FedEx Shocks Market

The stock market sagged again this morning after FedEx reported awful quarterly results (see below). At the moment, the Dow is off 340 points and the S&P 500 is down 1.3%. All eleven market sectors are lower, led by energy (-2.8%) and industrials (-2.4%). The VIX fear gauge has quietly risen above 27, suggesting higher volatility over the next 30 days. Commodities, on the other hand, are bouncing back from yesterday’s rout largely because the dollar is showing some weakness. WTI crude oil climbed back to $86/barrel. The bond market is selling off broadly. Rising Fed rate hike expectations are pushing up bond yields again. Over the last six weeks the 2-year Treasury Note yield climbed to 3.87% from 2.87%.

Federal Express (FDX) surprised investors with a warning that shipping volumes fell sharply in recent weeks. This caused management to freeze hiring, close some locations, and park some cargo planes. In addition, shareholders were told to ignore the company’s previous guidance for 2022 sales & profits. The CEO afterward said he believes the US economy will fall into recession. The stock price—50% from its high—has now returned to pre-Covid levels. Competitors UPS and XPO Logistics are down in sympathy. Investors are now wondering if this is a canary in the coal mine for the global economy. Some Wall Street analysts, however, think part of the problem must be company-specific. It is true that FDX has a history of poor execution. Let the debate begin.

The University of Michigan’s Consumer Sentiment survey improved modestly this month, clawing back from record lows last summer. Respondents were a bit more optimistic about the near-term economic outlook. They also lowered inflation expectations to 4.6% over the next year, and 2.8% over the next 5-10 years. Those numbers are obviously going the right direction, though they still leave a gap to achieving the Federal Reserve’s 2% long-run target.

Oil prices, insanely volatile over the last couple of years, reflect a tug-of-war between global recession fears and a post-pandemic surge in demand. The fear side is keeping US oil producers from unleashing maximum production. Baker Hughes’ count of active oil drilling rigs peaked out in July at 605 and has since fallen to 591. Not surprisingly, the rate of production has stagnated around 12.1 million barrels per day (mpd). Despite the fact that 2022 global demand is expected to be very close to 2019 levels, US production still isn’t back to where it was pre-pandemic (13 million mpd). Caution is probably warranted.