Waiting for Powell: Stocks Bounce Upward Ahead of Fed Testimony, Key Jobs Data

(Monday market open) It’s a “data du jour” week, mostly around the jobs market. Almost every day holds significance, but it all builds up to Friday’s February employment report.

Before that, investors will ponder Factory Orders today, Chinese trade data coming overnight, JOLTS data Wednesday, and mixed into all that, testimony to Congress tomorrow and Wednesday from Federal Reserve Chairman Jerome Powell.

Stocks rebounded late last week to arrest a long slide, drawing support from a pullback in Treasury yields and the dollar. Volatility also went back into hibernation, but keep a close eye on all those metrics if Powell sounds hawkish tomorrow.

Just in

New Tesla Price Cut: Investors may want to check Tesla’s (TSLA) performance today with news that the EV giant is cutting prices on its U.S. Model X and Model S by 4% to 9%. It disclosed the news on its company website. Analysts say this could be an attempt by the company to boost sales as Q1 draws to a close, but we’re still not talking bargain wheels—these cars sticker in the $90,000 to $100,000 range. Shares of the electric vehicle company barely moved in premarket trading. 

Morning rush

• The 10-year Treasury note yield (TNX) dropped 5 basis points to 3.9%.
• The U.S. Dollar Index ($DXY) is up slightly at 104.6.
• The Cboe Volatility Index® (VIX) futures are up marginally at 19.4
• WTI Crude Oil (/CL) traded down 1.4% at $78.57 per barrel.

Eye on the Fed

Federal Reserve Chairman Jerome Powell takes center stage at 10 a.m. ET Tuesday in his semiannual testimony to the Senate Banking Committee. His prepared remarks will likely come out just before he takes the podium, so it’s potentially a market-moving event about half an hour before the start of his appearance (he’ll also testify to a House committee Wednesday).

Here are a few things to look for when Powell speaks tomorrow. To start, see if he mentions “disinflation” in the goods sector again as he did after February’s Federal Open Market Committee (FOMC) meeting. Both the February Chicago Purchasing Managers’ Index (PMI) and Institute for Supply Management (ISM) Manufacturing reports last week showed continued contraction.

Will Powell indicate whether these movements are translating into lower prices, particularly at the wholesale level? Will his testimony or responses to questions afterward explain whether goods weakness could begin spilling into services? As a reminder, the February ISM services report came in strong last Friday with a headline of 55.1%. That was about flat with January’s but still well into expansion mode.

It’s unlikely Powell will directly address the future path of interest rates during his testimony. But back in July, the last time he appeared before the committee, Powell spoke of the need to be nimble and watch incoming data. It’s likely we’ll hear something similar tomorrow.

Stocks in spotlight

Earnings season ebbs: Whatever slings and arrows come from data and geopolitics, the stock market’s path ultimately depends on earnings. That’s why it may be hard to get a strong sense of up or down over the next four weeks before Q1 earnings season starts in earnest. The earnings calendar is pretty light this week, though Dick’s Sporting Goods (DKS) is expected to report tomorrow morning and Oracle (ORCL) is scheduled for Thursday.

China check-in: Over the weekend, China’s government set a 2023 growth target of 5% for its economy, up from 3% actual growth in 2022. Last year’s growth was among the worst in decades, Reuters reported, and some analysts think that 3% figure might have been overstated. The conservative outlook could weigh on crude and its effect on other commodities may actually be a positive for U.S. markets if it eases worries of Chinese demand-fueled inflation. Chinese trade data due out early Tuesday morning—expected tonight if you’re trading late—could provide fresh insight into how the reopening is going.  

Tesla (TSLA): Bad news drove in late Friday for Twitter, recently taken over by TSLA’s CEO Elon Musk. In an update to investors Twitter reported a 40% drop in revenue and adjusted earnings for December as advertisers abandoned the platform, the Wall Street Journal reported. It’s unclear if this will have any impact on TSLA shares, which were flat overnight.

What to watch

P/E trends: With analysts predicting 2.1% S&P EPS growth in 2023 and the SPX closing slightly above 4,000 on Friday, the forward price-earnings (P/E) ratio is slightly above 18. That’s up from 17.5 earlier last week before positive sentiment took over Thursday and Friday. Keep in mind, P/E averages around 16 historically and typically below that when inflation is similar to now.

Between 1958 and 2022, annual Consumer Price Index (CPI) growth of between 4% and 6%—approximately where it is today—was the case 16% of the time, according to Charles Schwab data. During those times, the average SPX forward P/E was 15.1. Inflation of 6% to 8% in that era coincided with an average P/E of 11.8.

Factoring in factories: January Factory Orders are due at 10 a.m. ET today. Analysts expect a 1.8% month-over-month drop, according to Briefing.com. They’ve risen four of the last five months.

S&P 500® earnings per share (EPS) are expected to decline 4.6% in Q4, with 99% of companies now reporting. It’ll be the first year-over-year quarterly drop since late 2020, according to research firm FactSet. Of the S&P firms reporting, 69% delivered an EPS above analysts’ expectations and 65% had higher-than-expected revenue.

Those earnings and revenue beats are well below long-term averages, and the amount of the beats has generally been smaller than in previous quarters, according to Charles Schwab research. Things don’t look better for Q1 either, with 81 of the 105 S&P companies that shared guidance warning of negative outlooks.

Analysts expect Q1 earnings to decline nearly 6% and to fall again in Q2 before rebounding in the second half of the year. Maybe it’s hopes for that rebound driving stocks higher at the moment, especially considering recent positive info tech earnings (see more below).

Market minutes

Here’s how the major indexes performed Friday:

• The Dow Jones Industrial Average® ($DJI) climbed 387 points, or 1.17%, to 33,390. It’s now back in positive territory for 2023.
• The Nasdaq Composite® ($COMP) rose 1.97% to 11,689.
• The Russell 2000® (RUT) gained 1.3% to 1,928.
• The SPX increased 64 points, or 1.61%, to 4,045.

Last week’s rally broke a three-week losing streak for the SPX and put it back above 4,000 for the first time in more than two weeks. Give falling yields most of the credit, with an assist from Broadcom (AVGO) and Salesforce (CRM) earnings.

Friday’s Treasury rally that sent the 10-year Treasury yield back below 4% was driven in part by a sharper-than-expected drop in February European producer prices. The dollar index also eased slightly toward the end of the week but remained near recent highs above 104 and remains a possible barrier to further gains on Wall Street.

Seatbelt light: Will the economy enjoy the proverbial “soft landing” that many investors hope for? Probably not. If it ends up being more turbulent, how should you prepare? Charles Schwab Chief Fixed Income Strategist Kathy Jones offers thoughts.

Talking technicals: Friday’s rally put the SPX into much better shape technically. It rebounded late Thursday after briefly falling below its 200-day moving average (MA) and closed higher. That’s a pretty significant move on the charts and may have played a role in Friday’s rally by inspiring some short covering. The close above 4,000 was also technically constructive. The SPX is now back above both the 200-day and 50-day MAs. The first line of technical resistance appears to be 4,050, and a former support area between 4,075 and 4,080 might represent technical resistance to watch higher up.

Thinking cap

Ideas to mull as you trade or invest

Your lying eyes: Just for fun, let’s fast-forward to this coming Friday. The February Nonfarm Payrolls data are just in, and let’s imagine they show far lighter jobs growth in February than the meteoric rise seen in January that spooked the market. Let’s even dial this scenario up a notch and assume wage growth also slowed. For further spice, we learn that the government downwardly revised its January jobs growth figure by 100,000. Again, this is all fantasy for now, but not completely unrealistic. If all this happened, would market participants take the data at face value? Remember, November and December showed inflation getting reined in, and then the government upwardly revised its price data. As the old saying goes, “Fool me once…”. That’s why it’s going to be interesting to see just how the market trades Friday morning if the data ends up looking rate-friendly. One hint: Watch Treasuries, not only stocks.

Tech turnaround? At the peak of Q4 info tech earnings in January, things seemed rather dark for the once high-flying sector that cratered in 2022. Benchmark tech firms like Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Intel (INTC), and Alphabet (GOOGL) disappointed with their numbers, their outlooks, or both. How the tables have turned. Recent tech earnings reports from Cisco (CSCO), Nvidia (NVDA), CRM, and AVGO showed these companies aren’t just surviving, but they’re thriving. And most offered sunny outlooks too. Does this mean the tide is turning for tech? If so, that could be extremely positive for stocks in general, especially if MSFT, GOOGL, AMZN, and AAPL can regain their footing. These mega-caps swing a lot of weight in the $COMP and SPX. GOOGL, AAPL, and MSFT all showed some life late last week. It’s going to be hard for the major indexes to get much upward traction without their help. ORCL’s earnings later this week loom.

Weighty considerations: If the news seems heavy lately with obesity coverage, you may be right. STAT, quoting a new report Thursday from a World Health Organization partner, estimated that by 2035, more than half of the world’s population will be either overweight or have obesity. That’s unfortunate in itself, but the dollar cost of this health condition is the real attention-getter. Data from the World Obesity Foundation reported the economic impact of a high body mass index (BMI) could eventually reach $4.32 trillion annually 12 years from now if policymakers don’t act. That’s roughly equal to 3% of global Gross Domestic Product (GDP). In response, investors might want to watch more than their snacking. The Boston Globe’s health site noted that the report doesn’t get into new classes of diabetes and obesity drugs being used for weight loss, but New York magazine’s latest cover story weighed in on the popularity of Novo Nordisk’s diabetes drug Ozempic for weight loss even though health insurers generally don’t cover it for that purpose now. Will weight loss become a big pharma theme in 2023? Stay tuned.

Calendar

March 7: January Wholesale Inventories and expected earnings from Dick’s Sporting Goods (DKS)

March 8: January JOLTS Job Openings, ADP Employment, Fed Beige Book, and expected earnings from Campbell Soup (CPB)

March 9: Initial and Continuing Jobless Claims and expected earnings from JD.com (JD) and Oracle (ORCL)

March 10: February Nonfarm Payrolls

March 13: No major data or earnings