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Stock investors are braced for an eventful week with the top headliner being the Federal Reserve’s two day policy meeting on Tuesday-Wednesday.
While the Fed is not expected to make any changes to its benchmark interest rate, investors are highly anxious to see if officials have changed their forecasts for rate cuts.
The so-called “dot plot” that shows where each Fed voting member expects rates to be in the future indicated a total of -75 basis points in rate cuts this year (three -25 basis point cuts) back in December. Because data so far in 2024 has been trending stronger than economists expected, there are some concerns that Fed officials may walk back their outlooks.
Keep in mind, it would only take two Fed members trimming their projections to shift the median outlook down to -50 basis points worth of cuts.
Some on Wall Street have been speculating whether investors are really all that concerned about how much the Fed cuts rates in 2024. More broadly, they believe investors only care that the next move will be a cut and not a hike, and it doesn’t really matter when that happens or by how much so long as the job market and earnings are holding up.
They point to the fact that Wall Street has dialed back its forecasts for Fed rate cuts from seven or eight 25 basis point trims at the start of the year to now just three or four cuts.
Yet stock indexes have barely registered the shift - the S&P 500 has not pulled back by more than -2% since the last big selloff in October 2023 and all three major indexes remain in record territory. Less optimistic analysts have noted that this may be because Wall Street’s estimates have not fallen below the Fed’s outlook. Meaning an outlook for LESS than three rate cuts this year has not yet been tested.
Others in the bull camp credit stronger-than-expected Q4 earnings and equally strong outlooks for the quarters ahead for Wall Street’s seeming disinterest in fading Fed rate cut expectations. It’s worth noting that Q1 2024 earnings estimates have come down since the start of the year with S&P 500 companies now expected to report year-over-year earnings growth of +3.3% versus +5.7% at the end of December.
Interestingly, analysts have lowered their expectations by a smaller margin than the 5-year average while the percentage of companies issuing negative earnings guidance for Q1 2024 is higher than the 5-year average, according to FactSet.
For what it’s worth, the percentage of S&P 500 companies issuing negative guidance for Q1 2024 is actually quite a bit higher than usual at 71% versus the 5-year average of 59% and above the 10-year average of 63%. Q1 earnings season “unofficially” kicks off on April 12 with big Wall Street bank results, and early results between now and then will likely lead to further analyst adjustments in the weeks ahead.
Beyond the Fed this week, investors are extremely excited about Nvidia’s GTC 2024 developers conference that kicks off today and runs through Thursday (March 18-21). The opening keynote from Nvidia CEO Jensen Huang this afternoon (11 a.m. CST - 1 p.m. CST) is expected to deliver news about the company’s newest products and AI advances. The balance of the conference includes some 900 events, as well as over 300 exhibitors, all of it focused on AI.
Also set to shake the markets up this week is Reddit’s IPO scheduled for Thursday, March 21. This will be the first tech-related stock debut since Instacart’s disappointing IPO last September.
Today, investors will be digesting the NAHB Housing Market Index. There are no earnings of note.
Corporate Defaults at Highest Rate Since Global Financial Crisis: More companies have defaulted on their debt in 2024 than in any start to the year since the global financial crisis as inflationary pressures and high interest rates continue to weigh on the world’s riskiest borrowers, according to S&P Global Ratings. This year’s global tally of corporate defaults stands at 29, the highest year-to-date count since the 36 recorded during the same period in 2009, according to the rating agency. Source Financial Times
Schools Are Taking Cell Phones Away to Keep Students Focused: Clark County School District in Las Vegas will soon participate in a pilot program requiring that cell phones be stowed during class in non-locking pouches that block cell signals. Clark County, the country’s fifth-largest district, will require all students in sixth through 12th grades to keep phones in the pouches starting next fall. The decision to disable or lock up phones, while still far from the norm, is taking hold in thousands of schools across the U.S., a sign of growing concern among policymakers and educators. A 2023 study by the nonprofit Common Sense Media found that students receive a median of 237 phone notifications a day, a quarter of them during school. The U.S. Surgeon General warned last year that social media can have detrimental effects on youth mental health. Indiana passed a law this month that will prohibit cell phone use during classroom instruction. Florida did the same last year. Massachusetts created $800,000 in grants this school year to help districts adopt phone restrictions. A recent national poll found that only one-third of public school parents supported a ban on cell phones during the school day. Having open lines of communication with our kids is something that we are really comfortable with, accustomed to, and we’re not willing to give that up, said Keri Rodrigues, president of the National Parents Union, the nonprofit that commissioned the poll. Source WSJ
FTC Probing Reddit’s AI Data-Licensing Practice: Reddit said on Friday that the Federal Trade Commission sent a letter to the company about its data-licensing business related to the training of artificial intelligence systems. “On March 14, 2024, we received a letter from the FTC advising us that the FTC’s staff is conducting a non-public inquiry focused on our sale, licensing, or sharing of user-generated content with third parties to train AI models,” Reddit said in an updated initial public offering prospectus. Reddit filed for an IPO in February, and plans to trade on the New York Stock Exchange under the ticker symbol “RDDT.” Although Reddit’s core business relies on online advertising, the company is seeking to make money in other ways, and is in the “early stages” of its “data licensing efforts,” the filing said. Read more at CNBC . Reddit isn’t alone in trying to make a buck off licensing data, including that generated by users, for AI. Programming Q&A site Stack Overflow has signed a deal with Google, the Associated Press has signed one with OpenAI, and Tumblr owner Automattic has said it is working “with select AI companies” but will allow users to opt out of having their data passed along. Reddit also isn’t the only company receiving an FTC letter about data licensing. The FTC in January issued orders to Alphabet, Inc., Amazon.com, Inc., Anthropic PBC, Microsoft Corp., and OpenAI requiring them to provide information regarding recent investments and partnerships involving generative AI companies and major cloud service providers. It’s unclear whether the letter to Reddit is directly related to review into any other companies. Reddit, whose 17 billion posts and comments are seen by AI experts as valuable for training chatbots in the art of conversation, announced a deal last month to license the content to Google. Source Wired
America’s Office Fire Sale Has Barely Begun: Office-building owners have been under pressure since the Covid-19 pandemic hollowed out their buildings in early 2020. According to data from real-estate consulting firm Colliers, the U.S. vacancy rate has risen from 11% in late 2019 to 17% today, higher than at any point in the 2008 global financial crisis. But forced sales are still surprisingly rare. In 2023, only 3.5% of all office deals in the U.S. involved a distressed seller. The most recent numbers available show the share slipping to 2.7% in January. Distressed sales ramped up much faster in the GFC. A strong economy is helping to delay the day of reckoning, as most tenants are still paying the rent. Pressure is building slowly as leases expire: Many companies are reducing their space by 30% to 40% when their contracts end. Lenders don’t want to force borrowers to sell buildings into a weak commercial real-estate market, which would lead to punishing losses. This might explain why debt maturities aren’t triggering the kind of distress that some property watchers expected. Of the $35.8 billion of office loans that came due in the commercial mortgage-backed securities market last year, only a quarter were paid off in full. Other loans were extended or sent to a special servicer. Opportunistic investors are crawling out of the woodwork with offers of debt. Reven Capital is trying to raise $1 billion in a blind-pool initial public offering for an office-focused distressed lender. Blackstone, Brookfield, Cohen & Steers and Manhattan landlord SL Green Realty are also bullish about distressed real-estate lending. Ironically, Blackstone and Brookfield are simultaneously handing back keys to some of their offices. Distressed-debt investors might slow the pace of forced sales in a handful of cases, but the office sector’s need for finance will soon massively outstrip supply. CBRE thinks U.S. office landlords face a $72.7 billion refinancing shortfall between now and the end of 2025. Source WSJ
Inside America’s Largest - and Trippiest - Megachurch: David Hodges founded San Francisco’s Church of Ambrosia on the belief that psychedelic mushrooms are a sacrament that can reveal life’s true purpose. Founded five years ago in Oakland, Hodges recently opened the church’s second location in San Francisco’s SoMa neighborhood. Yet unlike most other church founders, his members can obtain cannabis, hallucinogenic mushrooms and another psychedelic called DMT (the active ingredient in ayahuasca)— in exchange for a monetary contribution. In other words, his church possesses enough illegal drugs to put Hodges in prison for many years. His ministry is also sitting on a small fortune. The Church of Ambrosia is the largest known megachurch in the United States: with 105,000 members, it has more congregants than Oklahoma’s Life Church, which has 85,000 members, and more than double Texas’ Lakewood Church, run by televangelist Joel Osteen. New members pay $10 to join the Church of Ambrosia while existing members give $5 to its coffers to enter if their month-long membership has expired. Between membership fees and regular contributions for drugs, Hodges’ church rakes in more than $5 million a year, Forbes estimates Source Forbes
American Debt Stings Like Never Before: After years of managing household budgets through the stress of the worst inflation in a generation, US families are increasingly pressured by a different kind of financial squeeze: The cost of carrying debt. Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates on credit cards and auto loans are the highest in more than a decade. For the first time on record, interest payments on those and other non-mortgage debts are as big a financial burden for US households as mortgage interest payments. The figures suggest a difficult reality for the millions of consumers who are the engine of the US economy: The era of high borrowing costs — however necessary to slow price increases — has a sting of its own that many families may feel for years to come, especially the ones that haven’t locked in cheap home loans. Since the pandemic, families have taken on debt at a comparatively fast rate. According to calculations by Wells Fargo economists, it took only four years for households to set a new record debt level after paying down borrowings in 2021, when interest rates were still near zero. Before that, the time from one debt peak to the next was three times longer. And that increased debt load often comes with a higher price. The typical charge on a credit card has climbed to a record above 22%, according to the Fed. Source Bloomberg
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