Key Takeaways
Strong Economic Data Pushes Back Plans To Cut Interest Rates
Bond Yields Break 5%
Netflix Reports After The Close Thursday
After a volatile day on Monday, stocks settled into a more reasonable trading range on Tuesday. Both the S&P 500 and Nasdaq Composite were down slightly. Volatility also contracted by 4% after having jumped nearly 12% on Monday. But the story of late has been what’s going on with interest rates.
As I’ve discussed multiple times, heading into 2024, markets were offering an aggressive view of anticipated rate cuts. However, consistently stronger than expected economic data has pushed those hopes for cuts back later and later into the year. And following comments from Federal Reserve Chairman Jerome Powell yesterday, investors probably aren’t going to see any drop in interest rates until at least the second half of the year. That can be good or bad, depending on the context.
Usually, interest rate cuts are intended to stimulate a weakening economy. Reducing costs spurs borrowing, which in turn leads to greater spending, yielding more jobs and more demand throughout the economy. Growth companies, in particular tech companies, tend to be most sensitive to changes in interest rate policy because they are the companies most in need of borrowing in order to grow. Therefore, lower rates are generally a boon for the tech sector. Conversely, higher rates can serve as a drag. Right now, rates aren’t at a level I’d consider high, but they’re making some noise, especially in shorter duration maturities where the 2-year note briefly broke above 5% on Tuesday, something I don’t think many investors had on their Bingo cards. While I don’t necessarily see rates moving higher than current levels and staying elevated, we’re clearly seeing some short-term choppiness with rates and that could continue through earnings season.
Speaking of earnings, last night United Airlines reported first quarter numbers. In what’s been a tumultuous few months for the airlines industry, UAL exceeded expectations and in premarket, the stock is indicated higher by nearly 5%. Shares of Adidas are up around 3% after the company reported better than expected earnings and raised guidance. At the other end of the spectrum, luxury apparel maker LVMH said revenues decreased. In very thinly traded premarket action, shares of LVMH are down around 5%.
The main course for earnings season is still a week away when companies like Alphabet, Meta and MicrosoftMSFT
report. Perhaps the name most anticipated, Nvidia, isn’t scheduled to report until near the end of May. However, we’ll get a small taste from the tech sector tomorrow after the close when NetflixNFLX
reports. As of Tuesday’s close, Netflix has an expected move of nearly 10%.
I’ve mentioned it multiple times in past columns and viewers of tastylive know we’re talking quite a bit about earnings season and the potential importance being placed on it. With the interest rate picture not offering any signs of potential stimulus to markets, there is added emphasis to earnings in order to justify the market’s gains this year. First quarter earnings are not only a reflection on year-over-year growth, but it’s also the quarter when companies offer full year outlooks. Therefore, I’m very interested in not just what Netflix says tomorrow when they report, but also how the overall market responds. I think they will serve as a test pancake, if you will, for just how sensitive the market is to earnings.
For today, I wouldn’t be surprised to see a continuation of yesterday’s sideways trading action. I think markets are waiting on corporate news to decide where they’ll head next. As always, I would stick with your investing plans and long term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
Reply
Reply all
Forward
