Dow is slashing jobs and shutting down assets as it looks to make cost savings.
Photo:
Sean Proctor/Bloomberg News
Dow Inc.
DOW 0.40%
said it is laying off about 2,000 employees globally as job cuts that have so far been concentrated in the technology sector spread to other parts of the economy.
The Midland, Mich.-based chemicals company said it is targeting $1 billion in cost cuts this year as slowing economic growth and a drop-off in demand weigh on sales.
Dow said it is also shutting down certain assets and broadly looking to align spending with the macroeconomic environment. The company said it expects to book a charge of $550 million to $725 million in the first quarter for costs tied to the cost-cutting moves.
Chief Executive
Jim Fitterling
said the company is optimizing its cost structure amid macroeconomic uncertainties and “challenging energy markets, particularly in Europe.”
Shares of Dow rose less than 1% to close at $58.12 on Thursday.
Dow’s layoffs come after manufacturing conglomerate
3M Co.
said earlier this week that it was cutting 2,500 jobs globally, or about 2.6% of the company, as it confronts weakening demand.
The companies join a wave of technology companies that are cutting thousands of jobs as they recalibrate after growing rapidly at the start of the Covid-19 pandemic. On Wednesday,
International Business Machines Corp.
said it would cut 3,900 jobs, while software company
SAP SE
on Thursday said it would shed 3,000 positions.
Dow on Thursday also posted weaker-than-expected results for the fourth quarter. Revenue fell more than 17% to $11.86 billion, missing analysts’ estimates, with the company citing slowing economic growth around the world and destocking of inventory by customers.
The company’s fourth-quarter profit tumbled to 85 cents a share, down from $2.32 a share a year earlier. Adjusted earnings for the quarter missed estimates by a penny.
“While we see initial positive signs from moderating inflation in the U.S., improving outlook for energy in Europe, and reopening in China, we continue to be prudent and proactive,” Mr. Fitterling said.
Dow said it is targeting $500 million in structural improvements and another $500 million in operating cost reductions. The company said it would look to cut costs tied to purchasing raw materials, logistics and utilities.
The headline-grabbing expansion of layoffs beyond high-growth technology companies stands in contrast to historically low levels of jobless claims and news that companies such as
Chipotle Mexican Grill Inc.
and
Airbus SE
are adding jobs.
This week, four companies trimmed more than 10,000 jobs, just a fraction of their total workforces. Still, the decisions mark a shift in sentiment inside executive suites, where many leaders have been holding on to workers after struggling to hire and retain them in recent years when the pandemic disrupted workplaces.
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The creator of the popular layoff tracker Layoffs.fyi Roger Lee and the head of talent at venture firm M13 Matt Hoffman sit down with WSJ reporter Chip Cutter, to discuss what’s behind the recent downsizing and whether it will be enough to recalibrate ahead of a possible recession.
Unlike
Microsoft Corp.
and Google parent
Alphabet Inc.,
which announced larger layoffs this month, these companies haven’t expanded their workforces dramatically during the pandemic. Instead, the leaders of these global giants said they were shrinking to adjust to slowing growth, or responding to weaker demand for their products.
“We are taking these actions to further optimize our cost structure,”
Jim Fitterling,
Dow’s chief executive, said in announcing the cuts, noting the company was navigating “macro uncertainties and challenging energy markets, particularly in Europe.”
The U.S. labor market broadly remains strong but has gradually lost steam in recent months. Employers added 223,000 jobs in December, the smallest gain in two years. The Labor Department will release January employment data next week.
Economists from Capital Economics estimate a further slowdown to an increase of 150,000 jobs in January, which would push job growth below its 2019 monthly average, the year before pandemic began.
There is “mounting evidence of weakness below the surface,”
Andrew Hunter,
senior U.S. economist at Capital Economics wrote in a note to clients Thursday.
Last month, the unemployment rate was 3.5%, matching multidecade lows. Wage growth remained strong, but had cooled from earlier in 2022. The Federal Reserve, which has been raising interest rates to combat high inflation, is looking for signs of slower wage growth and easing demand for workers.
Many CEOs say companies are beginning to scrutinize hiring more closely.
Slower hiring has already lengthened the time it takes Americans to land a new job. In December, 826,000 unemployed workers had been out of a job for about 3½ to 6 months, up from 526,000 in April 2022, according to the Labor Department.
“Employers are hovering with their feet above the brake. They’re more cautious. They’re more precise in their hiring,” said
Jonas Prising,
chief executive of
ManpowerGroup Inc.,
a provider of temporary workers. “But they’ve not stopped hiring.”
Additional signs of a cooling economy emerged on Thursday when the Commerce Department said U.S. gross domestic product growth slowed to a 2.9% annual rate in the fourth quarter, down from a 3.2% annual rate in the third quarter.
Not all companies are in layoff mode.
Walmart Inc.,
the country’s biggest private employer, said this week it was raising its starting wages for hourly U.S. workers to $14 from $12, amid a still tight job market for front line workers. Chipotle Mexican Grill Inc. said Thursday it plans to hire 15,000 new employees to work in its restaurants, while plane maker Airbus SE said it is recruiting over 13,000 new staffers this year. Airbus said 9,000 of the new jobs would be based in Europe with the rest spread among the U.S., China and elsewhere.
General Electric Co.
, which slashed thousands of aerospace workers in 2020 and is currently laying off 2,000 workers from its wind turbine business, is hiring in other areas. “If you know any welders or machinists, send them my way,” Chief Executive
Larry Culp
said this week.
Annette Clayton,
CEO of North American operations at
Schneider Electric SE,
a Europe-headquartered energy-management and automation company, said the U.S. needs far more electricians to install electric-vehicle chargers and perform other tasks. “The shortage of electricians is very, very important for us,” she said.
Railroad CSX Corp. told investors on Wednesday that after sustained effort, it had reached its goal of about 7,000 train and engine employees around the beginning of the year, but plans to hire several hundred more people in those roles to serve as a cushion and to accommodate attrition that remains higher than the company would like.
Freeport-McMoRan Inc.
executives said Wednesday they expect U.S. labor shortages to continue to crimp production at the mining giant. The company has about 1,300 job openings in a U.S. workforce of about 10,000 to 12,000, and many of its domestic workers are new and need training and experience to match prior expertise, President
Kathleen Quirk
told analysts.
“We could have in 2022 produced more if we were fully staffed, and I believe that is the case again this year,” Ms. Quirk said.
The latest layoffs are modest relative to the size of these companies. For example, IBM’s plan to eliminate about 3,900 roles would amount to a 1.4% reduction in its head count of 280,000, according to its latest annual report.
As interest rates rise and companies tighten their belts, white-collar workers have taken the brunt of layoffs and job cuts, breaking with the usual pattern leading into a downturn. WSJ explains why many professionals are getting the pink slip first. Illustration: Adele Morgan
The planned 3,000 job cuts at SAP affect about 2.5% of the business-software maker’s global workforce. Finance chief
Luka Mucic
said the job cuts would be spread across the company’s geographic footprint, with most of them happening outside its home base in Germany. “The purpose is to further focus on strategic growth areas,” Mr. Mucic said. The company employed around 111,015 people on average last year.
Chemicals giant Dow said on Thursday it was trimming about 2,000 employees. The Midland, Mich., company said it currently employs about 37,800 people. Executives said they were targeting $1 billion in cost cuts this year and shutting down some assets to align spending with the macroeconomic environment.
Manufacturer
3M Co.
, which had about 95,000 employees at the end of 2021, cited weakening consumer demand when it announced this week plans to eliminate 2,500 manufacturing jobs. The maker of Scotch tape, Post-it Notes and thousands of other industrial and consumer products said it expects lower sales and profit in 2023.
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“We’re looking at everything that we do as we manage through the challenges that we’re facing in the end markets,” 3M Chief Executive
Mike Roman
said during an earnings conference call. “We expect the demand trends we saw in December to extend through the first half of 2023.”
Hasbro Inc.
on Thursday said it would eliminate 15% of its workforce, or about 1,000 jobs, after the toy maker’s consumer-products business underperformed in the fourth quarter.
Some companies still hiring now say the job cuts across the economy are making it easier to find qualified candidates. “We’ve got the pick of the litter,” said
Bill McDermott,
CEO of business-software provider
ServiceNow Inc.
“We have so many applicants.”
At
Honeywell International Inc.,
CEO
Darius Adamczyk
said the job market remains competitive. With the layoffs in technology, though, Mr. Adamczyk said he anticipated that the labor market would likely soften, potentially also expanding the applicants Honeywell could attract.
“We’re probably going to be even more selective than we were before because we’re going to have a broader pool to draw from,” he said.
Across the corporate sphere, many of the layoffs happening now are still small relative to the size of the organizations, said
Denis Machuel,
CEO of global staffing firm Adecco Group AG.
“I would qualify it more as a recalibration of the workforce than deep cuts,” Mr. Machuel said. “They are adjusting, but they are not cutting the muscle.”
Write to Chip Cutter at chip.cutter@wsj.com and Theo Francis at theo.francis@wsj.com
said it would stop making so-called forever chemicals and cease using them by the end of 2025, as criticism and litigation grow over the chemicals’ alleged health and environmental impact.
3M Chief Executive
Mike Roman
said that the decision was influenced by increasing regulation of the chemicals known as PFAS, and a growing market for substitute options.
“Customers are taking note of PFAS regulations. They’re looking for alternatives,” Mr. Roman said in an interview. “We’re finding other solutions that have the same properties,” he said.
The company’s move involves chemicals used to make nonstick cookware, food packaging and other consumer and industrial products. 3M estimated its current annual sales of the chemicals total about $1.3 billion.
Perfluoroalkyl and polyfluoroalkyl substances, or PFAS, are commonly called “forever chemicals” because they take a long time to break down in the environment. Such chemicals include highly durable compounds long prized by manufacturers for their resistance to heat, and their ability to repel water, grease and stains.
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In recent decades, research has linked exposure to some forms of the chemicals with health problems including kidney and testicular cancers, thyroid disease and high cholesterol, according to the Environmental Protection Agency. The synthetic compounds have also been found in drinking water, including some municipal systems and private wells, as well as in rainwater around the world.
Regulators and environmental groups have taken aim at the chemicals, and thousands of lawsuits alleging contamination and illness have been filed in recent years targeting 3M and other manufacturers.
3M stopped producing some types of PFAS chemicals in the early 2000s but has continued to make other types, which the company has said can be safely produced and used. 3M said Tuesday it would stop making all fluoropolymers, fluorinated fluids and PFAS-based additive products by the end of 2025.
The company also said it would stop using PFAS across its products by the end of 2025, saying that it has already reduced its use of the substances over the past three years.
3M’s shares declined about 0.5% in midday trading, while major U.S. stock indexes slightly increased. The company’s stock has fallen about 29% so far this year, compared with a 19% decline in the S&P 500 stock index.
The EPA has said there are roughly 600 PFAS chemicals in commercial use today. The American Chemistry Council, which represents chemical makers, said Tuesday that PFAS are integral to thousands of products in technologies including semiconductors, batteries for electric vehicles and 5G technology.
The group said its members are dedicated to the responsible production, use, management and disposal of PFAS chemistries, and that it would continue to work with the EPA toward policies that protect human health and allow the chemicals to continue to be used.
3M’s exit from PFAS was seen as a victory by environmental groups that for years have raised alarms over the chemicals.
Scott Faber, senior vice president of government affairs at the Environmental Working Group, said he didn’t think 3M will ever be held fully accountable for producing the chemicals. “But by exiting the market they have sent a powerful signal to the other polluters that it’s simply unaffordable to poison all of us,” Mr. Faber said.
3M’s net sales of PFAS chemicals represent about 4% of the company’s total annual sales, according to research by RBC Capital Markets. “This is a step in the right direction for 3M given all the regulatory scrutiny of PFAS chemicals,” RBC analysts wrote in a note to investors Tuesday.
Over the course of exiting the business of manufacturing the chemicals, 3M said it expects to incur pretax charges of about $1.3 billion to $2.3 billion, including a $700 million to $1 billion charge in the current quarter. The St. Paul, Minn.-based manufacturer said it intends to fulfill current contractual obligations during the transition period.
The EPA in August proposed designating two forms of PFAS chemicals as hazardous substances under the federal superfund law. The American Chemistry Council and companies such as 3M opposed the move, saying that it wasn’t based on the best available science and that it wouldn’t speed up remediation of contaminated sites.
Industry analysts said plant cleanup costs are likely to increase as the EPA uses broad discretion to impose cleanup terms under the Superfund designation. They said the hazardous substance designation also likely would hinder sales growth for the PFAS chemicals that 3M continues to produce, as customers look for alternatives.
3M pioneered the development of PFAS chemicals in the late 1940s, building on atomic research that used fluorine gas. By bonding fluorine with carbon, 3M found it could create durable compounds that could be adapted for use in consumer and industrial products.
3M’s plants where PFAS chemicals are produced have come under increasing regulatory focus for soil and water contamination. 3M has committed billions of dollars to clean up plant sites in recent years, including an $850 million settlement with the state of Minnesota related to a plant in Cottage Grove, Minn. The company also agreed earlier this year to provide about $600 million to remediate contamination connected to a plant in Belgium where PFAS chemicals have been produced.
3M also produces PFAS chemicals at plants in Alabama, Illinois and Germany.
3M phased out production of two PFAS chemicals, known as PFOA and PFOS, in the early 2000s. Those two forms of PFAS chemicals have been at the center of thousands of lawsuits targeting 3M and other manufacturers.
—Will Feuer contributed to this article.
Write to Kris Maher at Kris.Maher@wsj.com and Bob Tita at robert.tita@wsj.com
plans to cut potentially at least half of its workforce next week, people familiar with the matter said, as it scales back efforts to build and test autonomous truck-driving systems.
A staff reduction of that size would likely affect at least 700 employees, the people said. As of June, TuSimple had 1,430 full-time employees globally. It has operations in San Diego, Arizona, Texas and China.
The retrenchment follows a dramatic series of events, including the removal of the chief executive in October after a board investigation concluded that TuSimple had shared confidential information with a Chinese startup. TuSimple faces multiple federal investigations into its relationship with the Chinese startup, Hydron Inc.
TuSimple President and Chief Executive
Cheng Lu,
who previously held the CEO job and returned to the position in November, said on Friday, when asked for comment on the planned layoffs, that he intended “to right the ship, and this includes ensuring the company is capital efficient.”
The company plans to scale back significantly its work on building self-driving systems and testing self-driving trucks on public roads in Arizona and Texas, the people familiar with the matter said. As part of the downsizing, much of TuSimple’s operation in Tucson, Ariz., where it does a lot of its test driving, will be eliminated, and the team that works on the algorithms for the self-driving software will be pared back significantly, the people said.
TuSimple will focus on building out a software product that matches self-driving trucks with shippers that have freight to haul, with the aim of offering freight transport at a lower cost than human-driven trucks, the people said.
This month, TuSimple and Navistar International Corp. said they had jointly ended a two-year-old partnership. TuSimple had planned to incorporate its self-driving systems into Navistar trucks that would be sold to freight haulers starting in 2025. TuSimple doesn’t build trucks itself.
Employees have been bracing for the layoffs. Early this month, Mr. Lu sent an email to staff that said management was reviewing “our people expenses, the biggest part of our cash burn,” according to a copy viewed by The Wall Street Journal. He advised employees “to focus on the work at hand.”
TuSimple, based in San Diego, told employees this week that offices would be closed Tuesday and Wednesday, the people said. The job cuts are expected to be announced on Tuesday, they said.
TuSimple is cutting costs and scaling back its ambitions as it reels from a string of crises this year, including a crash of one of its self-driving trucks in April, the loss of key business partnerships, two CEO changes, a plummeting stock price and concurrent government investigations. Federal authorities are probing whether TuSimple improperly financed and transferred technology to Hydron, the Journal reported in October.
TuSimple has struggled to generate significant revenue as its technology remained in a testing phase; in the first half of the year, it reported $4.9 million in revenue on $220.5 million in losses. That revenue largely came from hauling freight for shippers in trucks while keeping a human driver behind the wheel. In recent weeks, some of those partners, including McLane Company Inc., have moved to distance themselves from TuSimple, according to people familiar with the matter.
“McLane is aware of the recent leadership, operational and route changes at TuSimple and is in communication with their team. We are in the process of assessing the business relationship with TuSimple and will determine the next course of action in due time,” said Larry Parsons, McLane’s chief administrative officer.
In October, following a board investigation and the day after the Journal reported that the Federal Bureau of Investigation, Securities and Exchange Commission, and Committee on Foreign Investment in the U.S., or Cfius, were investigating TuSimple, the company’s board fired then-CEO
Xiaodi Hou.
After being ousted, Mr. Hou joined forces with fellow co-founder Mo Chen, who is also the leader of Hydron, to fire the board. Together they brought Mr. Lu back to run the company. Mr. Chen now controls the company with 59% of the voting power, while Mr. Hou has 30%, according to securities filings.
Last month, accounting company KPMG LLP said in a letter to the SEC it had resigned as TuSimple’s auditor as a result of the board firing, which also involved dismissing TuSimple’s audit committee.
TuSimple has announced leadership changes in an effort to get back into compliance with regulators and public stock market rules. This included adding two independent board directors and a security director to its board. Cfius had required the security director role as part of a national-security agreement with the company, but TuSimple fired the previous security director.
TuSimple’s stock closed at $1.54 on Friday, a 75% decline over the past two months and down 96% from its 2021 initial public offering price.
Write to Heather Somerville at heather.somerville@wsj.com
a self-driving trucking company, said Monday it had fired its chief executive and co-founder,
Xiaodi Hou.
The San Diego-based company said in a news release and securities filing that its board of directors on Sunday had ousted Mr. Hou, who was also the board chairman and chief technology officer.
Mr. Hou was fired in connection with a continuing investigation by members of the board, the release said. That review “led the board to conclude that a change of Chief Executive Officer was necessary,” the company said in the release.
The securities filing said that the board’s investigation found that TuSimple this year shared confidential information with Hydron Inc., a trucking startup with operations mostly in China and funded by Chinese investors. The filing also said that TuSimple’s decision to share the confidential information hadn’t been disclosed to the board before TuSimple entered into a business deal with Hydron.
TuSimple said it didn’t know whether Hydron shared, or publicly disclosed, the confidential information, the securities filing said.
Messrs. Hou and Chen didn’t immediately respond to a request for comment.
Mr. Hou’s termination was announced the day after The Wall Street Journal reported TuSimple and its leadership, principally Mr. Hou, faced investigations by the Federal Bureau of Investigation, Securities and Exchange Commission and Committee on Foreign Investment in the U.S., known as Cfius, into whether the company improperly financed and transferred technology to a Chinese startup, according to people with knowledge of the matter.
TuSimple’s stock plunged more than 44% Monday. Shares in the company are down more than 90% for the year.
Investigators at the FBI and SEC are looking at whether Mr. Hou breached fiduciary duties and securities laws by failing to properly disclose TuSimple’s relationship with Hydron, the China-backed startup founded in 2021 by TuSimple co-founder Mo Chen that says it is developing autonomous hydrogen-powered trucks, the Journal reported. Federal investigators are also probing whether TuSimple shared with Hydron intellectual property developed in the U.S. and whether that action defrauded TuSimple investors by sending valuable technology to an overseas adversary.
The Journal also has reported that the board in July began investigating similar issues, including whether TuSimple incubated Hydron in China without informing regulators, the TuSimple board or its shareholders, said other people familiar with the matter. A June business presentation from Hydron viewed by the Journal named TuSimple as Hydron’s first customer, and said TuSimple would purchase from Hydron several hundred hydrogen-powered trucks equipped with self-driving technology. A TuSimple spokesman said the company has considered an agreement to buy freight trucks from Hydron but isn’t a Hydron customer.
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TuSimple’s securities filing on Monday said that TuSimple employees worked for Hydron and were paid, earning less than $300,000. The board wasn’t aware of this nor had members approve it, the filing said. Mr. Chen, who founded and leads Hydron, is TuSimple’s largest shareholder, owning about 11.8% of the company, according to FactSet.
Mr. Hou’s dismissal follows months of upheaval at the company, including the departures of its chief financial officer and chief legal officer and a sharp drop in its stock price. Much of the turmoil began when Mr. Hou took over as CEO in March, said former employees.
In April, one of TuSimple’s autonomous semi trucks crashed on an Arizona freeway. The accident revealed safety and security problems at TuSimple that former employees said leadership had dismissed, the Journal reported in August.
The company said
Ersin Yumer,
TuSimple’s executive vice president of operations, will serve as interim CEO while the board searches for Mr. Hou’s successor. Mr. Yumer previously worked on autonomous-vehicle technology at
Aurora Innovation Inc.,
Uber Technologies Inc.
and Argo AI, the autonomous-driving venture partly owned by
Ford Motor Co.
and
Volkswagen AG
that was shut down recently. Independent board director
Brad Buss,
the former chief financial officer at SolarCity Corp. and Cypress Semiconductor Corp., will be chairman, TuSimple said.
TuSimple said it would release its third-quarter earnings on Monday after the market closes. The earnings release was previously scheduled for Tuesday. The company, ahead of the results, said it remained on track to meet the full-year guidance disclosed in August, including ending the year with a cash balance of about $950 million.
Write to Heather Somerville at heather.somerville@wsj.com and Kate O’Keeffe at kathryn.okeeffe@wsj.com
The past week offered a tale of two markets, with gains for the Dow Jones Industrial Average putting the blue-chip gauge on track for its best October on record while Big Tech heavyweights suffered a shellacking that had market veterans recalling the dot-com bust in the early 2000s.
“You have a tug of war,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), in a phone interview.
For the technology sector, particularly the megacap names, earnings were a major drag on performance. For everything else, the market was short-term oversold at the same time optimism was building over expectations the Federal Reserve and other major global central banks will be less aggressive in tightening monetary policy in the future, he said.
Read: Market expectations start to shift in direction of slower pace of rate hikes by Fed
What’s telling is that the interest-rate sensitive tech sector would usually be expected to benefit from a moderation of expectations for tighter monetary policy, said Suzuki, who contends that tech stocks are likely in for a long period of underperformance versus their peers after leading the market higher over the last 12 years, a performance capped by soaring gains following the onset of COVID-19 pandemic in 2020.
RBA has been arguing that there was “a major bubble within major portions of the equity market for over a year now,” Suzuki said. “We think this is the process of the bubble deflating and we think there’s probably further to go.”
The Dow
DJIA,
+2.59%
surged nearly 830 points, or 2.6%, on Friday to end at a two-month high and log a weekly gain of more than 5%. The blue-chip gauge’s October gain was 14.4% through Friday, which would mark its strongest monthly gain since January 1976 and its biggest October rise on record if it holds through Monday’s close, according to Dow Jones Market Data.
While it was a tough week for many of Big Tech’s biggest beasts, the tech-heavy Nasdaq Composite
COMP,
-8.39%
and tech-related sectors bounced sharply on Friday. The tech-heavy Nasdaq swung to a weekly gain of more than 2%, while the S&P 500
SPX,
+2.46%
rose nearly 4% for the week.
Big Tech companies lost more than $255 billion in market capitalization in the past week. Apple Inc.
AAPL,
+7.56%
escaped the carnage, rallying Friday as investors appeared okay with a mixed earnings report. A parade of disappointing earnings sank shares of Facebook parent Meta Platforms Inc.
META,
+1.29%,
Google parent Alphabet Inc.
GOOG,
+4.30%
GOOGL,
+4.41%,
Amazon.com Inc.
AMZN,
-6.80%
and Microsoft
MSFT,
+4.02%.
Mark Hulbert: Technology stocks tumble — this is how you will know when to buy them again
Together, the five companies have lost a combined $3 trillion in market capitalization this year, according to Dow Jones Market Data.
Opinion: A $3 trillion loss: Big Tech’s horrible year is getting worse
Aggressive interest rate increases by the Fed and other major central banks have punished tech and other growth stocks the most this year, as their value is based on expectations for earnings and cash flow far into the future. The accompanying rise in yields on Treasurys, which are viewed as risk-free, raises the opportunity cost of holding riskier assets like stocks. And the further out those expected earnings stretch, the bigger the hit.
Excessive liquidity — a key ingredient in any bubble — has also contributed to tech weakness, said RBA’s Suzuki.
And now investors see an emerging risk to Big Tech earnings from an overall slowdown in economic growth, Suzuki said.
“A lot of people have the notion that these are secular growth stocks and therefore immune to the ups and downs of the overall economy — that’s not empirically true at all if you look at the history of profits for these stocks,” he said.
Tech’s outperformance during the COVID-inspired recession may have given investors a false impression, with the sector benefiting from unique circumstances that saw households and businesses become more reliant on technology at a time when incomes were surging due to fiscal stimulus from the government. In a typical slowdown, tech profits tend to be very economically sensitive, he said.
The Fed’s policy meeting will be the main event in the week ahead. While investors and economists overwhelmingly expect policy makers to deliver another supersize 75 basis point, or 0.75 percentage point, rate increase when the two-day gathering ends on Wednesday, expectations are mounting for Chairman Jerome Powell to indicate a smaller December may be on the table.
However, all three major indexes remain in bear markets, so the question for investors is whether the bounce this week will survive if Powell fails to signal a downshift in expectations for rate rises next week.
See: Another Fed jumbo rate hike is expected next week and then life gets difficult for Powell
Those expectations helped power the Dow’s big gains over the past week, alongside solid earnings from a number of components, including global economic bellwether Caterpillar Inc.
CAT,
+3.39%.
Overall, the Dow benefited because it’s “very tech-light, and it’s very heavy in energy and industrials, and those have been the winners,” Art Hogan, chief market strategist at B. Riley Wealth Management told MarketWatch’s Joseph Adinolfi on Friday. “The Dow just has more of the winners embedded in it and that has been the secret to its success.”
Meanwhile, the outperformance of the Invesco S&P 500 Equal Weight ETF
RSP,
+2.08%,
up 5.5% over the week, versus the market-cap-weighted SPDR S&P 500 ETF Trust
SPY,
+2.38%,
underscored that while tech may be vulnerable to more declines, “traditional parts of the economy, including sectors that trade at a lower valuation, are proving resilient since the broad markets bounced nearly two weeks ago,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.
“Stepping back, this market and the economy more broadly are starting to remind me of the 2000-2002 setup, where extreme tech weakness weighed on the major indices, but more traditional parts of the market and the economy performed better,” he wrote.
Suzuki said investors should remember that “bear markets always signal a change of leadership” and that means tech won’t be taking the reins when the next bull market begins.
“You can’t debate that we’ve already got a signal and the signal is telling up that next cycle not going to look anything like the last 12 years,” he said.
Some investors are on edge that the Federal Reserve may be overtightening monetary policy in its bid to tame hot inflation, as markets look ahead to a reading this coming week from the Fed’s preferred gauge of the cost of living in the U.S.
“Fed officials have been scrambling to scare investors almost every day recently in speeches declaring that they will continue to raise the federal funds rate,” the central bank’s benchmark interest rate, “until inflation breaks,” said Yardeni Research in a note Friday. The note suggests they went “trick-or-treating” before Halloween as they’ve now entered their “blackout period” ending the day after the conclusion of their November 1-2 policy meeting.
“The mounting fear is that something else will break along the way, like the entire U.S. Treasury bond market,” Yardeni said.
Treasury yields have recently soared as the Fed lifts its benchmark interest rate, pressuring the stock market. On Friday, their rapid ascent paused, as investors digested reports suggesting the Fed may debate slightly slowing aggressive rate hikes late this year.
Stocks jumped sharply Friday while the market weighed what was seen as a potential start of a shift in Fed policy, even as the central bank appeared set to continue a path of large rate increases this year to curb soaring inflation.
The stock market’s reaction to The Wall Street Journal’s report that the central bank appears set to raise the fed funds rate by three-quarters of a percentage point next month – and that Fed officials may debate whether to hike by a half percentage point in December — seemed overly enthusiastic to Anthony Saglimbene, chief market strategist at Ameriprise Financial.
“It’s wishful thinking” that the Fed is heading toward a pause in rate hikes, as they’ll probably leave future rate hikes “on the table,” he said in a phone interview.
“I think they painted themselves into a corner when they left interest rates at zero all last year” while buying bonds under so-called quantitative easing, said Saglimbene. As long as high inflation remains sticky, the Fed will probably keep raising rates while recognizing those hikes operate with a lag — and could do “more damage than they want to” in trying to cool the economy.
“Something in the economy may break in the process,” he said. “That’s the risk that we find ourselves in.”
‘Debacle’
Higher interest rates mean it costs more for companies and consumers to borrow, slowing economic growth amid heightened fears the U.S. faces a potential recession next year, according to Saglimbene. Unemployment may rise as a result of the Fed’s aggressive rate hikes, he said, while “dislocations in currency and bond markets” could emerge.
U.S. investors have seen such financial-market cracks abroad.
The Bank of England recently made a surprise intervention in the U.K. bond market after yields on its government debt spiked and the British pound sank amid concerns over a tax cut plan that surfaced as Britain’s central bank was tightening monetary policy to curb high inflation. Prime minister Liz Truss stepped down in the wake of the chaos, just weeks after taking the top job, saying she would leave as soon as the Conservative party holds a contest to replace her.
“The experiment’s over, if you will,” said JJ Kinahan, chief executive officer of IG Group North America, the parent of online brokerage tastyworks, in a phone interview. “So now we’re going to get a different leader,” he said. “Normally, you wouldn’t be happy about that, but since the day she came, her policies have been pretty poorly received.”
Meanwhile, the U.S. Treasury market is “fragile” and “vulnerable to shock,” strategists at Bank of America warned in a BofA Global Research report dated Oct. 20. They expressed concern that the Treasury market “may be one shock away from market functioning challenges,” pointing to deteriorated liquidity amid weak demand and “elevated investor risk aversion.”
Read: ‘Fragile’ Treasury market is at risk of ‘large scale forced selling’ or surprise that leads to breakdown, BofA says
“The fear is that a debacle like the recent one in the U.K. bond market could happen in the U.S.,” Yardeni said, in its note Friday.
“While anything seems possible these days, especially scary scenarios, we would like to point out that even as the Fed is withdrawing liquidity” by raising the fed funds rate and continuing quantitative tightening, the U.S. is a safe haven amid challenging times globally, the firm said. In other words, the notion that “there is no alternative country” in which to invest other than the U.S., may provide liquidity to the domestic bond market, according to its note.
YARDENI RESEARCH NOTE DATED OCT. 21, 2022
“I just don’t think this economy works” if the yield on the 10-year Treasury
TMUBMUSD10Y,
4.228%
note starts to approach anywhere close to 5%, said Rhys Williams, chief strategist at Spouting Rock Asset Management, by phone.
Ten-year Treasury yields dipped slightly more than one basis point to 4.212% on Friday, after climbing Thursday to their highest rate since June 17, 2008 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
Williams said he worries that rising financing rates in the housing and auto markets will pinch consumers, leading to slower sales in those markets.
Read: Why the housing market should brace for double-digit mortgage rates in 2023
“The market has more or less priced in a mild recession,” said Williams. If the Fed were to keep tightening, “without paying any attention to what’s going on in the real world” while being “maniacally focused on unemployment rates,” there’d be “a very big recession,” he said.
Investors are anticipating that the Fed’s path of unusually large rate hikes this year will eventually lead to a softer labor market, dampening demand in the economy under its effort to curb soaring inflation. But the labor market has so far remained strong, with an historically low unemployment rate of 3.5%.
George Catrambone, head of Americas trading at DWS Group, said in a phone interview that he’s “fairly worried” about the Fed potentially overtightening monetary policy, or raising rates too much too fast.
The central bank “has told us that they are data dependent,” he said, but expressed concerns it’s relying on data that’s “backward-looking by at least a month,” he said.
The unemployment rate, for example, is a lagging economic indicator. The shelter component of the consumer-price index, a measure of U.S. inflation, is “sticky, but also particularly lagging,” said Catrambone.
At the end of this upcoming week, investors will get a reading from the personal-consumption-expenditures-price index, the Fed’s preferred inflation gauge, for September. The so-called PCE data will be released before the U.S. stock market opens on Oct. 28.
Meanwhile, corporate earnings results, which have started being reported for the third quarter, are also “backward-looking,” said Catrambone. And the U.S. dollar, which has soared as the Fed raises rates, is creating “headwinds” for U.S. companies with multinational businesses.
Read: Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.
“Because of the lag that the Fed is operating under, you’re not going to know until it’s too late that you’ve gone too far,” said Catrambone. “This is what happens when you’re moving with such speed but also such size, he said, referencing the central bank’s string of large rate hikes in 2022.
“It’s a lot easier to tiptoe around when you’re raising rates at 25 basis points at a time,” said Catrambone.
‘Tightrope’
In the U.S., the Fed is on a “tightrope” as it risks over tightening monetary policy, according to IG’s Kinahan. “We haven’t seen the full effect of what the Fed has done,” he said.
While the labor market appears strong for now, the Fed is tightening into a slowing economy. For example, existing home sales have fallen as mortgage rates climb, while the Institute for Supply Management’s manufacturing survey, a barometer of American factories, fell to a 28-month low of 50.9% in September.
Also, trouble in financial markets may show up unexpectedly as a ripple effect of the Fed’s monetary tightening, warned Spouting Rock’s Williams. “Anytime the Fed raises rates this quickly, that’s when the water goes out and you find out who’s got the bathing suit” — or not, he said.
“You just don’t know who is overlevered,” he said, raising concern over the potential for illiquidity blowups. “You only know that when you get that margin call.”
U.S. stocks ended sharply higher Friday, with the S&P 500
SPX,
+2.37%,
Dow Jones Industrial Average
DJIA,
+2.47%
and Nasdaq Composite each scoring their biggest weekly percentage gains since June, according to Dow Jones Market Data.
Still, U.S. equities are in a bear market.
“We’ve been advising our advisors and clients to remain cautious through the rest of this year,” leaning on quality assets while staying focused on the U.S. and considering defensive areas such as healthcare that can help mitigate risk, said Ameriprise’s Saglimbene. “I think volatility is going to be high.”
Stocks ended the first full week of the earnings season on a strong note Friday, pushing the Dow Jones Industrial Average
DJIA,
+2.47%,
S&P 500
SPX,
+2.37%
and Nasdaq Composite
COMP,
-0.81%
to their strongest weekly gains since June. It gets more hectic in the week ahead, with 165 S&P 500 companies, including 12 Dow components, due to report results, according to FactSet, making it the busiest week of the season.
The bar for earnings was set high last year as the global economy reopened from its pandemic-induced state. “Fast forward to this year, and earnings are facing tougher comparisons on a year-over-year basis. Add in the elevated risk of a recession, still hot inflation, and an aggressive Fed tightening cycle, and it is of little surprise that the sentiment surrounding the current 3Q22 earnings season is cautious,” said Larry Adam, chief investment officer for the private client group at Raymond James, in a Friday note.
“We have reason to believe the 3Q22 earnings season will be better than feared and could become a positive catalyst for equities just as the 2Q22 results were,” he wrote.
Read: Stocks are attempting a bounce as earnings season begins. Here’s what it will take for the gains to stick.
Better-than-feared earnings were credited with helping to fuel a stock-market rally from late June to early August, with equities bouncing back sharply from what were then 2020 lows before succumbing to fresh rounds of selling that, by the end of September, took the S&P 500 to its lowest close since November 2020.
While earnings weren’t the only factor in the past week’s gains, they probably didn’t hurt.
The number of S&P 500 companies reporting positive earnings surprises and the magnitude of these earnings surprises increased over the past week, noted John Butters, senior earnings analyst at FactSet, in a Friday note.
Even with that improvement, however, earnings beats are still running below long-term averages.
Through Friday, 20% of the companies in the S&P 500 had reported third-quarter results. Of these companies, 72% reported actual earnings per share, or EPS, above estimates, which is below the 5-year average of 77% and below the 10-year average of 73%, Butters said. In aggregate, companies are reporting earnings that are 2.3% above estimates, which is below the 5-year average of 8.7% and below the 10-year average of 6.5%.
Meanwhile, the blended-earnings growth rate, which combines actual results for companies that have reported with estimated results for companies that have yet to report, rose to 1.5% compared with 1.3% at the end of last week, but it was still below the estimated earnings growth rate at the end of the quarter at 2.8%, he said. And both the number and magnitude of positive earnings surprises are below their 5-year and 10-year averages. On a year-over-year basis, the S&P 500 is reporting its lowest earnings growth since the third quarter of 2020, according to Butters.
The blended-revenue growth rate for the third quarter was 8.5%, compared with a revenue growth rate of 8.4% last week and a revenue growth rate of 8.7% at the end of the third quarter.
Next week’s lineup accounts for over 30% of the S&P 500’s market capitalization, Adam said. And with the tech sector accounting for around 20% of the index’s earnings, reports from Visa Inc.
V,
+1.68%,
Google parent Alphabet Inc.
GOOG,
+0.94%
GOOGL,
+1.16%,
Microsoft Corp.
MSFT,
+2.53%,
Amazon.com Inc.
AMZN,
+3.53%
and Apple Inc.
AAPL,
+2.71%
will be closely watched.
Away from the backward-looking numbers, guidance from executives on the path ahead will be crucial against a backdrop of recession fears, Adam wrote, noting that so far guidance has remained resilient, with the net percentage of companies raising rather than lowering their outlook remaining positive.
“For example, the ‘Summer of Revenge Travel’ was known to benefit the airlines, but commentary from United
UAL,
+3.56%,
American
AAL,
+1.86%
and Delta Airlines
DAL,
+1.34%
suggests demand remains strong for the months ahead and into 2023. Ultimately, the broader based and better the forward guidance, the higher the confidence in our $215 S&P 500 earnings target for 2023,” Adam said.
The soaring U.S. dollar
DXY,
-0.89%,
which remains not far off a two-decade high set at the end of last month, also remains a concern.
See: How the strong dollar can affect your financial health
“While the degree of the impact depends on the blend of costs versus sales overseas and how much of the currency risk is hedged, a stronger dollar typically impairs earnings,” Adam wrote.
After that CPI shock earlier in the week, Wall Street is fielding a fresh batch of data on Thursday, with the headline retail sales number coming in stronger than expected. And a disastrous rail strike may be inverted.
But there’s no cheering up billionaire investor and hedge-fund manager Ray Dalio who in our call of the day asserts the Fed has no choice but to keep driving up interest rates, at a high price to stocks.
And he’s putting some fairly precise guesswork out there. “I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices,” Dalio said in a LinkedIn post dated Tuesday.
Some are forecasting the Fed could hike interest rates by 100 basis points next week, a move not seen since the likewise inflationary 80s. The central bank’s short-term rate hovers between 2.25% to 2.5%, but Nomura, for one, sees that rate headed to 4.75% by 2023.
But Dalio thinks interest rates could even reach the higher end of a 4.5%-to-6% range. “This will bring private sector credit growth down, which will bring private sector spending, and hence the economy down with it,” he says.
Behind this prediction is the Bridgewater Associates founder belief that the market is severely underestimating where inflation will end up — at 2.6% over the next 10 years versus what he sees as 4.5% to 5% in the medium term, barring shocks.
Read: Why a single U.S. inflation report roiled global financial markets — and what comes next
As for what happens when people start losing money in the markets — the so-called “wealth effect” — he expects less spending as they and their lenders grow more cautious.
“The upshot is that it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects.”
The markets
Stock futures
ES00,
-0.25%
YM00,
+0.02%
NQ00,
-0.48%
are slightly lower post data, as Treasury yields
TMUBMUSD10Y,
3.437%
TMUBMUSD02Y,
3.852%
keep climbinging and the dollar
DXY,
-0.10%
firms up.
Oil prices
CL.1,
-1.63%
are lower, along with gold
GC00,
-0.83%.
China stocks
SHCOMP,
-1.16%
HSI,
+0.44%
slipped after the country’s central bank left rates unchanged. European natural-gas prices
GWM00,
+4.13%
are on the rise again. Bitcoin
BTCUSD,
+0.64%
is trading at just over $20,000.
The buzz
Shares of Union Pacific
UNP,
-3.69%,
Norfolk Southern
NSC,
-2.16%
and CSX
CSX,
-1.05%
are rallying in premarket after the White House said it has reached a tentative railway agreement with unions. No deal by Friday would mean strikes and havoc for supply chains, grain markets and even the coming holidays. Read more here.
August retail sales rose a stronger-than-expected 0.3% as Americans spent on new cars while weekly jobless claims came in lower for a fifth-straight week and import prices dropped 1%. Elsewhere, the Empire State manufacturing index perked up on the heels of a deep negative reading, but the Philly Fed factory index worsened. Industrial production and business inventories are still to come.
Adobe shares
ADBE,
+0.85%
are dropping after a report the software company is mulling a $20 billion deal to buy graphic design startup Figma .
Vitalik Buterin, one of the co-founders of Ethereum, says the so-called “merge” is done, meaning the birth of a more environmentally friendly crypto. Ethereum
ETHUSD,
-1.22%
is up just a little right now.
A new lawsuit claims Tesla
TSLA,
+3.59%
has made false promises over Autopilot and Full Self Driving features. And move over Tesla, Apple
AAPL,
+0.96%
is now Wall Street’s biggest short bet.
Ericsson
ERIC,
-3.32%
ERIC.A,
-1.78%
ERIC.B,
-3.34%
is dropping after a double downgrade at Credit Suisse, who cited inflationary headwinds. Analysts lifted Nokia
NOKIA,
-0.51%
NOK,
-0.40%
to outperform, though the stock is barely moving.
Cathie Wood’s Ark Investment Management went on a dip-buying spree after Tuesday’s market meltdown, scooping up chiefly Roku
ROKU,
+0.44%.
Opinion: Pinterest never considered itself a social network. Until now.
Patagonia billionaire Yvon Chouinard is donating his entire company — worth $3 billion — to the climate fight.
Best of the web
No U.S. shale rescue for Europe.
Turkey finds an extra $24.4 billion laying around.
Queue to pay respects to Queen is 2.6 miles long and counting.
The tickers
These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern Time:
Ticker
Security name
TSLA,
+3.59%
Tesla
GME,
+1.01%
GameStop
AMC,
+1.95%
AMC Entertainment
BBBY,
+4.66%
Bed Bath & Beyond
HKD,
+311.78%
AMTD Digital
NIO,
-0.14%
NIO
AAPL,
+0.96%
Apple
APE,
+0.94%
AMC Entertainment preferred shares
AMZN,
+1.36%
Amazon
NVDA,
-0.02%
Nvidia
Random reads
Scientists try to teach robots comedic timing
Sausage, mozzarella, batter. Meet South Korea’s hot dog.
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& Co.’s precious-metals traders consistently manipulated the gold and silver market over a period of seven years and lied about their conduct to regulators who investigated them, federal prosecutors said Friday.
The bank built a formidable franchise trading precious metals, but some of it was based on deception, prosecutors said at the start of a trial of two former traders and a co-worker who dealt with important hedge-fund clients. They said the traders engaged in a price-rigging strategy known as spoofing, which involved sending large, deceptive orders that fooled other traders about the state of supply and demand. The orders were often canceled before others could trade with them.
The criminal trial in Chicago is the climax of a seven-year Justice Department campaign to punish alleged spoofing in the futures markets. Prosecutors have alleged the former members of
JPMorgan’s
JPM -0.31%
precious-metals desk constituted a sort of criminal gang that carried out a yearslong conspiracy that racked up big profits for the bank.
“Day in, day out for seven years, the defendants manipulated the market so that they could make more money,” U.S. Justice Department prosecutor Lucy Jennings said. “And then they lied to cover it up.”
JPMorgan paid $920 million in 2020 to resolve regulatory and criminal charges over the conduct, which involved nine futures traders and at least two salespeople who dealt with clients such as hedge funds, according to court records. Three former traders cooperated with the Justice Department’s investigation and will testify against the three defendants: Gregg Smith and Michael Nowak, who traded precious metals; and Jeffrey Ruffo, who was their liaison to big hedge funds whose trades earned money for the bank.
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Attorneys for Messrs. Smith, Nowak and Ruffo told jurors Friday that prosecutors cherry-picked a handful of trades to concoct a misleading theory of how the men traded.
Mr. Smith canceled many orders but never used them as a ruse, defense attorney Jonathan Cogan said. He often canceled orders after he realized that high-speed trading firms, which made decisions faster than he could, jumped ahead of his orders and moved the price up or down, Mr. Cogan said.
“He did not place orders with the intent to manipulate the market, not during the snippets of time the prosecutors will focus on in this case—not ever,” Mr. Cogan said.
An attorney for Mr. Nowak, who led the precious-metals desk, said his client was a gold-options trader during the years under scrutiny. Mr. Nowak used futures mostly to limit the risk of his large options positions, attorney David Meister said, so his pay wasn’t linked to making more or less money on a futures trade.
“The stuff he’s charged with here couldn’t move the needle for Mike’s pay,” Mr. Meister said.
Mr. Smith had worked at Bear Stearns before joining JPMorgan in 2008 when the bank acquired Bear in a fire sale precipitated by the financial crisis. Mr. Nowak traded for JPMorgan in both London and New York. Mr. Ruffo worked at the bank for a decade, communicating with hedge funds that were brokerage clients and providing the desk with important market intelligence, according to prosecutors. All three have pleaded not guilty.
Prosecutors have alleged the pattern of spoofing was continuous, a claim that allowed them to charge the three men with racketeering in addition to conspiracy, attempted price manipulation, fraud, and spoofing. The conduct allegedly spanned from 2008 to 2016.
Racketeering is a charge typically reserved for criminal enterprises such as the mafia and violent gangs, although eight soybean-futures traders in Chicago were convicted of racketeering in a crackdown on cheating in the early 1990s.
U.S. District Judge Edmond E. Chang has reserved up to six weeks for the trial, although prosecutors said Friday that they could be finished presenting their case within two weeks. Judge Chang last year dismissed part of the case—several counts of bank fraud—against the defendants. Prosecutors also recently moved to drop allegations related to options trading that authorities claimed had been manipulative.
Prosecutors have alleged that JPMorgan employees already were spoofing when Mr. Smith got to the bank. They say Mr. Smith and another trader from Bear brought a new style of spoofing that was more aggressive than the simpler approach people at JPMorgan had been using, according to court records.
Spoofing became an important way to successfully execute trades for hedge-fund clients whose fees were critical to the trading desk, prosecutors said. “It was key to get the best prices for those clients, so that they keep coming back to the precious-metals desk at JPMorgan, and not another bank,” Ms. Jennings said.
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Guy Petrillo, an attorney for Mr. Ruffo, said Friday his client was a reliable and honest salesman whose only role was to communicate with clients and pass their orders to traders such as Messrs. Smith and Nowak.
“There will be no reliable evidence that Jeff knew that traders were using trading tactics that he understood at the time were unlawful,” Mr. Petrillo said.
Federal prosecutors have honed a formula for going after spoofing defendants during their multiyear strike on the practice. In addition to using cooperating witnesses who said they knew the conduct was wrong, prosecutors have deployed trading charts and electronic chats to depict a sequence of trades intended to deceive others in the market. While the charts show a pattern of allegedly deceptive trading, prosecutors said the incriminating chats reveal the intent of the traders placing the orders.
Former traders at
Deutsche Bank AG
and
Bank of America Corp.
were convicted of spoofing-related crimes in 2020 and 2021, respectively.
Those trials featured chats in which some defendants boasted about spoofing.
Lawyers for Messrs. Smith, Nowak and Ruffo said there are no chats in which their clients talked about spoofing because the men didn’t engage in it.
Spoofing is a form of market manipulation outlawed by Congress in 2010. Spoofers send orders priced above or below the best prices, so they don’t immediately execute. Those orders create a false appearance of supply and demand, prosecutors say. The tactic is designed to move prices toward a level where the spoofer has placed another order he wants to trade. Once the bona fide order is filled, the spoofer cancels the deceptive orders, often causing prices to move back to where they were before the maneuver started.
Mr. Smith’s style of spoofing involved layering multiple deceptive orders at different prices and in rapid succession, according to the settlement agreement that JPMorgan struck with prosecutors two years ago. It was harder to pull off but also harder to detect, and other JPMorgan traders adopted his mode of trading, court records say.
In the earlier trials, prosecutors successfully defended their theory that spoofing constitutes a type of fraud. Some traders have argued spoofing doesn’t involve making false statements—usually a precondition for fraud—because electronic orders don’t convey any intent or promises.
The tactic can impose losses on those tricked by spoofing patterns. The government has portrayed some of Wall Street’s most sophisticated trading firms, such as Citadel Securities and Quantlab Financial, as the past victims of spoofers. In the latest trial, prosecutors also plan to call individual traders who traded for their own accounts and were harmed by spoofing.