U.S. stocks scored their strongest week since June, as a report on Thursday that showed slowing inflation raised hopes that the Federal Reserve might pull back its policy of aggressive interest rate hikes. The Labor Department data pegged the annual rate of inflation at 7.7% in October, short of expectations for a 7.9% rise and down from this summer’s high of 9.1%. Stocks skyrocketed on the news Thursday in their biggest rally since the early weeks of the COVID pandemic in 2020, and U.S. Treasury yields tumbled, with the benchmark 10-year yield plunging to 3.82% after finishing last week at 4.16%. For the week, the S&P 500 surged 5.9%, while the Nasdaq Composite soared 8.1% for the week as investors shook off a drop in cryptocurrencies to snap up oversold tech shares, and the Dow Jones average added 4.1%. Read a preview of next week’s big market events in Seeking Alpha’s Catalyst Watch.
In a U.S. midterm election where very few seats were changing hands, the first key narrative shift came well after midnight, with Democrat John Fetterman projected by numerous decision desks to win a Pennsylvania Senate seat – the first seat in that chamber forecast to change party hands. With the Senate coming into election day deadlocked at 50 seats for each party, the flip made it increasingly likely that not only would Republicans take control of the Senate as they hoped, but that the Democrats might end up increasing their majority.
No red wave: That will depend on final results in Georgia, Arizona and Nevada. Fetterman’s win leaves 48 Senate seats in Democratic hands compared to 49 for the GOP. Over in the House, early projections saw Republicans picking up a few dozen seats, and while they’re still likely to take control of the chamber, it appears they might do so with a slim majority similar to that of the Democrats coming into the day – perhaps 225 vs. a needed 218 seats. NBC’s decision desk sees it much closer: 220 GOP seats to the Democrat’s 215, or when all is said and done, a five-vote margin.
“Obviously we don’t have 100% reporting in on anything yet, but it doesn’t look like anything we have seen so far has spooked markets at all,” said Randy Frederick, Managing Director of Trading and Derivatives at Charles Schwab.
Go deeper: Stocks have generally performed well in the one-year period after a midterm election dating back to 1950, according to LPL strategists Barry Gilbert and Jeffrey Buchbinder, with nearly identical figures under Democratic and Republican presidents. However, this time around the government is contending with soaring inflation, an energy crisis and a worsening backdrop for the economy. A Georgia run-off election between Raphael Warnock and Herschel Walker could also delay knowing the breakdown of the Senate until December. (350 comments)
Shares of Disney (DIS) slipped 6.8% AH to $93.10 on Tuesday following a fiscal fourth quarter where it missed revenue and profit expectations. Stellar revenue results from its “Parks, Experiences and Products” division (+36% Y/Y to $7.4B) were weighed down by sales on its “Media and Entertainment” side (-3% Y/Y to $12.7B). CFO Christine McCarthy also dented expectations for the new fiscal year, predicting revenue growth of less than 10% (compared to 22% in fiscal 2022).
Bigger concerns: Looking to counter investor worries over direct-to-consumer sales, the House of Mouse highlighted revenue and earnings forecasts for Disney+. It said that the streaming service would achieve profitability in fiscal 2024, while a series of price hikes in December and an ad-supported tier would likely boost its financial metrics. Operating losses will improve by about $200M next quarter and will be even lower in the fiscal second quarter of 2023.
“We are actively evaluating our cost base currently, and we are looking for meaningful efficiencies,” McCarthy announced on the earnings call. “Some of those are going to provide some near-term savings and others are going to drive longer term structural benefits.”
By the numbers: Investors put a big focus on streaming subscriber figures following a 10% drop in domestic average revenue per user (ARPU) to $6.10. While the company talked about “peak losses” and tacked on another 12M Disney+ users – topping Netflix (NFLX) with a total count of 235M subscribers (including Hulu, ESPN+ and Disney+) – it didn’t appear to be enough to turn around the stock. Net operating losses in the “Direct-to-Consumer” segment more than doubled Y/Y to $1.5B, up from $630M a year earlier, while many of the forecasts Disney made were under the assumption that “we do not see a meaningful shift in the economic climate.” (47 comments)
The firing of 13% of Meta Platforms’ (META) workforce also brought the tech and economic outlook back into the spotlight. In addition to the layoffs, the company is extending a hiring freeze through the first quarter of 2023, and will “roll out more cost-cutting changes” in the coming months. Shares of Meta climbed 5% on Wednesday in response to the news, but remain off 70% YTD amid worries over the platform’s pivot to the metaverse and reckless spending.
Quote: “I know there must be just a range of different emotions. I want to say up front that I take full responsibility for this decision,” Zuckerberg said on a video call after announcing the layoffs. “I’m the founder and CEO, I’m responsible for the health of our company, for our direction, and for deciding how we execute that, including things like this, and this was ultimately my call.”
“And it was one of the hardest calls that I’ve had to make in the 18 years of running the company. And a lot of why it’s hard is, obviously, it has a big impact on your lives, but also for our mission. We’re losing people who… you’ve really put your heart and soul into this place. No matter what team you may have worked on, each of you played a role in contributing to the products that billions of people use to connect every day.”
Outlook: Meta kept its Q4 revenue guidance of $30B to $32.5B unchanged, which is in line with analysts’ consensus estimates of about $31.6B. The 2022 and 2023 expense forecasts provided on the Q3 earnings conference call also factored in the financial impact of the layoffs. Going forward, investors will be keeping an eye on moderating growth and operating margins, as well as additional weakening in the company’s core advertising business. (89 comments)
One of the biggest stories of the week was the collapse of FTX International, or what some in the market are calling a “Lehman Brothers” moment for the crypto industry. Once valued at $32B and the third-largest crypto exchange by trading volume, FTX is in the middle of an insolvency crisis, prompting regulators from the Bahamas to Japan to freeze what’s left of its operations. It’s a moment of irony for the firm led by Sam Bankman-Fried, which itself served as a white knight this past summer to rescue several crypto players including BlockFi, Voyager Digital and Celsius.
The apology: “I’m sorry. That’s the biggest thing,” SBF wrote in a thread spanning over 20 tweets. “The full story here is one I’m still fleshing out every detail of, but as a very high level, I f—-d up twice [regarding leverage and liquidity]. A poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower. Because, of course, when it rains, it pours. We saw roughly $5B of withdrawals on Sunday – the largest by a huge margin.”
Sister trading house Alameda Research is “winding down trading,” though SBF noted that the end of his crypto empire does not impact “FTX US, the US-based exchange that accepts Americans.” While consumers can get their funds out for now, the crisis is weighing heavily on the sector, with Bitcoin (BTC-USD) falling to the $15,000 level before paring some of those losses. “For a period of time after this, which could be months, investors will be hesitant to come back into the market for fear that there’s another shoe to drop,” noted Matthew Hougan, chief investment officer at Bitwise Asset Management.
Course of action: “My #1 priority – by far – is doing right by users. To take responsibility, and do what I can,” SBF continued. “So, right now, we’re spending the week doing everything we can to raise liquidity. I can’t make any promises about that. But I’m going to try. And give anything I have to if that will make it work. There are a number of players who we are in talks with, LOIs, term sheets, etc. We’ll see how that ends up. Every penny of that – and of the existing collateral – will go straight to users, unless or until we’ve done right by them.” (80 comments)
“Explosive,” “shock” and “relief” are some of the adjectives being used to describe the rally on Thursday as stocks recorded their best session since the early days of the pandemic in 2020. When all was said and done, the Dow Jones Industrial Average and S&P 500 closed out the session up 3.7% and 5.5%, respectively, while the tech-heavy Nasdaq Composite Index skyrocketed 7.4%. U.S. government bond yields also recorded their steepest one-day decline in more than a decade, with the rate on the 10-year Treasury falling 32 basis points to 3.82%.
Driving the sentiment: Core and headline consumer inflation were weaker than expected in October, fueled by a decline in used car and truck prices, cheaper airfare and health insurance costs. The U.S. Labor Department reported a 0.3% month-over-month rise in October’s core Consumer Price Index, compared to forecasts for 0.5%, marking the softest reading since September 2021 for core CPI (it came in at 6.3% on an annualized basis). The headline CPI figure, which factors in volatile food and energy prices, climbed 7.7% from a year earlier vs. expectations of 8.0% and compared to an 8.2% clip seen in the previous month.
The moderation in prices could give the Fed more breathing room in terms of slowing down the pace of its aggressive rate hikes. Some Fed officials even hinted to a downshift following the data, like Dallas Fed President Lorie Logan, who said “while I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy.” According to the CME’s FedWatch Tool, markets are now pricing in an 80.6% probability of a 50-basis-point hike rather than a 75-point one at the central bank’s policy meeting next month.
Don’t get too excited: “A rally like this is of course very dramatic to say the least, but you have them all the time in a bear market,” famed investor Carl Icahn told CNBC in an interview. “We keep our portfolio hedged. I am still very, quite bearish on what is going to happen. I think the Fed has to keep raising and if it doesn’t then it’s going to be worse in the future anyway.” (242 comments)
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