Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 29, 2022.
Brendan Mcdermid | Reuters
The stock market is heading into what promises to be a volatile second quarter, but April is traditionally the best month of the year for stocks.
The major indices were higher in March, but they turned in a weak performance for the first quarter, the worst since the pandemic. Investors have been worried about rising interest rates, the war in Ukraine and inflation, which was made even worse by disruptions in commodities exports from both Russia and Ukraine.
Stocks are typically higher in April, and it is historically the best month of the year for the S&P 500. The S&P has been higher 70% of the time, and has gained an average 1.7% in all Aprils since World War II, according to Sam Stovall, chief investment strategist at CFRA. For all months, the S&P averaged a gain of 0.7%.
The S&P 500 was up 3.6% in March, and Stovall said the rally could continue. “I think we get back to breakeven, but then I wouldn’t be surprised if we go through another pullback or correction before we have an end of year rally,” he said.
Market focus in the week ahead will remain squarely on developments around the Ukraine war and on the Federal Reserve. The Fed on Wednesday is scheduled to release minutes from its March meeting, where it raised interest rates for the first time since 2018.
There are also a handful of Fed speakers, including Fed Governor Lael Brainard who speaks Tuesday.
Greg Faranello, Amerivet Securities head of U.S. rates, said the Fed minutes could be the highlight of the week since the central bank is likely to provide more detail on its plans to shrink its balance sheet. The Fed has nearly $9 trillion in securities on its balance sheet, and a reduction of those holdings would be another step to tighten policy.
“The market is curious. They’re going to be looking for some clues in terms of how quickly, how big, what the caps look like,” said Faranello.
The economic data calendar is light, with factory orders Monday, international trade and ISM services Tuesday, and wholesale trade Friday.
Traders will also be watching for any comments from companies ahead of the first quarter earnings reporting season, which starts in mid-April.
“The first quarter earnings have actually been improving in the last month, so that’s encouraging,” said Stovall.
Farewell to first quarter
The Dow was off 4.6% for the first quarter, while the S&P 500 was down 5%. The worst performer by far was the Nasdaq, down 9.1%. In the past week, the Dow and S&P were slightly negative while the Nasdaq was flat.
Interest rates also moved dramatically during the quarter, with the benchmark 10-year Treasury yield temporarily touching a high of 2.55% in the past week, after starting the quarter at 1.51%.
On Friday, the 10-year was yielding 2.38%, while the 2-year yield, which most reflects Fed policy, was at 2.43%. The 2-year was yielding 0.73% at the beginning of the year.
Faranello said bond yields can keep going higher on inflation concerns, but they could consolidate before another big move.
“I think the market is looking for a new catalyst here,” he said. “I just think the first quarter has been about repricing the market, and we’ve done that…The Fed came out very hawkish. We made made a dramatic repricing. Now, we need to see more data to see how this is going to evolve in the second quarter.”
Stovall said the S&P 500’s first quarter performance is one of the 15 worst first quarters, going back to 1945. After those weak quarters, down 3.8% or more, the second quarter was better on average. This year’s first quarter decline was tied with 1994, which had the 12th worst first quarter.
After those 15 weak first quarters, “we actually climbed 4.8% in the second quarter and rose in price two out of every three times,” he said. But for the full year, the S&P 500 gained just 40% of the time, and was down an average 2% in those years.
But this year is a midterm election year, and in those years the second and third quarters are typically the weakest. “Of those 15 worst quarters, five of them were midterm election years, and of those five, the second quarter was up an average 1%, and it rose in price only 40% of the time,” Stovall said.
Stovall said the market could be higher in the second quarter, but it will face headwinds. “Oil prices are likely to remain up. Interest rates are certainly not coming down,” he said, adding geopolitical pressures are likely to remain. “I see the possibility of a 1% gain. We could probably eke out something good.”
Stocks were held hostage by rising and volatile oil prices in the first quarter, as the world scrambled to make up for Russia’s export barrels. Many customers refused to buy Russian oil for fear of running afoul of financial sanctions on Russia’s financial system.
After wild swings both higher and lower, West Texas Intermediate oil futures gained 39% in the first quarter, the eighth positive quarter in a row and its best first quarter since 1999. WTI was just under $100 per barrel Friday afternoon.
Choppy, volatile market
Joe Quinlan, head of CIO Market Strategy for Merrill and Bank of America Private Bank, said he is constructive on the market heading into the second quarter, but he sees some rough spots ahead.
“We’ve got to work through the inflation problem, and the Fed catching up to the expectations of the market,” Quinlan said. “We’ve got to re-anchor inflation. It’s going to be a choppy, volatile year. We’re tilting more toward hard assets, whether it’s commodities, energy and natural gas.”
Quinlan said he leans towards equities over fixed income, which has also been unusually volatile. “We’re using equities as a hedge against inflation,” he said. “Within that framework is more hard assets, fuels, agriculture complex in general and metals and minerals.”
In the second quarter, the stock market will continue to adjust to an aggressive Federal Reserve against the backdrop of what should have been a solid economy. With 431,000 payrolls added in March, jobs data continues to be strong, but there is a fear the Fed will raise interest rates too quickly, derailing the economy and spinning it into recession.
Traders in the futures market expect the Fed will increase its fire power at its next meeting in early May, hiking interest rates by 50 basis points, or a half percent. The Fed’s first rate increase was a quarter point at its March meeting.
The market is pricing in the equivalent of eight quarter point hikes, and Treasury yields have moved higher with stunning speed as market expectations for interest rates shifted. The 2-year Treasury yield rose above the 10-year yield, or inverted this past week, for the first time since 2019. That is viewed by the market as a warning sign for a recession.
Fed officials have signaled they want to move to trim the balance sheet soon. Kansas City Fed President Esther George this past week said the Fed’s balance sheet will need to decline significantly. She said the Fed’s holdings of Treasurys may have depressed the 10-year yield, causing the yield curve to invert.
Faranello said interest rates could still head higher on inflation worries, but rates could consolidate after their recent run higher. The yield curve could also remain inverted.
“We can stay like this for a year-and-a-half. Everyone’s screaming a recession is coming…I don’t think the yield curve is telling us a recession is just about to happen,” Faranello said.
Week ahead calendar
10:00 a.m. Factory orders
8:30 a.m. International trade
9:45 a.m. Services PMI
10:00 a.m. ISM Services
11:05 a.m. Fed Governor Lael Brainard
2:00 p.m. New York Fed President John Williams
Earnings: Levi Strauss
9:30 a.m. Philadelphia Fed President Patrick Harker
2:00 p.m. FOMC minutes
8:00 a.m. St. Louis Fed President James Bullard
8:30a.m. Initial claims
2:00 p.m. Atlanta Fed President Raphael Bostic
2:00 p.m. Chicago Fed President Charles Evans
3:00 p.m. Consumer credit
4:05 p.m. New York Fed’s Williams
10:00 a.m. Wholesale trade
Goldman Sachs CEO David Solomon gets 29% pay cut to $25 million
David Solomon, Chairman & CEO of Goldman Sachs, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 23rd, 2023.
Adam Galica | CNBC
The package includes a $2 million base salary and variable compensation of $23 million, New York-based Goldman said in the filing. Most of Solomon’s bonus— 70%, or $16.1 million, is in the form of restricted shares tied to performance metrics, while the rest is paid in cash, the bank said.
Solomon’s pay, while large by most any measure, is about 29% lower than the $35 million he was granted for his 2021 performance. Meanwhile, Goldman’s full year earnings fell by 48% to $11.3 billion, thanks to sharp declines in investment banking and asset management revenue, the company said last week.
While the bank was primarily hit by industrywide slowdowns in capital markets activity as the Federal Reserve raised interest rates, Solomon also faced his own set of issues last year. Goldman was forced to scale back its ambitions in consumer finance and lay off nearly 4,000 workers in two rounds of terminations in recent months.
Fiji fires police commissioner and end security deal with China
Police operate a security check point in the Fijian capital of Suva in December following general elections. The Pacific island nation has played an important regional role amid competition between China on the one side and Australia, New Zealand and the United States on the other.
Saeed Khan | Afp | Getty Images
Fiji’s president on Friday suspended the commissioner of police following a general election saw the first change in government in the Pacific island nation in 16 years, after the military earlier warned against “sweeping changes.”
President Ratu Wiliame Katonivere said Commissioner of Police Sitiveni Qiliho had been suspended on the advice of the Constitutional Offices Commission, “pending investigation and referral to and appointment of, a tribunal.”
The Supervisor of Elections Mohammed Saneem was also suspended by the commission, the statement said.
Qiliho declined to comment to local media because he said he will face a tribunal over his conduct. He was seen as being close to former prime minister Frank Bainimarama, who led Fiji for 16 years before a coalition of parties narrowly won December’s election and installed Sitiveni Rabuka as leader of the strategically important Pacific nation.
The day before a coalition agreement was struck, Qiliho and Bainimarama called on the military to maintain law and order because they said the hung election result had sparked ethnic tensions, a claim disputed by the coalition parties.
The Pacific island nation, which has a history of military coups, has been pivotal to the region’s response to competition between China and the United States, and struck a deal with Australia in October for greater defence cooperation.
On Thursday, Fiji Times reported that Rabuka said his government would end a police training and exchange agreement with China.
“Our system of democracy and justice systems are different so we will go back to those that have similar systems with us,” the prime minister was quoted as saying, referring to Australia and New Zealand.
The prime minister’s office did not immediately respond to a request for comment.
Republic of Fiji Military Forces Commander Major General Jone Kalouniwai earlier this month warned Rabuka’s government against making “sweeping changes,” and has insisted it abide by a 2013 constitution which gives the military a key role.
Inventory glut and underused factories
Intel CEO Pat Gelsinger, with U.S. President Joe Biden (not pictured), announces the tech firm’s plan to build a $20 billion plant in Ohio, from the South Court Auditorium on the White House campus in Washington, January 21, 2022.
Jonathan Ernst | Reuters
Investors hated it, sending the stock over 9% lower in extended trading, despite the fact that Intel did not cut its dividend.
The earnings report, which was the eighth under CEO Pat Gelsinger’s leadership, shows a legendary technology company struggling with many factors outside of its control, including a deeply slumping PC market. It also highlights some of Intel’s current issues with weak demand for its current products and inefficient internal performance, and underscores how precarious the company’s financial health has become.
“Clearly, the financials aren’t what we would hoped,” Gelsinger told analysts.
In short: Intel had a difficult 2022, and 2023 is shaping up to be tough as well.
Here are some of the most concerning bits from Intel’s earnings report and analyst call:
Intel didn’t give full-year guidance for 2023, citing economic uncertainty.
But the data points for the current quarter suggest tough times. Intel guided for about $11 billion in sales in the March quarter, which would be a 40% year-over-year decline. Gross margin will be 34.1%, a huge decrease from the 55.2% in the same quarter in 2021, Gelsinger’s first at the helm.
But the biggest issue for investors is that Intel guided to a 15 cent non-GAAP loss per share, a big decline for a company that a year ago was reporting $1.13 in profit per share. It would be the first loss per share since last summer, which was the first loss for the company in decades.
Management gave several reasons for the tough upcoming quarter, but one theme that came through was that its customers simply have too many chips and need to work through inventory, so they won’t be buying many new chips.
Both the PC and server markets have slowed after a two-year boom spurred by remote work and school during the pandemic. Now, PC sales have slowed and the computer makers have too many chips. Gelsinger is predicting PC sales during the year to be around 270 million to 295 million — a far cry from the “million units-a-day” he predicted in 2021.
Now, Intel’s customers have to “digest” the chips they already have, or “correct” their inventories, and the company doesn’t know when this dynamic will shift back.
“While we know this dynamic will reverse, predicting when is difficult,” Gelsinger told analysts.
Underpinning all of this is that Intel’s gross margin continues to decline, hurting the company’s profitability. One issue is “factory load,” or how efficiently factories run around the clock. Intel said that its gross margin would be hit by 400 basis points, or 4 percentage points, because of factories running under load because of soft demand.
Ultimately, Intel forecasts a 34.1% gross margin in the current quarter — a far cry from the 51% to 53% goal the company set at last year’s investor day. The company says it’s working on it, and the margin could get back to Intel’s goal “in the medium-term” if demand recovers.
“We have a number of initiatives under way to improve gross margins and we’re well under way. When you look at the $3 billion reduction [in costs] that we talked about for 2023, 1 billion of that is in cost of sales and we’re well on our way to getting that billion dollars,” Gelsinger said.
Long-term investors have always closely watched how the company balances the near-term need to placate shareholders with the massive capital spending needed to stay competitive in the semiconductor manufacturing business.
If Intel is cutting costs and still needing to invest in chip factories to power its turnaround, analysts say it may want to reconsider its dividend. Intel spent $6 billion on dividends in 2022, but did not cut its dividend on Thursday.
Meanwhile, the company said it wants to cut $3 billion in costs for 2023 and analysts believe it wants to spend around $20 billion in capital expenditures to build out its factories.
Gelsinger was asked about this dynamic on Thursday.
“I’d just say the board, management, we take a very disciplined approach to the capital allocation strategy and we’re going to remain committed to being very prudent around how we allocate capital for the owners and we are committed to maintaining a competitive dividend,” Gelsinger replied.
There was at least one bright spot for Intel on Thursday.
Mobileye, its self-driving subsidiary that went public during the December quarter, reported earlier in the day, showing adjusted earnings per share of 27 cents and revenue growth of 59%, to $656 million. It also forecast strong 2023 revenue of between $2.19 billion and $2.28 billion. Shares rose nearly 6% during regular trading hours Thursday.
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