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Investors Shrug Off Weak Retail Sales as All Eyes Are on The Fed – Ticker Tape

The retail sales report was released Wednesday morning. Investors are focusing on the Fed announcement Wednesday afternoon. Software companies are getting downgraded as analysts readjust valuations for inflation and higher interest rates. The Bank of America U.S. Corporate Index Effective Yield suggests that investors are demanding higher yields. Many investors turn to the forex markets to find higher yields. eyes on the Fed

5 min read

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Key Takeaways

  • Retail Sales Softer Than Expected but Investors are Focused on the Fed Announcement 

  • Software Stocks Seeing Downgrades as Analysts Focus on Valuations in an Inflationary Environment 

  • Investors Searching for Yield Despite Negative Real Returns 

JJ Kinahan, Chief Market Strategist, TD Ameritrade

(Wednesday Market Open) Stock index futures were mostly flat before the open as investors await the Fed announcement this afternoon. The Census Bureau retail sales reports found that sales grew at a much slower pace in November despite rising prices inflating the numbers. However, stock index futures were unmoved on the report and the VIX (Cboe Volatility Index) remained slightly elevated before the open.

Apparently, all eyes are on the Fed. As investors focus on the Fed, it’s likely that volumes will be light in the morning. Light volumes carry the risk of not getting orders filled at a desirable price. Traders should consider waiting until after the meeting before placing trades or scaling into their positions to limit their risk. The reaction to the announcement will depend on how hawkish the Fed is with its need to taper faster and raise rates.

Outside of the Fed watch, everyone appears to be losing a little in the streaming wars. Netflix (NFLX) was downgraded Wednesday morning by Deutsche Bank. The analysts said it was hard to justify the company’s valuation because its revenue growth is slowing. However, the stock was unchanged in premarket trading. Additionally, yesterday, Morgan Stanley cut their price target on Disney (DIS) to $185 from $210.

Despite the popularity of electric vehicle (EV) makers, lithium producers Albemarle (ALB) and Livent (LTHM) were downgraded by Goldman Sachs on Wednesday morning from “neutral” to “sell”. EV batteries are lithium batteries, so there should be high demand for lithium so the downgrade may come as a bit of surprise for these companies. The stocks fell 4.96% and 7.80% respectively in premarket trading.

Citi analysts see the supply chain clearing up, which prompted them to upgraded United Parcel Service (UPS). UPS rallied 1.27% in premarket trading.

Stocks fell on Tuesday but trimmed some of its losses going into the close. The tech-heavy Nasdaq Composite (COMP: GIDS) was the biggest loser among the major indices on Tuesday. The index fell more than 2% but rallied off its lows to close 1.14% lower. The Nasdaq was drug down by the technology sector, which was the worst sector on the day. By contrast, the Dow Jones Industrial Average ($DJI) was down just 0.3% because it was buoyed by financial stocks, which rose on a pop in interest rates.

The software industry group was a big drag on technology stocks which, were the worst performer on the day. The Dow Jones U.S. Software Index ($DWCSOF) fell 3.28% after JP Morgan software analyst Sterling Auty issued a slew of stock downgrades and price target cuts that included companies like Adobe (ADBE), Akamai (AKAM), Cadence (CDNS), Cloudflare (NET), LegalZoom (LZ), and more.

But it wasn’t all bad for software companies. Auty upgraded a few stocks like CrowdStrike (CRWD) and SS&C Technologies (SSNC). According to Barron’s, Auty cited growth rates as the top factor to determining software valuations, which suggests that software companies could experience a slowdown in the near future.

Microsoft (MSFT) could be a good example of why valuations matter. It fell 3.26% on Tuesday despite not being downgraded. Analysts project that Microsoft will grow revenue by 15% over the next five years, but on Monday we learned from the Producer Price Index (PPI) that inflation for companies is growing at 9.6%. This means that inflation could eat up Microsoft’s growth, giving it an inflation-adjusted growth rate of 5.4%. Rising inflation and interest rates are forcing analysts and investors to reconsider their valuations and projections.  

Forecasting the Fed

On Tuesday, CNBC reported that analysts expect that the Fed will increase its tapering plans from $15 billion per month to $30 billion per month. Additionally, the projections include two, and possibly three, rate hikes in 2022 and three more in 2023. The target at the end of 2023 is a fed rate at 2.3%. Of course, these are only projections, and there are many factors that could influence the Fed’s decisions going forward.

Bond investors may fear that the Fed won’t raise rates fast enough. The Bank of America U.S. Corporate Index Effective Yield has an aggregate yield at 2.3%, which is about one percentage point higher than Treasuries. According to Barron’s, this is the highest spread between corporates and Treasuries since March 2021. The higher yield reflects demand from investors to get more for their money.

Of course, what the market wants and what the Fed does could be very different. But the Fed is also aware that the longer it waits to raise rates, the higher likelihood it has of feeding asset bubbles.  

Investors want higher yields
CHART OF THE DAY: DEMANDING MORE. The Bank of America U.S. Corporate Index Effective Yield (BAMLCOAOCMEY: FRED—read and green) separated from the 10-year Treasury yield (TNX—pink) when market demand differed between the assets. (An aggregate Treasury yield would be a better comparison, but there isn’t an index for it yet.) FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.  

Meeting Demand: Investors commonly demand higher yields from corporate bonds than Treasury bonds because corporate bonds are considered riskier. This is because Treasuries are backed by the taxing…

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