FedEx sent shock waves through the markets on Friday after the company withdrew its full-year guidance and warned that a global recession is brewing.
FedEx’s stock plummeted by more than 22% after the market opened following news that it expects to fall $500 million short of its revenue target, the biggest drop since at least 1980. The news is an indicator that global demand is slowing, which could portend a recession.
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The company said it expects first-quarter earnings to clock in at $3.44 per share, far below the average analyst estimate of $5.10.
“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations,” FedEx CEO Raj Subramaniam said in a statement.
As a result of the bad outlook, FedEx announced that it will be shuttering dozens of locations, freezing hiring, and taking other immediate actions to cut costs.
Transportation and shipping stocks are seen as a bit of a leading indicator of the health of the economy and how the wider stock market will perform, so FedEx’s gloomy outlook is causing investors to panic that a recession could be right at the country’s doorstep.
The Dow Jones Industrial Average shed nearly 400 points by midday on Friday. The tech-heavy Nasdaq plunged by more than 1.8%, and the S&P 500 fell by more than 1.5% following the news about FedEx.
Adding fuel to the fire, Subramaniam appeared on CNBC, where he was asked whether the economy is entering “into a worldwide recession.”
“I think so. But you know, these numbers, they don’t portend very well,” Subramaniam responded. “I’m very disappointed in the results that we just announced here, and you know, the headline really is the macro situation that we’re facing.”
Deutsche Bank released a statement to clients highlighting just how bad the news from FedEx was compared to forecasts.
“FedEx preannounced last night the weakest set of results we’ve seen relative to expectations in our ~20 years of analyzing companies,” the bank’s analysts said in a note to clients.
The slowdown in demand is raising fears of a recession as the Federal Reserve continues to jack up rates in an attempt to pump the brakes on the country’s towering inflation, which is now clocking in at 8.3% annually when measured by the consumer price index for August.
“The FedEx warning came as a slap. It’s a solid sign that the economy started slowing,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. “This is certainly the first in a series of warnings that we may see for the quarters to come.”
While stocks are down for Friday, they tumbled even more precipitously earlier in the week, notching their worst daily performance in more than two years. The August CPI report rattled investors as it was hotter than expected, increasing the odds that the Fed will be forced to hike rates even more in order to drive down the explosively high prices.
Following the CPI report, the Dow Jones Industrial Average suffered its seventh biggest decline in points in U.S. history. The tech-heavy Nasdaq composite fell by more than 5%, and the S&P 500 declined by 4.3%.
The Fed has raised rates twice by 75 basis points so far this year. The first hike marked the most aggressive increase since 1994, and it is expected that there will be another jumbo rate hike following the Federal Open Market Committee’s meeting next week.
Investors now see a 86% chance of a 75-basis-point hike and a 14% chance that the Fed will go even further and raise rates by 100 basis points at once, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
Bigger and more frequent rate hikes make a recession more likely. Some elements of the economy indicate that a recession is seemingly inevitable.
The Bureau of Economic Analysis recently announced in a revised estimate that GDP fell at a 0.6% annualized rate in the second quarter. That came after negative 1.6% GDP growth in the first quarter — bad news for the economy because two quarters of negative GDP growth typically constitutes a recession in the minds of economists.
This week, mortgage rates also popped beyond 6% for the first time since 2008, something that means housing is less affordable and causes home sales and new construction to dampen.
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As of Thursday, the average 30-year fixed-rate mortgage was 6.02%, up more than 3.1 percentage points from a year before, according to Freddie Mac. That is a 0.13-point jump in the past week alone. The average 15-year fixed-rate mortgage increased to 5.21%.
The Fed is set to meet on Tuesday and Wednesday next week, when it will decide by how much to hike interest rates once again.
