Stocks Puke After Powell’s Heavy Pour

You can always count on the market to be surprised by things it shouldn’t be surprised by. 🤦

The Federal Reserve has been prepping the market with strong language for weeks, and inflation data remains stubbornly high. All of that pointed to today’s 75 bp hike and several more before the end of the year. 

So, what’s changed? Not a whole lot, but let’s read between the lines as we always do.

The first significant change was to the Fed’s “Dot Plot,” which shows that 12 of 19 FOMC members expect the Fed Funds rate to be between 4.50% and 5.00% by the end of 2023. Additionally, its projections show an expected rate range of 4.25%-4.50% before the end of 2022. 

If their projections are correct and inflation remains high, another 75 and a 50 bp hike are coming in the next three months. 🔺

The second significant change, which isn’t really a change, is that the Fed is throwing out the potential for a “soft landing.” While most of us discarded that idea after seeing the labor market strength and stickiness of inflation, it appears the market still had some hope left in it.

That hope is no more. 👎

Jerome Powell is waging a full-on war against inflation, and his two targets are the labor market and housing. He cannot, and will not, stop until prices meaningfully progress back towards 2%. That means unemployment will rise and housing prices will fall (or so the Fed hopes) in the coming quarters. Historically, that’s not great for risk assets like stocks or crypto either.

In the meantime, here’s a look at the CME FedWatch Tool, which shows the market’s projections for future hikes/cuts. After today’s meeting, it looks like the market is readjusting its expectations for more hikes through early 2023 and just one cut. To put that in perspective, over the summer, the market had been projecting rate cuts as early as Q1 2023.

What’s going to happen is anyone’s guess. That’s what we’re all doing here. But it appears the market is finally waking up to the idea that things could get worse before they get better. 😬

The housing market is already in rough shape, and the Fed reiterated its determination to bring prices down further. Given this is such an essential part of the economy, let’s look at earnings from homebuilders KB Home and Lennar. 👀

 First, let’s start with KB Home. Its earnings per share beat estimates of $2.67, coming in at $2.86. Meanwhile, its revenues of $1.84 billion were slightly below expectations. 

Home deliveries were up 6% YoY, but its third-quarter net orders fell by 50% due to higher mortgage rates, inflation, and macro pressures. In addition to demand waning, the company expects extended build times and supply constraints to continue into the fourth quarter. ❌

Meanwhile, Lennar earned $5.03 per share compared to $4.52 last year. Revenues were up 29% YoY to $8.9 billion, with deliveries rising 13% YoY and an average sales price of $491,000. 🔺

Like KB Home, a drop in new home orders shows slipping demand as a weaker macro environment, and higher rates push buyers out of the market. On the supply side, it noted an increase in materials and labor costs and that overall supply chain constraints (although improving) continue to limit its deliveries.

While these companies aren’t entirely sounding the alarms yet, the housing market is clearly amid a slowdown. And with the Federal Reserve focused on bringing down inflation by any means, monetary policy will likely remain a headwind for these companies well into next year.

After-hours volume is typically light for these companies, so we’ll have to see what tomorrow brings. Though the initial reaction from both stocks looks like their reports…not great. 👎

When people hear the word “general,” they may think of the military, car insurance, or automobiles. However, today we’re talking about a general in the food space whose stock price has quietly moved to all-time highs.

That stock is General Mills, which marched higher today after reporting better-than-expected earnings and raising its forecast. 💪

The $47 billion consumer foods company known for Cheerios, Betty Crocker, and Häagen-Dazs reported adjusted earnings of $1.11 and revenues of $4.72 billion. Earnings beat expectations by $0.11 per share, while revenue matched estimates.

Given the U.S. dollar’s strength, multinational companies have struggled internationally, and General Mills was not exempt. Its international sales dropped 30% YoY. 😮

Offsetting that weakness was strength in its North American Retail, North American Foodservice, and Pet sales, which saw YoY growth of 10%, 21%, and 19%, respectively. The company expects that strength to continue, raising its fiscal 2023 guidance for EPS growth of 2%-5% (from 0%-3%). Additionally, it expects organic net sales to rise 6%-7% vs. previous guidance of 4%-5% YoY.

Whether defensive areas of the market will continue to be a safe haven during these volatile times remains to be seen. But so far, that seems to be the case for companies with good results.

Investors cheered the strength and sent $GIS shares up 5.71% to new all-time highs while the market flopped. 📈