Day Traders Diary

8/25/22

The major averages rose through the day on Thursday as traders searched for clues out of the Federal Reserve's annual Jackson Hole symposium. The broader S&P 500 index gained 50 points or 1.25%. The Nasdaq Composite advanced 183 points or 1.4%. The Dow Jones Industrial Average after opening lowrr is up over 250 points or 0.8%.

Still, the major averages are on pace for a losing week. The Dow is down 1.6% so far, the S&P 500 is 1.2% lower and the Nasdaq Composite is down 1%.

Materials, communication services and financials outperformed in the S&P 500. Investors pivoted away from consumer staples and utilities.

Snowflake jumped 20% after posting a beat on revenue. Salesforce fell more than 5% after the company provided a disappointing forecast for fiscal 2023.

The Dow on Wednesday rose slightly along with the S&P 500. For both averages, the gains snapped three-day long losing streaks. The tech-heavy Nasdaq Composite also ticked up 0.41%.

Traders will be listening for more information out of the Jackson Hole economic symposium, with Fed chair Jerome Powell scheduled to speak Friday. Investors are looking for clues on whether policymakers will cut rates when the current hiking cycle is over.

"The market is trying to decide if we are mid cycle or late cycle and sending a couple different signals," said Liz Young, head of investment strategy at SoFi. "We're waiting to get news of what happens tomorrow in Jerome Powell's speech and kind of stuck without a whole ton of direction."

Jobless claims drifted lower in the week ending Aug. 20, according to the Labor Department. A revision for second-quarter GDP showed a smaller decline.

Investors are also waiting for the personal consumption expenditures on Friday. The PCE report is one of the Fed's favorite inflation measures that could influence its actions going forward.

Pimco portfolio manager and market strategist Tony Crescenzi said Thursday that the Federal Reserve needs to remain aggressive on rate hikes even if inflation starts to decrease.

The Fed has raised its benchmark interest rate to 2.5%, but that is still below the annual rate of inflation. Crescenzi said that relationship would need to flip, creating a positive real interest rate, to make sure inflation expectations are held down.

Tighter money means lower P/E multiples for stocks, Wolfe's Senyek says

It's a straightforward idea.

Tighter money translates into lower forward price-to-earnings multiples paid for stocks, and the typical lag is about six months after liquidity starts drying up, according to a note Thursday by Wolfe Research's chief investment strategist Chris Senyek.

The Federal Reserve is expected to raise interest rates "at least another" 1.25 to 1.50 percentage points over the course of this current tightening cycle, "at a minimum," Senyek wrote. What's more, the monthly Quantitative Tightening policy will start running off $95 billion each month from the Fed's balance sheet, starting in September.

The result? "We expect the on-going liquidity withdrawal to place additional downward pressure on stock multiples," the note said.

 

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