Persistent uncertainty regarding the strength of the global economy, combined with mixed conviction over the yield curve, pressured U.S. stocks Friday, sending Dow Jones Industrial Average lower by triple digits.
Fear of a recession, which sent bond prices soaring, killed hopes ignited only a day before by a dovish Federal Reserve. Is it time to panic? Like the boogeyman, global growth fears are always assumed to be around the corner. But a litany of downbeat macroeconomic data from the United States as well as economies abroad fanned the flames of an impending global recession. This was further compounded by treasury yield curve watchers, noting that the curve inverted on Friday for the first time since the last financial crisis.
The yield on 10-year U.S. Treasury notes declined 10 basis points to 2.44% on Friday, which puts it lower than the 2.46% yield on 3-month Treasury bills — something that has not happened since 2007. And we know the Great Recession soon followed. An inverted yield curve is broadly considered by economists a reliable predicted of recession — which typically occurs within 18 months.
This is not the first time an inverted yield curve has sparked fears of an impending doom. Recall, we raised these same questions almost a year ago. And yet, before Friday’s decline, the S&P 500 Index on Thursday was within 2.4% of its all-time high. Is this a legitimate concern this time or an overreaction?
Kevin Giddis, Raymond James’ income capital markets strategist noted that risk assets such as stocks as “will crack first when the overall expectation is that there is a recession approaching.” Adding, “investors need to pay close attention.”
Investors were certainly paying attention Friday. The Dow plunged 460 points, or 1.8%, to close at 25,502.32 Friday, while the S&P 500 index lost 1.9%. The tech-heavy Nasdaq Composite Index saw an even bigger decline, losing 2.5%. Indeed, the market will continue to experience up-and-down swings. But investors by now should realize, despite all the so-called “headline risk,” stock valuations are supported by strong company fundamentals — much of which were evident during the fourth quarter earnings results.
And tons of evidence suggests that the overall growth trend will be higher, not lower. As such, fears of a recession aside, I would be a buyer on these dips, given the market’s resiliency over the past six months.
In the meantime, here are a couple of stocks reporting this week that should be on your radar:
Lululemon (LULU) - Reports after the close, Wednesday, Mar. 27
Wall Street expects the company to earn $1.74 per share on revenue of $1.15 billion. This compares to the year-ago quarter when earnings came to $1.33 per share on revenue of $928.8 million.
What to watch: Where other retailers have failed, yoga powerhouse Lululemon — currently on a streak of seven straight earnings beats — has managed to thrive. But has the company stretched too far? On Friday Wedbush analyst Jen Redding downgraded the stock from Outperform to Neutral with a $155 price target, which the firm cut from $176. From Friday’s close of $143.21 that still calls for a premium of 23%. Redding noted that she issued her downgrade on expectations of lower margins, which she now forecasts below Wall Street estimates.
BlackBerry (BB) - Reports before the open, Friday, Mar. 28
Wall Street expects the company to earn 6 cent per share on revenue of $241.66 million. This compares to the year-ago quarter when earnings came to 5 cents per share on revenue of $239 million.
What to watch: Can revenue continue to rise? The company believes it has an enormous opportunity to service customers in need of device security as the number of connected devices grow over the next several years, especially given the rate at which cyberattacks on mobile and traditional devices have grown recently. To that end, the company’s announced acquisition of Cylance, an AI (Artificial Intelligence) software company specializing in security products, bodes well. This deal could allow BlackBerry, which still has a long way to go to earn Wall Street’s trust, to become more relevant as a software security vendor.