We're Weighing Prudent Action as Three Holdings Hit Overbought Territory
Plus, Costco does it again in October and quick reactions to these two Portfolio earnings reports.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Following the market’s pronounced move higher on Wednesday, we had a string of positive developments after the market close. These included beat-and-raise quarters from Qualcomm QCOM and Dutch Bros BROS as well as another wonderful monthly revenue report from Costco COST.
Despite the impact of hurricanes in October, Costco delivered adjusted U.S. comp sales that rose 5.8% year over year and overall sales that climbed 7.2% year over year to $20 billion. Next week’s October Retail Sales report should bring perspective that leaves little question to Costco continuing to take consumer wallet share during the month. See that continuing this holiday season.
We’ll dig into the results from Qualcomm and Dutch Bros in separate alerts, but we will share that what we saw in Qualcomm’s result and guidance reaffirms our thinking. With Dutch Bros, we’ll be revising our price target higher following last night’s results due to the combination of favorable same-store and margin trends.
Potential Portfolio Management Ahead
Following Wednesday's eye-popping move in the market, one that fueled a nice move in the overall Portfolio, a few of our holdings are approaching position sizes that may warrant some prudent action. Ones that fall into that camp include Marvell MRVL, Morgan Stanley MS and Bank of America BAC, all of which had significant moves on Wednesday and have landed back in overbought territory.
Should we see those shares move higher today, the odds of us carrying out some prudent Portfolio action will increase as well.
Could the Fed Throw Some Cold Water on the Market?
After jumping Wednesday back to levels last seen in early July, ahead of the Fed’s latest monetary policy decision, the 10-year treasury yield is inching up further this morning. While the Fed is widely expected to deliver a 25 basis point rate cut today, following the October Services PMI report, which brought with it a very different perspective than the one found in the October Employment Report, and the outcome of Tuesday’s election, the market is going to hang on Fed Chair Powell’s words about the path for further rate cuts.
The data collection issue riddled October Employment Report cleared the way for the Fed to dial back monetary policy further. Despite this, the underlying strength of the economy and potential Trump economic policies are raising another round of questions about how many rate cuts the Fed could deliver in the coming months. Recent market expectations tallied by the CME FedWatch Tool called for as many as five 25-basis point rate cuts exiting the Fed’s June 2025 meeting. That figure now stands somewhere between three and four such cuts.
Currently, that same tool shows the Fed delivering another cut in December, but in analyzing the shifting probabilities, it’s worth noting the odds of no December cut have been climbing. The same tool shows the market expects the Fed to take a rate cut pause in January. Our thinking is that these expectations are very much in flux but across the Fed’s last two policy meetings this year and all eight next year, the market sees the Fed delivering just four rate cuts. That puts the fed funds rate between 375 basis points and 400 basis points, and suggests the Fed will need to lift its 2025 fed funds targets when it updates its December set of economic projections. The same is likely true for its GDP forecasts for this year and next as well.
Where we’re going with this is, even though the Fed will likely deliver a rate cut today, Powell’s presser comments may not be as dovish as they were in August and September. Yes, he’ll reiterate the Fed being data-dependent and making decisions meeting by meeting, but the underlying data increasingly suggests the Fed will take a measured path to get monetary policy back to a more neutral stance.
That could throw some cold water on the market’s face following Wednesday's post-election pop. It’s another reason that we’re inclined to take some prudent Portfolio action later this morning.
As it relates to Builders FirstSource BLDR and other construction-related holdings, it’s the move lower in rates and the flow through for lower mortgage rates and borrowing costs that will drive activity in those markets next year and 2026. That keeps our long-term view intact, but if the prospect for rate cuts shifted toward the Fed needing to deliver rate increases, that would lead us to revisit owning those positions in the Portfolio. We see that probability as very low, but as you know we’ll update our thinking as things develop.
At the time of publication, TheStreet Pro Portfolio was long QCOM, BROS, COST, MRVL, MS, BAC and BLDR.
