Brace Yourself For Another Wild Month In Stock Markets

For the year, the Dow is down -6%, the S&P 500 is down just over -9%, and the Nasdaq has lost -14.7%. The previous record-holder is January 2009, an ugly moment for the economy, when the stock market fell -8.6%. In addition, the VIX – aka the CBOE Volatility Index – has actually dropped back to around 31 after topping 37 earlier this week, its highest point since November 2020.

Keep in mind, the index isn’t registering anywhere close to levels reached during other periods of “extreme” volatility. For example, the index, which is measured between zero and 100, hit its highest point of almost 83 during the financial crisis in 2008. Its most extreme point during the pandemic was around 66 in March 2020. So, by comparison, this week’s volatility has been rather mild.

Federal Reserve

Some insiders equate the wild swings in stock prices to investors, particularly “big money,” trying to establish a new baseline for stock valuations minus the Fed’s easy money policies that have driven a massive amount of cash into markets since the pandemic began in 2020.

At its height, the Fed was pumping as much as +$120 billion per month into the system via its asset purchase program, ballooning its balance sheet to now nearly $9 trillion.

At the same time, the Fed has held its benchmark rate at near-zero and, before that, hadn’t even attempted to raise rates since 2018, and then only briefly. The last full-cycle of rate hikes was 2015. What’s more, investors haven’t really had to factor for inflation since the early 90s and it hasn’t been this high since the 80s.

Bottom line, whatever the new “normal” ends up looking like, it will be dramatically different from the pre-pandemic investing landscape. I’ve heard several large stock traders saying it seems to be the return of Alpha instead of the race to levered Beta. I hear others on Wall Street referencing it to a bit of league recreational youth baseball team where everybody now gets an award simply for participation, but then kids run into a rude awakening when performance really starts to matter.

It feels like we are there in the stock market; every business that was coming into the market was simply being rewarded with participation points, now people are starting to keep a real scorebook and counting the strikeouts and runs scored.

Economy still roars

The good news is that the U.S. economy continues to roar. Historically, a combination of moderate inflation and moderate interest rates has led to some of the biggest boom times for U.S. Last week, the Commerce Department said Q4 Gross Domestic Product (GDP) grew at an annualized rate of +6.9%, stronger than Q3’s +2.3% and well above Wall Street expectations of around +5.7% growth.

Consumer spending climbed at a +3.3% annual pace led by a +4.7% increase in services spending. But the real stand out was private investment which rocketed +32% higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, contributed nearly +5% to Q4 GDP growth.

On the one hand, the inventory build is positive because it indicates an easing of supply chain dislocations that should in turn help with inflation pressures. On the other hand, many economists note that the big boost from retailer and wholesaler restocking is not likely to be repeated.

Companies will also likely start to unwind at least some of that inventory in the quarters ahead, which could drag overall 2022 GDP, especially if consumer spending also drops off. And investors are more closely tracking consumer behavior as inflation continues to rise.

With consumer spending accounting for about 70% of the U.S. economy, any signs that belts are tightening or moods are getting overly pessimistic will likely set off some alarm bells.

Data to watch

Turning to next week, it will be another busy one for both key economic data as well as earnings. The main economic data highlight will be the January Employment Situation on Friday. Other key data includes ISM Manufacturing, Construction Spending, and the JOLTS report on Tuesday; ADP’s private payrolls report on Wednesday; Productivity & Costs, Factory Orders, and the ISM Non-Manufacturing Index on Thursday.

Earnings wise, results are due from NXP Semiconductor and Trane on Monday; Advanced Micro Devices, Alphabet, Amgen, Chubb, Electronic Arts, Exxon, General Motors, Gilead Sciences, Match Group, PayPal, Sirius XM, Starbucks, and UPS on Tuesday; AbbVie, Aflac, Allstate, Boston Scientific, CNH, Corteva, D.R. Horton, Ferrari, Humana, Johnson Controls, Meta (Facebook), MetLife, Novartis, Novo Nordisk, Qualcomm, Siemens, Thermo Fisher, TMobile, and Waste Management on Wednesday; Activision Blizzard, Amazon, Biogen, Carlyle Group, Check Point, Cigna, Clorox, ConocoPhillips, Deckers Outdoors, Eli Lilly, Estee Lauder, Ford, Hanesbrands, Hershey, Honeywell, Ingredion, Merck, Pinterest, Quest Diagnostics, Royal Dutch Shell, Snap, SnapOn, Wynn Resorts, and Xylem on Thursday; and BristolMyersSquibb, CBOE, Phillips 66, Regeneron, and Sanofi on Friday.

Bottom line, brace for another huge week of extreme volatility.

Sirius XM to Acquire Stitcher Podcasting Unit for Nearly $300 Million

Sirius XM Holdings Inc, an American broadcasting company headquartered in New York City, is close to a deal to acquire E.W. Scripps’ Stitcher Inc. podcasting unit for nearly $300 million, the Wall Street Journal reported, citing people familiar with the matter.

The satellite radio operator is currently planning to expand into the fast-growing podcasting industry. In 2019, Sirius XM hinted to expand its business with a deal in which Walt Disney Company’s Marvel Entertainment is creating exclusive podcasts for the company’s satellite radio and streaming services, the WSJ reported.

According to the Interactive Advertising Bureau, the United States advertising revenue from podcasts climbed over 40% to $678.7 million in 2019 and it is forecast to rise to $863.4 million in 2020 and cross $1 billion next year.

After this news, Sirius XM’s share closed 0.51% higher at $5.87 on Monday, albeit putting it down around 20% since the start the year.

Sirius XM price target

Nine analysts forecast the average price in 12 months at $6.51 with a high of $7.50 and a low of $4.50. The average price target represents a 10.90% increase from the last price of $5.87, according to Tipranks. From those nine, five analysts rated ‘Buy’, three analysts rated ‘Hold’ and one rated ‘Sell’.

Morgan Stanley target price is $6.75 with a high of $8 under a bull scenario and $4.5 under the worst-case scenario. In April, Liberty Sirius XM Group Series has been assigned a consensus broker rating score of 1.25 (Strong Buy) from the two analysts that provide coverage for the stock, Zacks Investment Research reports.

One analyst has rated the stock with a buy recommendation and one has given a strong buy recommendation to the company. Wells Fargo lowered the price target to $7 from $9, RBC cuts target price to $6 from $7 and Evercore ISI cuts price target to $6.5 from $8.

Analyst view

“We believe SiriusXM has executed well in the franchise channel of the used car market, and rising penetration has helped slow trial start growth deceleration and given us more conviction in net adds. However, we see limited upside to our subscriber forecast given the difficulty of executing in the remaining used channels,” Benjamin Swinburne, equity analyst at Morgan Stanley noted in June.

“While we expect declining auto sales and an expected recession to weigh on results, we expect resilience in Sirius’ fundamentals and sub base to support EBITDA growth over the 2020-22 time frame. We see modest upside today, but believe OW Liberty Sirius (LSXMK) presents a more attractive opportunity, given its 70%+ stake in SiriusXM is valued at a 35-40% discount,” the analyst added.