Is the Fed Pivot Upon Us?

Will the Fed buckle? … OPEC+ looks to cut production … historic pain in the bond market … watch out for too much inventory in Q3 … great news in the labor market

Is the elusive “Fed Pivot” finally on the verge of happening?If you’re a regular Digest reader, you’re familiar with the idea that “the Fed will hike rates until it breaks something, then it will turn dovish.”Well, last week, we covered the meltdown in the U.K. gilt (bond) market in which the Bank of England had to come to the rescue to prevent an economic implosion.Doesn’t that count as breaking something?And then yesterday, the United Nations basically scolded Federal Reserve Chairman Jerome Powell, telling him to stop hiking rates because it’s leading to a global recession.While not necessarily a “break,” that might as well be the U.N. yelling “Uncle! You’re about to break things, stop!”Then, this morning, we learned that Australia’s central bank surprised forecasters by raising interest rates less than anticipated. Traders saw this and smelled blood in the water.Put it all together, and suddenly Wall Street is asking “did we just see the ‘break’ point? Is the Fed finally about to pivot? Is it time to go long?”That sentiment has markets surging as I write Tuesday morning.This is important to watch, and we’ll keep you updated. But there are so many other stories happening in the news right now. Let’s cover some of the top ones impacting your portfolio.

Yesterday, top oil stocks exploded on news that OPEC+ is considering a “historic” supply cut

The member countries of OPEC+ meet in Vienna tomorrow. The likely outcome will be supply cuts to crude production.From The Wall Street Journal:

OPEC+ is set to consider Wednesday its most drastic reduction of production since the pandemic in order to help prop up falling oil prices, a move that could put pressure on global economic growth.The Organization of the Petroleum Exporting Countries and Moscow-led allies, collectively known as OPEC+, is considering a cut of more than 1 million barrels a day, delegates in the group said.

In response, crude prices and energy-related stock prices surged yesterday.West Texas Intermediate Crude (WTIC) shot up more than 4%. And many names in the oil patch soared, such as Devon Energy, up 8.5%, APA Corp, up 9.1%, and Marathon Oil, exploding 10.6%.The gains are piling up again as I write on Tuesday. WTIC is up another 3.4% to $86.50 a barrel. And the three featured stocks are up 3%+. Actually, Marathon is exploding, up 14%.This could be the start of a new bullish push for crude. Analysts at Goldman Sachs even see oil returning to $100 a barrel within three months, then topping $105 a barrel within six months.Legendary investor Louis Navellier has been urging subscribers to load up on high-quality energy stocks for months. If you haven’t yet, you’re not too late. Q3 earnings season begins next week and Louis sees energy stocks surging on strong results.From Louis’ Platinum Growth Club monthly issue last Friday:

I expect energy and commodity-related stocks to reassert themselves in October, as the third-quarter earnings announcement season kicks off…The energy sector is anticipated to achieve the highest earnings growth of the third quarter, with 116.7% growth…Wave-after-wave of positive results should support higher stock prices in the upcoming weeks.

Louis just added a new energy play to his Platinum Growth Club portfolio. You can learn more as a subscriber here.In the meantime, watch your price at the pump. According to GasBuddy, the national average price for gasoline has been ticking up over the last month. Tightening from OPEC+ will only accelerate such increases.

Circling back to “break points,” we’re beginning to see some in the debt market

Coming into 2022, we’d grown accustomed to a “free money” world as interest rates were effectively zero since 2020.But as rates are now soaring, cracks are starting to show in corners of the credit market, and causing some bleeding investors to flee.Last week, bond investors pulled a net $9.08 billion out of U.S. bond funds. It was the biggest weekly net selling since June.From Bloomberg:

…The pain was not confined to junk — investment-grade debt funds saw one of the biggest cash withdrawals ever and spreads flared to the widest since 2020, following the worst third quarter returns since 2008.“The market is dislocated and financial stability is at risk,” said Tracy Chen, portfolio manager at Brandywine Global Investment. “Investors are going to test central bank resolve,” she said in a phone interview.

As just one illustration of how stretched the bond market has become, a measure of credit stress tracked by Bank of America jumped to a “borderline critical zone” last week.So far, the Fed isn’t blinking.As we noted in yesterday’s Digest, Cleveland Fed chief Loretta Mester admitted that a recession would not cause the Fed to change course on its rate-hike plan. It appears historical pain in the bond market won’t either.Back to Bloomberg:

…The pain is spreading to all corners of credit, including structured products. Collateralized loan obligation prices are dropping as Wall Street banks retreat from buying the securities, pressured by regulators.“A recession is a forgone conclusion, if we aren’t tipping into one already,” said Scott Kimball, managing director at Loop Capital Asset Management. “The question is the duration and severity and none of that improved during the quarter.”

The riskiest “CCC” rated bonds are leading high-yield losses, down almost 17% this year.That’s worse than the 15% drop for junk bonds, although junk is headed for the worst year-to-date losses on record.

Meanwhile, as we approach Q3 earnings season, keep your eye on this potential landmine

Too much inventory has become a big problem for U.S. retailers.In the wake of the Covid-19 lockdowns, we went from supply-chain-related inventory shortfalls to excesses.Today, there’s just too much “stuff” on the shelves that hasn’t moved. This is great for shoppers, since retailers will have to lower prices if they want to get rid of these products. But it’s bad news for corporate profit margins and earnings.Here’s more from Bloomberg:

The inventory glut that dragged down US retailers over the past two quarters may only be getting worse…Inventory levels have increased sequentially and are at the highest level relative to sales since the start of the pandemic, UBS Group AG analysts led by Jay Sole said in a recent note.Nike Inc. said Thursday that its North American inventories grew by a whopping 65% in the fiscal first quarter ended Aug. 31, well above the growth that set off alarm bells earlier this year at companies such as Walmart Inc., Target Corp. and Gap Inc.

As we just noted, we’ll be watching how this impacts Q3 earnings, as well as guidance for the end of the year.As to earnings expectations themselves, here’s the latest from FactSet, which is the go-to earnings data analytics company used by the pros:

For Q3 2022, the estimated earnings growth rate for the S&P 500 is 2.9%. If 2.9% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q3 2020 (-5.7%)During the third quarter, analysts lowered EPS estimates for the quarter by a larger margin than average. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 6.6% (to $55.51 from $59.44) from June 30 to September 29.

Earnings begin in earnest next week when the big banks report. We’ll keep you updated.

Finally, job openings plunged in August

New this morning is that the level of job openings nosedived in August. It’s a great sign that the U.S. labor gap is beginning to close.From CNBC:

Available positions totaled 10.05 million for the month, a 10% drop from the 11.17 million reported in July, according to a Bureau of Labor Statistics release Tuesday. That was also well below the 11.1 million FactSet estimate.

Given that the Fed watches this number closely, you can expect this dovish reading to add to hopes that the great “Fed Pivot” is finally upon us.Have a good evening,Jeff Remsburg


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