operations would have created widespread uncertainty and turbulence. Instead, the move offers stability and continuity as the economy faces broader headwinds.

With virtually all government functions continuing normal operations, economic data releases, services, and programs will not face disruptions. Past shutdowns caused delays in economic reports, processing visa and loan applications, releasing small business aid, and more. These disruptions introduce friction that can dampen economic momentum.

Federal employees will continue receiving paychecks rather than facing furloughs. The last major shutdown in 2018-2019 resulted in 380,000 workers being furloughed. With over 2 million federal employees nationwide, even a partial shutdown can reduce economic activity from lost wages.

Government contractors also avoid financial duress from suspended contracts and payments. Many contractors faced cash flow crises during the 2018 shutdown as the government stopped paychecks. Reduced revenues directly hit company bottom lines.

Consumer and business confidence are likely to be maintained without the dysfunction of a funding gap. Surveys showed confidence dropped during past shutdowns as uncertainty rose. Lower confidence can make households and businesses reduce spending and investment, slowing growth.

The tourism industry does not have to contend with closing national parks, museums and monuments. The 2013 shutdown caused sites like the Statue of Liberty to close, resulting in lost revenue for vendors, hotels, and airlines. These impacts radiate through the economy.

Markets also benefit from reduced policy uncertainty. The 2011 debt ceiling showdown and 2018-2019 shutdown both introduced volatility as deadlines approached. Equities fell sharply in the final weeks of the 2018 impasse. While shutdowns alone don’t determine market trends, they contribute an unnecessary headwind.

With recent stock volatility driven by inflation and recession concerns, averting a shutdown provides one less factor to potentially spook markets. Traders never like surprises, and shutdowns heighten unpredictability.

On a sector basis, federal contractors and businesses leveraged to consumer spending stand to benefit most from the avoided disruption. Aerospace and defense firms like Lockheed Martin and Northrop Grumman rely heavily on federal budgets. Consumer discretionary retailers and restaurants avoid lost sales from furloughed workers tightening budgets.

While shutdowns impose only marginal economic impact when brief, longer impasses can impose meaningful fiscal drags. The 16-day 2013 shutdown shaved 0.3% from that quarter’s GDP growth. The longer the stalemate, the greater the economic fallout.

Overall, with myriad headwinds already facing the economy in inflation, rising rates, and recession risks, avoiding a shutdown removes one variable from the equation. While defaulting on the national debt would produce far graver consequences, shutdowns still introduce unnecessary turbulence.

By staving off even a short-term shutdown, Congress helps maintain economic and market stability at a time it’s especially needed. This provides a breather after policy uncertainty spiked leading up to the shutdown deadline. While myriad challenges remain, at least this box has been checked, for now.

DoorDash Ditches NYSE for Nasdaq in Major Stock Exchange Switch

Posted on by slightbourne@noblecapitalmarkets.com

Food delivery app DoorDash announced it will transfer its stock exchange listing from the New York Stock Exchange to the Nasdaq. The company will begin trading on the Nasdaq Global Select Market under the ticker ‘DASH’ starting September 27, 2023.

This represents a high-profile switch that exemplifies the fierce competition between the NYSE and Nasdaq to attract Silicon Valley tech listings. It also reflects shifting sentiments around brand associations and target investor bases.

DoorDash first went public on the NYSE in December 2020 at a valuation of nearly $60 billion. At the time, the NYSE provided the prestige and validation desired by the promising young startup.

However, DoorDash has since grown into an industry titan boasting a market cap of over $30 billion. As a maturing technology company, Nasdaq’s brand image and investor mix provide better positioning.

Tony Xu, co-founder and CEO of DoorDash, emphasized the benefits of the Nasdaq in the company’s announcement. “We believe DoorDash will benefit from Nasdaq’s track record of being at the forefront of technology and progress,” he said.

Nasdaq has built a reputation as the go-to exchange for Silicon Valley tech firms and growth stocks. Big name residents include Apple, Microsoft, Amazon, Tesla, Alphabet, and Facebook parent company Meta.

The exchange is also home to leading next-gen companies like Zoom, DocuSign, Crowdstrike, Datadog, and Snowflake. This creates an environment tailor-made for high-growth tech outfits.

Meanwhile, the NYSE leans toward stalwart blue chip companies including Coca Cola, Walmart, Visa, Walt Disney, McDonald’s, and JPMorgan Chase. The historic exchange tends to attract mature businesses and financial institutions.

Another factor likely influencing DoorDash is the investor makeup across the competing exchanges. Nasdaq generally appeals more to growth-oriented funds and active traders. The NYSE caters slightly more to institutional investors like pension funds, endowments, and passive index funds.

DoorDash’s switch follows ride sharing pioneer Lyft’s jump from Nasdaq to the NYSE exactly one year ago. Like DoorDash, Lyft desired a brand halo as it evolved past its early startup days.

“It’s a signal of us being mature, of us continuing to build a lasting company,” said Lyft co-founder John Zimmer at the time of the company’s NYSE listing.

Jared Carmel, managing partner at Manhattan Venture Partners, believes these exchange transfers reflect the “changing identities of the companies.”

As startups develop into multi-billion dollar giants, they evaluate whether their founding exchange still aligns with their needs and desired perceptions. Brand association and shareholder registration are becoming as important as operational capabilities for listings.

High-flying growth stocks like DoorDash also consider indexes, as the Nasdaq 100 often provides greater visibility and buying power from passive funds tracking the benchmark. Prominent inclusion in those indexes requires trading on Nasdaq.

Whether mature blue chips or emerging Silicon Valley darlings, the rivalry between Nasdaq and NYSE will continue heating up as each exchange vies to attract and retain brand name public companies. With lucrative listing fees on the line, exchanges will evolve branding, services, and capabilities to better cater to their target customers.

The DoorDash switcheroo exemplifies the changing perspectives and motivations influencing exchange selection. As companies lifecycles and personas transform, they reevaluate decisions made during those frenetic early IPO days.

Mortgage Rates Hit 23-Year High

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates crossed the 7% threshold this past week, as the 30-year fixed rate hit 7.31% according to Freddie Mac data. This marks the highest level for mortgage rates since late 2000.

The implications extend far beyond the housing market alone. The sharp rise in rates stands to impact the stock market, economic growth, and investor sentiment through various channels.

For stock investors, higher mortgage rates pose risks of slower economic growth and falling profits for rate-sensitive sectors. Housing is a major component of GDP, so a pullback in home sales and construction activity would diminish economic output.

Slower home sales also mean less revenue for homebuilders, real estate brokers, mortgage lenders, and home furnishing retailers. With housing accounting for 15-18% of economic activity, associated industries make up a sizable chunk of the stock market.

A housing slowdown would likely hit sectors such as homebuilders, building materials, home improvement retailers, and home furnishing companies the hardest. Financial stocks could also face challenges as mortgage origination and refinancing drop off.

Broader economic weakness resulting from reduced consumer spending power would likely spillover to impact earnings across a wide swath of companies and market sectors. Investors may rotate to more defensive stocks if growth concerns escalate.

Higher rates also signal tightening financial conditions, which historically leads to increased stock market volatility and investor unease. Between inflation cutting into incomes and higher debt servicing costs, consumers have less discretionary income to sustain spending.

Reduced consumer spending has a knock-on effect of slowing economic growth. If rate hikes intended to fight inflation go too far, it raises the specter of an economic contraction or recession down the line.

For bond investors, rising rates eat into prices of existing fixed income securities. Bonds become less attractive compared to newly issued debt paying higher yields. Investors may need to explore options like floating rate bonds and shorter duration to mitigate rate impacts.

Rate-sensitive assets that did well in recent years as rates fell may come under pressure. Real estate, utilities, long-duration bonds, and growth stocks with high valuations are more negatively affected by rising rate environments.

Meanwhile, cash becomes comparatively more attractive as yields on savings accounts and money market funds tick higher. Investors may turn to cash while awaiting clarity on inflation and rates.

The Fed has emphasized its commitment to bringing inflation down even as growth takes a hit. That points to further rate hikes ahead, meaning mortgage rates likely have room to climb higher still.

Whether the Fed can orchestrate a soft landing remains to be seen. But until rate hikes moderate, investors should brace for market volatility and economic uncertainty.

Rising mortgage rates provide yet another reason for investors to ensure their portfolios are properly diversified. Maintaining some allocation to defensive stocks and income plays can help smooth out risk during periods of higher volatility.

While outlooks call for slower growth, staying invested with a long-term perspective is typically better than market timing. Patience and prudent risk management will be virtues for investors in navigating markets in the year ahead.

What Investors Should Know About the Growing Disparity Between Large and Small Cap Returns

Posted on by slightbourne@noblecapitalmarkets.com

Over the past year, large cap stocks have vastly outperformed their small cap counterparts. This widening rift between the biggest and smallest public companies has reached extremes not seen in over 20 years. While large caps continue charging ahead, small caps face mounting challenges that threaten their role in a balanced investment portfolio.

The stark contrast is evident in the returns of two major indices. The S&P 500, comprised of 500 of the largest U.S. companies, has delivered over -15% returns over the past 12 months. Meanwhile the Russell 2000 small cap index plunged over -25% over the same period.

This nearly 10 percentage point gap represents the highest divergence between large and small caps since 2001. The lopsided returns conjure memories of the late 1990s dot-com bubble, when mega cap tech stocks left smaller companies in the dust.

However, the current environment contains even stronger headwinds against small caps. Rampant inflation has battered small companies, which lack the pricing power of large cap brands. Ongoing supply chain difficulties and labor shortages have also taken a heavier toll on small business.

Moreover, the Federal Reserve’s aggressive interest rate hikes to combat inflation have disproportionately impacted small caps. Not only are borrowing costs up, but higher rates dampen economic growth forecasts which small caps rely upon. With the Fed signaling even more hikes ahead, the path ahead looks rocky.

Large caps have also benefitted from a flight to quality. Investors have piled into mega cap stocks like Apple, Microsoft, and Procter & Gamble as safe havens amid volatile markets. These stalwarts deliver steady revenues and dividends that provide shelter from broader economic storms.

The growth versus value dynamic has also disadvantaged small caps. With recession fears looming, investors have favored large cap stocks of mature companies over risky, high-growth small caps. Additionally, large tech names like Amazon and Nvidia dominate future-facing themes like cloud computing, AI, and the metaverse.

Some analysts argue this gap has created a bubble, with popular large caps trading at overextended valuations. However, until inflation shows meaningful declines, small caps will likely continue struggling against their mega cap peers.

For investors, the uneven returns underscore the importance of diversification between company sizes. While small caps carry higher risks today, they historically deliver long-term outperformance. Once the economy stabilizes, the pendulum could swing back in favor of smaller dynamos. For those with the risk tolerance, small caps trading at multi-year discounts could offer an opportunity.

Looking ahead, economic uncertainty persists. But maintaining exposure across the market cap spectrum remains imperative. Having allocation to both large and small caps allows investors to weather various market cycles. With patience and prudence, this lopsided period will eventually balance out.

FedEx Gains Market Share Amid Rival Struggles

Posted on by slightbourne@noblecapitalmarkets.com

Shares of FedEx jumped over 5% on Thursday after the shipping giant reported better-than-expected fiscal first quarter results. The stock rally comes amid a broader market selloff, with investors cheering FedEx’s improved profitability and outlook.

FedEx earned $4.55 per share last quarter, handily beating analyst forecasts of $3.70. Though revenue declined 6.5% year-over-year to $21.7 billion, the company boosted its operating margin to 7.3%, surpassing expectations.

The strong quarter was driven by effective cost-cutting under CEO Raj Subramaniam and higher shipping volumes as key rivals dealt with challenges. FedEx gained U.S. market share in recent months which it expects to retain.

Management raised full-year EPS guidance to a range of $17.00 to $18.50, up from prior outlook of $16.50 to $18.50. The company also announced new demand surcharges for the holiday peak season and a January rate increase.

FedEx continued benefiting from its DRIVE cost savings program which seeks $1.8 billion in total reductions. Steps like reducing flights, realigning staff and shifting to one daily delivery wave boosted efficiency.

The Ground segment was a standout with a 59% jump in operating income as volumes improved. The Express unit grew operating income 18% despite lower revenue. But the Freight division saw income drop 26% on reduced shipments.

The outperformance comes as labor negotiations weighed on service levels at rival UPS. UPS disclosed it lost 1 million packages daily to other carriers, which FedEx said it captured 400,000 of. The bankruptcy of trucking company Yellow also benefited FedEx.

Demand for logistics and shipping services remains resilient despite economic uncertainty. And challenges at competitors created an opening for FedEx to flex its network strength and snatch market share. It expects to maintain most new volumes.

Take a moment to take a look at a few shipping and logistics companies covered by Noble Capital Markets Senior Analyst Michael Heim.

The results suggest FedEx has turned a corner after recent struggles with costs and service issues. The company’s turnaround plan is clearly bearing fruit. And investors have taken notice, bidding the stock price higher after the earnings beat.

FedEx shares have now rebounded nearly 20% from 52-week lows hit in June. The stock remains down 25% year-to-date amid broader market volatility. But it has outpaced the S&P 500 recently.

Thursday’s post-earnings pop provides encouragement that FedEx may sustain its momentum if execution remains solid. But the company still faces macro uncertainty and must continue improving productivity.

The holiday quarter is crucial for delivery firms like FedEx. The company aims to avoid last year’s service shortfalls. Management expressed confidence its initiatives will enable strong peak season performance.

While risks remain, FedEx has proactively adapted its network for holiday demand spikes. And it should reap continued benefits from rival struggles if recent market share gains stick.

Ongoing cost discipline also remains key. As higher rates kick in, boosting revenue, FedEx must maintain focus on trimming unnecessary expenses. Investors want to see margins continue expanding.

The quarterly beat suggests the shipping titan is making strides in its turnaround bid under new leadership. If FedEx sustains stronger operational execution, its stock price could continue recovering lost ground.

But the company must keep innovating and finding efficiency gains in the rapidly evolving logistics arena. Satisfying customers and shareholders means continually improving services and profitability, even in a weakened economic climate.

Cisco to Acquire Cybersecurity Firm Splunk in $28 Billion Cash Deal

Posted on by slightbourne@noblecapitalmarkets.com

Cisco Systems announced Thursday it will acquire cybersecurity company Splunk in an all-cash deal valued at around $28 billion. The acquisition, Cisco’s largest ever, aims to expand its presence in the security software market and boost recurring revenue streams.

Under the agreement, Cisco will pay $157 per share to buy Splunk, representing a premium of over 20% to Splunk’s recent stock price. Splunk shares jumped 21% on the news, while Cisco stock slipped nearly 5%.

The network gear giant has been on an acquisition spree lately to grow its software offerings. Splunk provides data analytics software and services focused on security, internet of things and infrastructure monitoring.

Take a look at One Stop Systems Inc., a company that designs and manufactures innovative AI Transportable edge computing modules and systems, and data recording software for AI workflows.

Cisco CEO Chuck Robbins said Splunk’s data capabilities combined with Cisco’s network telemetry presents an opportunity for more AI-enabled security solutions. The deal is expected to close in late 2024 after clearing regulatory approvals.

Cisco aims to leverage Splunk’s analytics tools to improve threat detection and better predict cyber risks. Splunk’s software is used by over 9,000 customers including over 90 of the Fortune 100. The acquisition provides Cisco an avenue into more subscription-based software sales.

The company said it expects the deal to be cash flow positive and accretive to gross margins within the first year post-closing. Cisco forecasts the acquisition boosting adjusted earnings per share starting in the second year.

Splunk CEO Gary Steele will join Cisco’s executive leadership team once the merger is finalized and report directly to Robbins. Together the companies aim to become a leading force in security infrastructure.

The acquisition reflects Cisco’s ongoing shift toward software and subscription revenue. It provides both an expanded customer base and advanced analytics capabilities around security, core focuses for Cisco. The company will fund the sizable purchase through cash reserves and new debt financing.

Fed Keeping Rates Higher Despite Pausing Hikes For Now

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve left interest rates unchanged on Wednesday but projected keeping them at historically high levels into 2024 and 2025 to ensure inflation continues falling from four-decade highs.

The Fed held its benchmark rate steady in a target range of 5.25-5.5% following four straight 0.75 percentage point hikes earlier this year. But officials forecast rates potentially peaking around 5.6% by year-end before only gradually declining to 5.1% in 2024 and 4.6% in 2025.

This extended timeframe for higher rates contrasts with prior projections for more significant cuts starting next year. The outlook underscores the Fed’s intent to keep monetary policy restrictive until inflation shows clearer and more persistent signs of cooling toward its 2% target.

“We still have some ways to go,” said Fed Chair Jerome Powell in a press conference, explaining why rates must remain elevated amid still-uncertain inflation risks. He noted the Fed has hiked rates to restrictive levels more rapidly than any period in modern history.

The Fed tweaked its economic forecasts slightly higher but remains cautious on additional tightening until more data arrives. The latest projections foresee economic growth slowing to 1.5% next year with unemployment ticking up to 4.1%.

Core inflation, which excludes food and energy, is expected to fall from 4.9% currently to 2.6% by late 2023. But officials emphasized inflation remains “elevated” and “unacceptably high” despite moderating from 40-year highs earlier this year.

Consumer prices rose 8.3% in August on an annual basis, down from the 9.1% peak in June but well above the Fed’s 2% comfort zone. Further cooling is needed before the Fed can declare victory in its battle against inflation.

The central bank is proceeding carefully, pausing rate hikes to assess the cumulative impact of its rapid tightening this year while weighing risks. Additional increases are likely but the Fed emphasized future moves are data-dependent.

“In coming months policy will depend on the incoming data and evolving outlook for the economy,” Powell said. “At some point it will become appropriate to slow the pace of increases” as the Fed approaches peak rates.

For now, the Fed appears poised to hold rates around current levels absent a dramatic deterioration in inflation. Keeping rates higher for longer indicates the Fed’s determination to avoid loosening prematurely before prices are fully under control.

Powell has reiterated the Fed is willing to overtighten to avoid mistakes of the 1970s and see inflation fully tamed. Officials continue weighing risks between high inflation and slower economic growth.

“Restoring price stability while achieving a relatively modest increase in unemployment and a soft landing will be challenging,” Powell conceded. “No one knows whether this process will lead to a recession.”

Nonetheless, the Fed chief expressed optimism that a severe downturn can still be avoided amid resilient household and business spending. The labor market also remains strong with unemployment at 3.7%.

But the housing market continues to soften under the weight of higher rates, a key channel through which Fed tightening slows the economy. And risks remain tilted to the downside until inflation demonstrably falls closer to target.

For markets, clarity that rates will stay elevated through 2024 reduces uncertainty. Stocks bounced around after the Fed’s announcement as investors processed the guidance. The path forward depends on incoming data, but the Fed appears determined to keep rates higher for longer.