Key Takeaways
- Tesla Shares Fell After Disappointing Earnings
- Layoffs Continue To Spread
- Volatility Keeps Falling
Stocks traded lower on Thursday with the S&P 500 falling 0.6% and the Nasdaq Composite dropping 0.8%. Selling was not limited to any one area as ten of the eleven sectors in the S&P 500 were down on the day. Disappointing earnings from AT&T and Tesla sent both stocks down 10%.
In their earnings call after the close Wednesday, Tesla reiterated their more aggressive pricing model, which has included multiple price cuts, is part of their broader strategy at gaining market share. That caused operating margins to fall from 19% last year to just over 11%. The commitment to market share over margins spurred selling on Thursday and may be playing a role in this morning’s news that the company is raising prices on its model S and X automobiles. Tesla stock is up over 60% from its lows early this year, but remains down nearly 50% from where it traded in September.
Elsewhere, we continue seeing some signs the broader economy is slowing. Existing home sales in March were down 2.4% from February. March traditionally kicks off the strongest part of the season for housing sales. Earlier this week, data on new home starts showed a slowdown of 0.8%. Next week, we’ll get a look at new home sales. As an interesting side note, yesterday, shares of home builder D.R. Horton increased after the company beat on earnings and offered an upbeat outlook for the housing sector.
I find the news in the housing sector interesting because we continue seeing large scale layoffs and cutbacks in hiring. Clorox announced Thursday after the close that they would be laying off 4% of their non-production workforce. Also, in a virtual townhall yesterday, Mark Zuckerberg told Meta Platform employees there may be more job cuts coming and the company would be cutting back on hiring as well. At some point, I would expect the turmoil in the job market, along with rising interest rates, to spill over into housing, so I’m closely watching that sector.
Speaking of interest rates. We’re just under two weeks away from the next meeting of the Federal Reserve Open Market Committee (FOMC). Members of the Fed have been out speaking this week, offering insights as to where they see monetary policy heading. In her comments yesterday, Cleveland Fed President Mester reiterated her belief rates need to get above 5%. Those comments were echoed by Atlanta Fed President Bostic, who also said he believes rates need to move higher. Neither Mester nor Bostic are voting members of the Fed; however, voting member Patrick Harker, President of the Philadelphia Fed, said that he also believes the Fed needs to raise rates at least one more time. Currently, there is an 84% probability of a quarter point rate hike at the May FOMC meeting.
Another story I’ve been watching this week has been volatility. The VIX hit a low of just over 16 on Wednesday, well below its historical mean of 18. I find this very interesting given the recent turmoil in the banking sector and the heavy amount of data coming next week. With the S&P 500 still stuck below 4200 and volatility very quiet, I think it’s important retail investors not get caught off guard.
Next week is a big one for earnings. Companies such as Alphabet, Amazon and Microsoft lead a massive number of earnings announcements. We’ll also get some important economic numbers. In addition to the housing data already mentioned, we’ll also get an update on durable goods and then Friday, the most recent reading of the Personal Consumption Index (PCE) will be released. The PCE plays a big role in Fed decisions and as the old Life cereal commercial goes, it won’t take long to find out if it’s a, “He likes it! Hey, Mikey!” moment or not. Therefore, I would be particularly diligent about not getting lulled to sleep just yet. As always, I would stick with your investing plan and long term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
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