The important thing from Wednesday’s Federal Reserve decision was the long-awaited pivot.
Just as Fed Chairman Jerome Powell last month warned of “head fakes” from inflation, investors have been faked out by false promises of shifts from the Fed before. This time was different—Powell more or less confirmed that officials are done raising rates for now, and the accompanying forecasts show a series of rate cuts in the not-so-distant future.
In central bank parlance, that’s a dovish message—implying looser policy may be warranted. It’s the opposite of the hawkish message of the past few meetings, when Powell maintained that rates would need to stay higher for longer.
Of course, give the market an inch and it will take a mile—traders promptly priced in deeper cuts than what was predicted by the Fed. The gap between market expectations and the central bank remains, but at least they’re both pointed in the same direction now.
It’s no coincidence that the Dow Jones Industrial Average closed at a new high on Wednesday. Or that Apple, the market capitalization of which has grown by $1 trillion this year, also finished at a record. There are even signs the stock rally could be widening from the so-called Magnificent Seven that have driven gains for much of the year.
The rising bond yields that were kryptonite for stocks are retreating. The 10-year Treasury yield is back below 4% after touching 5% just two months ago. Gold prices are hovering around record highs, helped by the prospect of lower rates.
The euphoria feels appropriate, but Powell also cautioned that the economy may have more surprises ahead. Indeed, this could be the moment of maximum optimism for traders. Enjoy it, but know that eventually sentiment will return to Earth.
—Brian Swint
*** Join Barron’s deputy editor Alex Eule and associate editor for technology Eric J. Savitz today at noon when they discuss the outlook for tech companies and individual stocks. Sign up here.
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Officials Foresee Three Quarter-Point Cuts in 2024
Federal Reserve officials have penciled in three quarter-point interest rate cuts in 2024, as implied in their latest economic projections that were released along with their decision to hold rates steady heading into the end of 2023. Chairman Jerome Powell said the central bank is likely finished with rate increases.
- The Fed’s projections on rate cuts is higher than what officials were forecasting in September. But the futures market was projecting the probability of even deeper cuts next year—coming in four or five quarter-point increments. Those expectations led to a rally in stocks and bonds.
- Powell said while strong real economic growth itself isn’t problematic, it could make it more difficult to reach its 2% inflation target. Robust economic growth would keep the labor market strong. And that could put some upward pressure on inflation, Powell noted.
- The projections put gross domestic product at 2.6% for 2023, slowing to 1.4% by the end of 2024. Officials were cautiously optimistic about avoiding a recession. Powell said they foresee the possibility of a soft landing, meaning inflation cools without a big downturn in the economy.
- Policy makers expect the core personal consumption expenditures price index, which excludes volatile food and energy costs and is considered a better indicator of inflation trends, to end the year at 3.2%. That’s significantly lower than the 3.7% year-end rate in earlier forecasts.
What’s Next: While Fed officials expect core PCE inflation will be at 2.4% at the end of 2024, Powell said policy makers will start cutting rates well before inflation hits their 2% target, rather than “overshoot.” He declined to elaborate on when the Fed would feel comfortable making that move.
—Nicholas Jasinski, Megan Leonhardt, and Megan Cassella
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Apple Stock Glides to Another Record High on Tech Rally
Apple
shares hit another all-time closing high on Wednesday, helping to lift the Dow Jones Industrial Average to its own record close. Despite a 52% rally in the stock this year, Apple has had four quarters of revenue declines from a year ago and hasn’t given details about its artificial intelligence plans.
-
Apple’s last closing high was July 31, and it is now at $197.96. Its market value has increased $1 trillion this year, to around $3.08 trillion. Five U.S. companies have market values of $1 trillion or higher. One of them,
Microsoft,
also added $1 trillion in value this year. - Apple has projected its revenue for the quarter ending December will be about flat compared with the same period a year earlier, falling short of Wall Street’s prior forecast for 5% growth. Hardware sales showed weakness in the recent quarter.
-
Separately, Apple faces a European Union decision on potentially banning its App Store rules for music-streaming platforms such as
Spotify,
Bloomberg reported. Regulators are looking at how Apple blocks music services from pushing their users away from the App Store to alternative, cheaper, subscription options, the report said. - A fine could result from the EU’s decision, the report said, adding the decision could come early next year. Apple argued in June at a hearing that it has addressed any possible competition concerns, the report said. A representative from Apple didn’t answer a request for comment.
What’s Next: In 2024, Apple investors will be focused on the potential for renewed growth in iPhone demand and on the continued expansion of its services arm. An expected decision in the Justice Department’s antitrust lawsuit against
Google
could also affect Apple’s results.
—Eric J. Savitz and Liz Moyer
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Warren Buffett’s Berkshire Buys More Occidental Stock
Berkshire Hathaway
was a big buyer of
Occidental Petroleum
stock in recent days in what will be seen as a vote of confidence by CEO Warren Buffett in Occidental and its CEO Vicki Hollub after the company unveiled its $12 billion purchase of the privately held energy producer CrownRock on Monday.
- Berkshire Hathaway recently purchased 10.5 million shares for about $590 million and now holds a stake of 238.5 million shares worth $13.6 billion in the energy company, or a 27% interest, according to a Form 4 filing with the Securities and Exchange Commission late Wednesday.
- The purchases were made from Monday through Wednesday with Berkshire paying an average price of about $56 a share. Buffett took advantage of the recent weakness in Occidental Petroleum’s stock price, which hit a 52-week low Tuesday. These are Berkshire’s first purchases since late October.
- The deal hasn’t played well on Wall Street as Occidental stock has fallen about 5% since news of the talks broke last month. Some analysts called the price rich. The shares gained more than 1% early Thursday.
What’s Next: To finance the deal Occidental will add additional debt to what is the most leveraged balance sheet among its peers. This could make the company vulnerable if oil prices continue to drop but Occidental would benefit if energy prices rise.
—Andrew Bary
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Pfizer’s Deal Spree in Spotlight as It Closes Seagen
Pfizer’s
big spending on acquisitions could come under investor scrutiny as it closes its $43 billion deal for cancer drug developer Seagen today. That’s because Pfizer’s 2024 profit is taking a 40-cent-a-share hit from deal-related financing costs. Waning interest in Covid-19 treatments will also hurt its results.
- Pfizer slashed its 2024 guidance. It expects adjusted earnings of $2.05 to $2.25 a share, including the addition of Seagen and the Seagen financing-related cost, compared with estimates for $3.17 a share. Projected revenue of $58.5 billion to $61.5 billion is also below expectations.
- Pfizer expects $8 billion in revenue from its Covid vaccine Comirnaty and Paxlovid treatment in 2024, while analysts were forecasting $13.8 billion. The pharmaceuticals maker also expects $3.1 billion in revenue from Seagen. Pfizer shares closed at $26.66, their lowest since October 2014.
- The stock drop fueled speculation about whether Pfizer might seek to replace CEO Albert Bourla after next year. Mizuho healthcare equity strategist Jared Holz told investors it “could be time for new leadership.” Pfizer didn’t respond to Barron’s request for comment.
- Bourla said Pfizer’s product portfolio remains strong, saying its cost realignment program is expected to save at least $4 billion by the end of 2024. That cost-cutting target is an increase from the $3.5 billion goal it set in August, based on the midpoint of a range.
What’s Next: Seagen is an important driver of Pfizer’s plan to make up the $17 billion in annual revenue it expects to lose from drug patent expirations by 2030. It had set a goal of achieving $25 billion in annual revenue by 2030 through business development, with $10 billion coming from Seagen.
—Josh Nathan-Kazis and Janet H. Cho
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Global Emissions Agreement Could Boost Clean-Energy Stocks
Nations at the United Nations climate conference in Dubai reached agreement to accelerate efforts to transition away from fossil fuels to limit global warming by 2030. It could bolster investment in companies that build wind and solar energy projects and raises questions about the oil industry’s future.
- Although not legally binding, the agreement encourages countries to develop economy-wide emission-reduction targets by 2025. More than 100 nations promised to triple their investment in clean energy and double their energy-efficiency improvements by 2030.
- The International Energy Agency said it was encouraged by the progress, but cautioned that measures now under way, including new pledges, “would not be nearly enough to move the world onto a path to reaching international climate targets.”
-
László Varró,
Shell’s
vice president global business environment, said tripling global renewable capacity by 2030 is “absolutely doable,” but requires capital and market designs that can mobilize it. In the U.S., consumers have tax incentives to install solar panels on their houses. - Most oil and gas companies don’t think oil demand will decline. A Dallas Fed survey of 142 producer company executives found that 53% expect oil consumption to be higher in 2050 than it is today, while 15% expect it to be about the same.
What’s Next: Oil executives have said the energy transition will mean higher oil prices, and will be harder than consumers think.
Exxon Mobil,
which is investing in low-carbon initiatives including hydrogen, lithium, and biofuels, has said getting to net-zero carbon emissions by 2050 is highly unlikely.
—Lauren Foster, Avi Salzman, and Janet H. Cho
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After decades of squirreling away money for retirement, people can feel incredible anxiety when it’s time to shift into spending mode. Having a strategy for spending money in retirement can alleviate some of that stress.
Major worries among retirees include not being able to spend as much as before retirement, not being able to leave money to beneficiaries, facing unknown healthcare expenses and outliving their money. MarketWatch talked with advisors about how to set up a strategy that relieves the stress.
For more, read here.
—Jessica Hall
***
—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
Read the full article here
