The fever that gripped the stock market after the Federal Reserve’s pivot this month finally broke on Wednesday. After nine days of gains, the S&P 500 posted its biggest drop since September.
There’s no obvious reason for such a big move. The relatively minor economic data on the day showed housing and consumer confidence were stronger than expected. That doesn’t explain the size of the stock drop. But it is a reminder that as long as traders are waiting for the Federal Reserve to start cutting interest rates, any news suggesting economic strength will be bad for stocks.
The big exception to the more-is-less rule will be inflation, with the next data from the personal consumption expenditures index due out Friday. Faster inflation is bad for the economy, and it is also bad for stocks, because it would require the Fed to keep rates higher for longer.
There was some speculation that short-term options trading helped push down stocks Wednesday. It might be the case, but it’s not a satisfying explanation. Nor is the thought that traders might just want to cash in on recent gains and hit the slopes until the new year.
So has the Santa rally run its course? It’s still way too early to say. Stocks have risen quickly since the last dip in October. Price trends don’t move in a straight line, there will always be ups and downs to make your stomach churn.
The real good news is that bets on Fed cuts are as strong as ever. The evidence is the precipitous drop in government bond yields which continued on Wednesday. It’s a sign that investors may not want to give up on the stock rally for a while yet.
—Brian Swint
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Consumer Confidence Surges as Rate Cut Expectations Grow
Americans are wrapping up 2023 feeling better about the economy, with consumer confidence surging past expectations and the outlook improving for the next six months. Business industry group The Conference Board said conditions reflect less pessimistic views of business, the labor market, and personal income prospects.
- The Conference Board’s consumer confidence index jumped to 110.7 in December, a higher than expected level and up from November’s downwardly revised reading. Americans are also more optimistic that the economy will avoid a recession within the next year, The Conference Board said.
- The December increase was the most since early 2021, while the outlook for inflation a year from now is the lowest since late 2020. Confidence gained the most for households aged 35-54 with income levels of $125,000 and above, The Conference Board said.
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Still, consumer product companies continue to report a cautious mood.
General Mills,
maker of Cheerios and Pillsbury crescent rolls, slashed its sales guidance for the fiscal year after disappointing second quarter revenue. CEO Jeff Harmening said consumers still display “value-seeking” behaviors. - Expectations the Federal Reserve will begin cutting interest rates in 2024 is helping to fuel some of the improving economic outlook. On Wednesday, Philadelphia Fed President Patrick Harker said in a radio interview that rates should come down, but not any time soon.
What’s Next: Harker’s comments might toss cold water on the idea that a Fed rate cut is coming early in 2024, though futures markets continue to believe otherwise. Markets put a nearly 70% probability of a quarter-point rate cut in March after holding steady in January, according to CME’s FedWatch Tool.
—Liz Moyer and Sabrina Escobar
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Micron Sets Strong Revenue Forecast on Data Center Demand
Micron Technology
forecast better-than-expected revenue for the current quarter as demand for memory chips in its data center arm is overcoming the slower recovery supplying chips for smartphones and personal computers.
- Fiscal first quarter revenue rose 16% to $4.73 billion and beat expectations, while an adjusted loss of 95 cents a share was narrower than analysts forecast. For the second quarter, Micron is expecting revenue of $5.3 billion at the midpoint of a range.
- CEO Sanjay Mehrotra said business fundamentals are expected to improve next year and the total addressable market is expected to reach a record by 2025. Mehrotra cited its higher memory capabilities for data center artificial intelligence applications as a driver of growth.
- Micron also expects its losses to narrow in the current quarter, projecting a range for an adjusted loss of 21 cents a share to 35 cents a share, better than analysts’ forecasts. Mehrotra said Micron is well-positioned to capitalize on the “immense” opportunities in AI.
- The company said inventories for memory and storage are at or near normal levels for most customers across the PC, mobile, automotive, and industrial segments. It also said data center customer inventory of memory and storage is improving.
What’s Next: Mehrotra said data center server unit shipments are expected to increase by a mid-single-digit percentage in 2024 after a dip in 2023. Demand for AI servers is strong after businesses have shifted budgets from traditional servers to content-rich AI servers.
—Liz Moyer
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Choice Hotels Raises Heat on
Wyndham
Shareholders in Tender Offer
Choice Hotels
has tried to convince shareholders of
Wyndham Hotels & Resorts
that they should support a merger of the two hospitality chains. Choice is urging Wyndham shareholders to send a “clear message” by tendering their shares after Wyndham’s board recommended its shareholders reject the $85-a-share buyout offer.
- Choice said it recently engaged with Wyndham shareholders representing over 40% of shares outstanding, and that many shareholders are “eager” for both parties to work together toward a resolution. Choice has already said it would nominate people to Wyndham’s board for next year’s shareholder vote.
- Wyndham said on its website that it has a proven record of creating value and has better growth prospects without a transaction with Choice, whose offer undervalues the chain and brings the risk of a prolonged regulatory review. It also said franchisee owners oppose a deal.
- Wyndham also said its growth opportunity, consistent with the guidance it gave in October, could result inasmuch as $44 of incremental share price growth, which it said “represents a far more compelling value” than Choice’s offer.
- Choice announced a tender offer for Wyndham shares on Dec. 12. After that, Wyndham representatives reached out to its representatives to talk about a potential deal, Choice said, but then Wyndham abruptly ended those talks five days later.
What’s Next: Choice said it still expects to close a transaction with Wyndham in a one-year time frame. It said it is working closely with the Federal Trade Commission on addressing possible competitive concerns after starting the review process.
—Liz Moyer
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A New Covid-19 Variant Is Spreading Rapidly Into Year-End
Health officials are warning about a fast-moving new variant of coronavirus that is leading to a spike of illness and hospitalizations as the holiday season advances toward the new year. The Centers for Disease Control and Prevention calls it the fastest-growing variant in the U.S., especially in the Northeast.
- The World Health Organization says the variant, known as JN. 1, makes up 27% of coronavirus cases globally, up significantly since early November, especially in winter climates. Officials have been tracking the variant since August, and it was first detected in the U.S. in September.
- The highest number of JN. 1 cases are in the U.S., France, Singapore, Canada, the U.K., and Sweden. The CDC estimated that JN. 1 was responsible for 21% of U.S. coronavirus cases as of Dec. 8. It’s about one-third of cases in the northeastern U.S.
- The CDC said hospitalizations for influenza, coronavirus, and respiratory syncytial virus, or RSV, overall are on the rise in recent weeks, including a 51% increase in Covid hospitalizations. The WHO calls JN. 1 a “variant of interest.”
- Most current variants of coronavirus are descendants of the Omicron strain. While JN. 1 is spreading rapidly, health officials said right now it doesn’t appear to cause more severe illness than prior strains. The CDC is urging immunizations against respiratory illnesses.
What’s Next: WHO said current vaccines should protect against severe disease and death from JN. 1 as well as other strains. U.S. households can order another four free at-home Covid-19 tests to be mailed to them through the federal government’s Covid.gov website.
—Liz Moyer
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Federal Reserve Chairman Jerome Powell signaled that enough was likely enough on interest-rate increases, and that a policy pivot to rate cuts was likely next year. MarketWatch talked to experts about what this all means for investors who have been chilling out with cash earning 5%.
For more, read more.
—Joy Wiltermuth
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—Newsletter edited by Liz Moyer, Steve Goldstein, and Rupert Steiner
Read the full article here