Before The Bell
Wall Street broke out of its tight early week trading band yesterday but, unfortunately for the bulls, the consequent move was dramatically to the downside, with the selling commencing at the start of trading and continuing throughout the session. By the final bell, the averages were close to session lows, brought down by concerns about earnings, valuations, new COVID-19 worries, and a sobering economic assessment by the Federal Reserve. The bevy of earnings reports continued after the closing bell; the profit parade will resume today, as will the economic data. It could be another volatile day.
Let's look first at major company earnings. Companies reporting their results after the close yesterday included Apple (AAPL), and Tesla (TSLA). We regard these results as mixed. Apple reported its first-ever quarter of $100 billion sales on solid holiday demand for its iconic iPhone. In all, revenues surged 21%, easily exceeding forecasts. Earnings also topped targets. On the other hand, while Tesla reported its first full-year profit ever, net for the fourth quarter was shy of expectations. TSLA shares sold off following the report. Now, this morning, both TSLA and APPL are indicated lower at the open, along with other tech shares.
Wild trading continued in shares of much smaller enterprises, with GameStop (GME) doubling in price and theater chain AMC Entertainment Holdings (AMC) quadrupling, both on heavy trading volume. The theory is that either day traders or a squeeze on short sellers explains the action; some $30 billion changed hands on shares of GME Wednesday.
There’s still the economy for investors to assess. Here, fourth-quarter GDP showed growth of just 4.0%, off sharply from the third quarter's 33.4% advance and estimates of 4.3%. Regarding more current news, weekly jobless filings came in at 847,000. That level remains uncomfortably high, reflecting the multiple problems facing the country, as the coronavirus continues to enact a devastating toll. Then, some 30 minutes into Thursday’s session, the government will report new home sales for December.
But the big story and a major reason for the 633-point selloff in the Dow Jones Industrial Average and the 355-point plunge in the NASDAQ was the issuance of the FOMC statement that accompanied the conclusion of the Federal Reserve's latest meeting. What shook investors was the assessment by the lead bank that the pace of the recovery in the economy and employment was moderating reflecting the enormous toll being taken by the COVID-19 pandemic.
That evaluation should not have been a surprise, given some of the weak numbers being released over the past few weeks. In a sense, especially given the major selloff already under way before the statement's release at 2:30 PM (EST), the market was ripe for a drop, reflecting the high valuations and elevated risk in place at this time. The dramatic rise in some very risky stocks mentioned above, occurring in recent days on short squeezes by aggressive traders also may have frayed nerves in the broader market. Finally, there were worries about COVID-19 and the new and easily communicable variants. All of this contributed to the drop in stocks yesterday and to growing concerns about a frothy market.
Looking ahead and assessing the latest selloff, one would think the downward push may resume at any time. There clearly is risk in the market at these levels, particularly in stocks with little or no underlying earning power in the respective companies. Investors should be careful. We sense the bull market is still intact, but the elevated valuations clearly have narrowed the margin for error.
- Harvey S. Katz, CFA
At the time of this article's writing, the author had a position in AAPL.
