Commentary

Stock bulls are hoping to regain control this week. This year’s rally has been interrupted by what appears to be a stall in the disinflation trend, which now has Wall Street rethinking its outlook for Federal Reserve policy.

Some are starting to question whether Fed rate cuts are even necessary in order for stocks to push higher. The shift in thinking seems to be gaining more of a foothold after a third month of stronger-than-expected job gains in March. US employers added +303,000 jobs, which was over +100,000 more than Wall Street was anticipating and compares to a downwardly revised +270,000 jobs added in February.

Remember, coming into 2024, investors and companies alike were concerned about possible recession due to tight financial conditions and high borrowing costs. Now, the strong pace of hiring this year indicates those concerns may have been overblown. It’s also notable that the pace of wage gains continues to hold steady at +4.1%. While that is higher than most believe the Fed is comfortable with, bulls believe it shows the economy can keep growing without causing inflation to reignite. 

The CME’s FedWatch tool shows traders place the odds of a June cut at around 50% and most still expect three 25 basis point cuts in total this year. More than anything else, it’s the steady climb in oil prices that’s really rattling investors due to the fact that higher energy prices could push inflation higher.  That of course runs the risk of the Federal Reserve needing to raise interest rates, which is the exact opposite of Wall Street’s current playbook.

Geopolitical tensions remain one of the key culprits behind crude oil’s climb with concerns still high that Iran may retaliate against Israel over a strike that killed several Iranian military officials last week. Oil markets are also dealing with Mexico’s recent move to cut crude exports, threatening to compound a growing global supply deficit.  Bulls are hoping upcoming Q1 2024 corporate earnings can provide a distraction from inflation concerns and highlight how well US companies have adapted to the higher-rate environment.

After several quarters of trimming the fat, bulls believe more companies are finally starting to move ahead with growth plans which they expect will be reflected in optimistic forward guidance.

The estimated earnings growth for S&P 500 companies in Q1 is +3.2%, down from around +5.7% at the start of the year, according to FactSet. The Utilities sector is expected to report the highest earnings growth rate of all eleven sectors at +23.7%, followed by Information Technology (+20.4%) and Communication Services (19.4%). However, those big gains may be largely offset by big losses projected across the Energy sector (-25.8%) and Materials (-24.1%).

Q1 2024 earnings season “unofficially” kicks off on Friday with results from big Wall Street Banks Citigroup, JPMorgan, and Wells Fargo.  Unfortunately, the Financial sector, which will also dominate earnings next week, is expected to be particularly weak with growth not even projected to top +1%. Meaning A1 2024 earnings season may start with more of a wimper than a bang.

The bulk of Big tech earnings will start rolling out the week of April 22. It’s worth noting that Google is hosting its “Cloud Next” conference this week (April 9-11) which could generate some buzz.

On the data front, the big highlights will be the “minutes” from the Fed’s most recent policy meeting and the March Consumer Price Index (CPI) on Wednesday, and the Producer Price Index (PPI) on Thursday.

Today, things get off to a very quiet start with no earnings or economic data of note. 

Jersey Mike’s Considers Sale... Owner to Become Multi-Billionaire!   The sandwich chain has been in talks with Blackstone for a deal that could be worth +$8 billion. Though those talks have cooled, Jersey Mike’s remains open to a deal with the private-equity firm or another suitor. Jersey Mike’s is the second largest sub-style sandwich company by U.S. sales, following Subway, according to Technomic. It has some of the top customer ratings among big chains, according to the market-research firm. The deliberations are the latest sign that consolidation is heating up among restaurant owners, whose prodigious cash flows have drawn interest from deep-pocketed private-equity firms. Peter Cancro, who started working at the sandwich shop in 1971 at the age of 14, scraped together the money to buy Mike’s Subs, as it was then known, in 1975. So at just 17-years-old and still in high school, Cancro suddenly owned a sub shop that employed 12 people. That meant that on school days during Cancro's senior year, "I went to homeroom, history, English, skipped gym, and went to work." Apparently he had to come up with a medical excuse (bad back) to explain his many gym absences but he did indeed graduate. He also says it wasn't easy, especially with people at school convinced he'd ruined his life. With no one else at the store to really guide him, Cancro says he mostly learned by doing. "Paperwork and taxes were a challenge," he recalls, but "when you’re 17, you feel invincible, and most times you are because you think that way." Along with his wife, Linda, the couple opened a second store in town in 1986 and changed the name from "Mike's" to "Jersey Mike's." Around that time, people also started asking him about franchise opportunities, so in 1987, Cancro dove headfirst into that business, sinking every dime they made into it. Four years later, they had 35 stores but the party looked like it might be over when recession hit in 1991. According to Cancro, they were "negative a million and a half dollars and were counseled to declare bankruptcy, but I said no way." Cancro ended up laying off six office workers, including his own brother. Cancro was working seven days a week, morning to night, had to liquidate his 401(k), sold his car, and "any extra things we had." During that time, Cancro says he got some "lucky breaks," and learned some valuable lessons about slowing down and not overspending. "In the beginning, I went charging up the hill. Now I look around the hill and plan first before expanding." After more than a year, Cancro says he was finally able to start hiring people back and by 1998, Jersey Mike's had 100 stores. Today, that's swelled to more than 2,500 locations. While Cancro has been undeniably successful in his business pursuits, he says what he's most proud of is having coached all his kids’ sports teams. "No matter how busy I was, I made it back for their practices. And they all got their first job at age 14." Fun fact: Jersey Mike’s signature sub sandwich, “The Original Italian,” was created by his mom! Today, the 66-year-old Peter Cancro still owns the company outright, and remains chief executive  Source WSJ

Where the Jobs Are for March: Health care and social assistance were the top sector for job gains — a common theme in recent years — adding +81,300 jobs. Government and leisure and hospitality were the next two strongest sectors, and together these top groups accounted for more than 60% of March’s gains. Within health care, ambulatory services and hospitals combined to add 55,000 jobs, according to the Bureau of Labor Statistics. Local government was another strong subgroup for hiring, growing by 49,000 jobs. Notably, the leisure and hospitality sector is now back to its pre-pandemic employment level, according to the BLS. The continued rebound of these jobs, along with strong months for sectors like construction, could be a sign that immigration is helping the labor market grow without putting too much upward pressure on wages. The Bureau of Labor Statistics noted that the labor force participation has changed little in the past year despite consistent upside surprises for job gains. Source CNBC Labor Of Statistcs

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The Odds of $100 Oil Are Rising: When oil jumped above $90 a barrel just days ago, military tensions between Israel and Iran were the immediate trigger. But the rally’s foundations went deeper — to global supply shocks that are intensifying fears of a commodity-driven inflation resurgence. A recent move by Mexico to slash its crude exports is compounding a global squeeze, prompting refiners in the US — the world’s biggest oil producer — to consume more domestic barrels. American sanctions have stranded Russian cargoes at sea, with Venezuelan supply a potential next target. Houthi rebel attacks on tankers in the Red Sea have delayed crude shipments. And despite the turmoil, OPEC and its allies are sticking with their production cuts. It all adds up to a magnitude of supply disruption that has taken traders by surprise. The crunch is turbocharging an oil rally ahead of the US summer driving season, threatening to push Brent crude, the global benchmark, to $100 for the first time in almost two years. Oil shipments from Mexico, a major supplier in the Americas, slid 35% last month to their lowest since 2019 as President Andres Manuel Lopez Obrador tries to make good on promises to wean the country off costly fuel imports. The country’s exports of so-called sour crude — the heavy, dense kind that many refineries are designed to process — now stand to shrink even further as state-controlled oil company Pemex has canceled some supply contracts to foreign refiners, Bloomberg News reported last week. The supply pinch could become even more acute in the weeks ahead if supplies from Venezuela come under pressure. According to reports, Venezuelan President Nicolas Maduro is showing no sign of heeding promises to move toward free and fair elections, which means the Biden administration could reimpose sanctions this month.  Source Bloomberg

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A Few Companies May Simply Have Too Much Money: Having more money than you know what to do with used to be a high-quality problem. Now it is just a problem. The largest tech companies in the world are also the richest. Apple, Amazon, Microsoft, Google-parent Alphabet, and Facebook-parent Meta now collectively sit on a little more than $570 billion in cash, short-term and long-term investments. That is more than double the collective pile of the next five richest nonfinancial companies on the S&P 500 index, according to data from S&P Global Market Intelligence. This is mostly attributable to business models that sell widely used products and services without the sky-high fixed costs common to other industries. Apple, Microsoft and Alphabet each produced more than $100 billion in cash from operations last year. Oil giant Exxon Mobil’s operating cash flow was a little past $55 billion for the same period. That is an awful lot of capital to have to put to work. And doing so effectively has become an even bigger challenge over the past couple of years, as regulators in the U.S. and around the world have zeroed in on Big Tech, with the determination to keep it from getting bigger. Amazon, Adobe and Intel have had to spike acquisition attempts over the past year because of resistance from global regulators. And the deals that do get through are taking longer and require costly lobbying efforts. But there are only so many ways to put such a large amount of cash to work. Google’s parent spent $61.5 billion on share buybacks last year and $59 billion the year before, according to FactSet. And even those are becoming controversial. In its antitrust lawsuit against Apple last month, the Justice Department noted the company’s $77 billion in share buybacks last year—more than double the nearly $30 billion it spent on R&D—as evidence that “Apple itself has less incentive to innovate because it has insulated itself from competition.” Source WSJ

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