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Next Week's Opportunity to Tame the Bears

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Friday, January 21, 2022

The poor showing on subscription guidance for Netflix (NFLX - Free Report) yesterday has rippled through tech-world in Friday pre-market activity; the streaming leader, missing growth projections on net adds by a wide margin, is -20% ahead of today’s opening bell. Almost as fruit from the same blighted tree, streaming rival Disney (DIS - Free Report) is -4% in today’s pre-market, even though the company doesn’t report earnings until February 8th.

Netflix is also the first of the so-called FAANG stocks to report in this Q4 earnings season, hot on the heels of the big Wall Street banks that started last week and failed to outperform across the board, as they have in quarters past. Aside from the Netflix-specific difficulties Netflix may be facing — and content-creators naturally have plenty of discrepancies from each other, even though they compete in the same space — focus now expands to how all the other mega-tech holding are expected to do. Apple (AAPL - Free Report) reports next week; Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) and Meta (FB - Free Report) report the following week.

Usually the heart of earnings season, which we are approaching, carries the narrative for stock market activity. But in our current circumstance, with investors continually fretting the coming interest rate hikes from the Fed, arguably next week’s press conference from Fed Chair Jay Powell may have more impact on trading than any single earnings report, FAANG or no FAANG. This presser follows the two-day meeting of the Federal Open Market Committee (FOMC).

Part of what’s motivating the sell-off of growth names in the market is the prospect of four interest rate hikes coming in 2022. This is nothing Powell himself has explicitly stated, but has become a form of shorthand to forecasting Fed moves from the analyst community. After next week’s FOMC, which is expected to continue the $30 billion taper of asset purchases for the month, which will bring the program to zero in another month, Powell will address all manner of inflation in today’s economy, and what the Fed intends to do about it (and when).

We’ve not heard from Powell since the minutes to the most recent FOMC meeting were released. These revealed a concentrated interest from voting members on not only bringing the taper to a close (which would then clear the way for interest rate hikes) but also working down the $9 trillion balance sheet, which will be accomplished by not renewing expired holdings. This alone will help bring the era of “cheap money” to an end, though it is not the same as raising interest rates.

Powell has a golden opportunity next week to spell this all out. Of course the Fed is concerned about controlling inflation (a little late, some analysts would say), so of course rate hikes are going to be on the table. But definitely four? Based on lackluster economic data that has begun to come in since the last Fed meeting, there is plenty to draw from that indicates the economy won’t be overheating in the near-term, after all. And if the Fed finds this to be the case, they won’t be in a rush to fit in four hikes from now til December.

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