The Early Bird Gets…Eaten

The Federal Reserve hiked rates another 75 bps today as its fight against inflation continues. While Fed members and recent economic data largely telegraphed the increase, Powell’s commentary spooked the stock market and other risk assets.

Let’s get into the details. 📝

First, let’s talk about why stocks popped upon the initial release. A red-lined version from Nick Timiraos shows that the Fed not only delivered on its 75 bp hike but also added language suggesting more moderate increases would be ahead. At face value, that’s a slightly more “dovish” tone that we’ve seen from other central banks worldwide over the last month or two.

Fed hikes by 75 basis points.

New sentence in the FOMC statement signals more increases but hints at possibly smaller increments pic.twitter.com/nU13MVg5Sr

— Nick Timiraos (@NickTimiraos) November 2, 2022

Where things ran into trouble during Powell’s press conference. Again we’ll defer to Nick for another excellent summary here, but the critical difference is item #2.

The terminal fed funds rate initially discussed will likely have to rise. And rates will have to stay high for longer because it takes time for policy to work through the economy and have a meaningful impact on inflation. ⏳

The 3 takeaways from Powell's press conference:

1) The Fed could step down to a slower pace in Dec even if inflation data don't improve much
2) If there had been new estimates of the terminal funds rate released today, they would have moved up
3) Not ready to talk about a pause

— Nick Timiraos (@NickTimiraos) November 2, 2022

In other words, rates will stay higher for longer. That’s not great for risk assets, especially growth stocks and speculative investments like crypto.

The Fed outwardly acknowledging the lagging effect of policy and baking that into its decisions is a significant change in its communication. Until now, the Fed said it would rely on lagging inflation indicators like the PCE index and continue hiking until the housing and labor markets cooled. 📉

This rhetoric created fear that it’d continue hiking blindly until something broke in the economy. And while it’s not drastically changing that approach, it at least acknowledged the limitations of its policy measures and has outlined a more measured approach for future hikes.

For now, expectations are for another 50 bp hike in December before the pace slows further in Q1.

After today’s ADP payroll report showed 239k jobs added in October and wage increases of 7.7% YoY, all eyes will be on Friday’s nonfarm payroll data to see how tight the labor market remains. In the meantime, it seems the tightening continues, and stocks are not loving it… 👎

Given the interest rate and macro environment look likely to be challenging for the foreseeable future, there’s a lot of reluctance among growth stock investors. You’d think that after 50-60-70% or more declines from their 2021 highs, investors would be rushing to buy some names back at cheaper valuations. But that’s not been the case.

SoFi Technologies and Match Group are good examples from the last few days.

SoFi reported a decent quarter, topping revenue estimates and a loss slightly below expectations before Tuesday’s open. The stock rallied more than 20% initially but faded throughout the day to close up 5%. Today, the selling continued, with shares falling another 11%!

Meanwhile, Match Group experienced similar action today after reporting better-than-expected earnings and revenues.

The stock was initially up nearly 20% before fading throughout the day, closing up 4%

Bears will say that both of these companies also reported soft guidance for the coming quarters, which is understandable. But at the very least, they’re taking actions to get back on track and are inching closer to analyst estimates each quarter. That’s gotta count for something…right?

Apparently, not in this environment.

And don’t get us started with the growth stocks that continue to miss and/or reduce guidance. The market continues to punish them ruthlessly.

A good example from today is Roku, which fell another 18% after hours. Despite beating current-quarter revenue and earnings estimates, its weak revenue guidance and a larger adjusted EBITDA loss spooked investors. The company expects ad budgets to degrade along with consumers’ discretionary spending, hence the weaker guidance.

With central banks continuing to tighten as the global economy heads toward recession, can we really blame investors for wanting to steer clear of these stocks? As history suggests, valuation is not a catalyst on its own. And right now, the bigger-picture trends around liquidity and economic growth remain major headwinds for growth stocks worldwide.

And with headlines about companies ranging from Apple to Opendoor to Chime all slashing headcounts or freezing hiring to prepare for an upcoming recession, it’s no surprise investors are a little trigger-shy after a year-plus of buying dips that kept on dipping.

When that will change remains to be seen. But for now, the environment remains very difficult for growth stocks and investors alike.

Speaking of beaten-down growth stocks, Robinhood reported earnings today! 📝

The company’s diluted earnings per share of ($0.20) beat expectations of ($0.27), while revenues of $361 million beat expectations of $357.7 million. The brokerage’s net interest revenue drove the results, rising 73% to $128 million due to rising interest rates.

Its cryptocurrency transaction revenue fell 12% to $51 million as the “crypto winter” continues. On the other hand, equity trading ticked up 7% QoQ to $31 million, and options trading revenue was $124 million. Meanwhile, its quarterly monthly active users fell well short of the 13.74 million expected, at 12.2 million.

Transaction revenue is attempting to stabilize at $208 million, down from $266 million last year but up from last quarter’s $202 million. However, like other growth darlings, the company continues to cut costs and prioritize profitability amid the weaker environment. 💵

The initial reaction from investors was positive, with $HOOD shares rising 4% and erasing their intraday losses. We’ll have to see how it holds up in the coming days or if it faces a similar fate as the growth stocks discussed above.