Is the financial crisis now under control? Are the worse case scenarios no longer in play? Those are two of the main questions investors want answers to before deciding to take on additional risk. But if judging by the decision of the Federal Reserve to raise interest rates earlier this week on the heels of recent bank failures, they aren’t worried. After all, rising interest rates was a contributing factor in the collapse of Silicon Valley Bank (SVB).
To be sure, the demise of SVB was partly self-inflicted. The bank’s management placed the wrong bet at the wrong time. With bonds yielding 1.79% at a time when interest rates had risen drastically could be understood. But the decision to sell $21 billion worth of bonds at a $1.8 billion loss left many investors (and depositors) questioning the management’s competence.
Fast-forward two weeks later, the market has by now reconciled that this won’t be a repeat of 2008. Financial regulators and government agencies from both the U.S. and internationally have instilled confidence in the global financial system. JPMorgan Chase (JPM) and Bank of America (BAC) were two of eleven banks who last week pledged $30 billion in deposits to beleaguered First Republic (FRC). Meanwhile, on the other side of the Atlantic, the European Central Bank on Thursday raised interest rates by 50 basis points.
In that vein, the Fed’s decision on Wednesday to raise interest rates by 25 basis points serves as another confidence booster. While many market participants, including Bill Ackman and Tesla (TSLA) CEO Elon Musk argued against an increase, I believe it was the right move for both the near term and the long term. And if judging by the market’s reaction the past two days, a consensus on this view could be forming, though the market overall appears neither optimistic nor pessimistic.
On Friday in the wake of the Federal Reserve’s 25-basis point interest rate increase on Wednesday, stocks rose for a second consecutive session to send the major benchmarks towards weekly gain. The Dow Jones Industrial Average rose 132.28 points, or 0.41%, to close at 32,237.53. Gains in Apple (AAPL), IBM (IBM), Salesforce (CRM) and Microsoft (MSFT) sent the blue chip index back above a key support level. The S&P 500 Index added 22.27 points, or 0.56%, to close at 3,970.99, while the tech-heavy Nasdaq Composite rose 36.56 points, or 0.31%, to end the session at 11,832.96.
On a weekly basis, the Dow added 1%, while the S&P 500 and Nasdaq rose 1% and 1.2%, respectively. For the week, the Nasdaq Composite posted the largest gain, driven by a rise in technology stocks as investors are betting that the Fed will be less hawkish with interest rate hikes from this point forward. Earlier in the week Fed Chair Jerome Powell commented on credit conditions, saying that they have tightened, which could put pressure on the economy.
Not surprisingly, investors are already betting on the the Fed to start cutting interest rates sometime in the second quarter of the year, according to the CME’s FedWatch tool. It remains to be seen if this sparks a near-term rally. In the meantime, increasing exposure to the most beaten-down segments, and especially rate-sensitive stocks may soon pay off.
On the earnings front, here are stocks I’ll be watching.
Micron (MU) – Reports after the close, Tuesday, Mar. 28
Wall Street expects Micron to lose 80 cents per share on revenue of $3.73 billion. This compares to the year-ago quarter when earnings came to $2.14 per share on revenue of $7.79 billion.
What to watch: The improved prospects for memory chips have driven a rebound in Micron stock, which on Thursday closed at their highest point in more than a month. The stock has risen 8% and 4.5% in the past week and thirty days, respectively. Not only has the stock risen 22% in six months, the shares are up 23% year to date, besting the 3% rise in the S&P 500 index. And there could be more gains on the horizon, according to Citigroup analyst Christopher Danely, who reiterated his Buy rating on the stock. In the previous two quarters, the company has suffered through poor economics and macro issues. Aside from weak memory chip demand and falling prices, the company has also dealt with supply chain headwinds in an already volatile memory market. Evidenced by the recent stock movement, investors are optimistic that the memory business have reached cyclical trough. The management, meanwhile, has made the best of the bad situation by trimming operating expenses to maintain margins and preserve the company’s balance sheet. These cost cuts have helped Micron achieve its profitability goals as it waits for demand and price stability to return. On Tuesday these are among the topics the company will need to discuss, along with issuing positive guidance that instill confidence that memory pricing can rebound in the quarters ahead.
BlackBerry (BB) – Reports after the close, Thursday, Mar. 30
Wall Street expects BlackBerry to lose 7 cents per share on revenue of $156.65 million. This compares to the year-ago quarter when earnings were a penny per share on revenue of $185 million.
What to watch: BlackBerry shares have been rebounding nicely so far this year, rising 18% year date, compared to a 3% rise in the S&P 500 index. After falling roughly 50% over the past year, the cybersecurity specialist is looking at ways to revive revenue growth and regain investor confidence. In the most-recent quarter, the company’s security segment, which makes up more than 60% of revenue, reported a $22 million year-over-year decline in revenues, which fell near 20%. Investors want to see revenue revived in this segment before betting on the sustained rise in the shares. Meanwhile, analysts aren’t holding their breath, and have pushed out their timeline for the once-prominent tech company to return to overall revenue growth into 2024. Analysts have been busy slashing their projections ahead of Thursday’s release. Notably, this would be the ninth consecutive quarter with declining revenue. Nevertheless, the management aims to hit revenue of $1.2 billion in fiscal 2027, believing it has an enormous opportunity to service customers in need of device security as the number of connected devices continue to grow. Nevertheless, with BlackBerry stock still down so much over the past year, the market will want to see whether its fundamentals can justify a higher price.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
