Before The Bell
At the midway point of the month of October, investors are feeling much better than they did at the start of the 31-day stretch. A notable two-day rally on Wall Street that saw the Dow Jones Industrial Average climb 917 points to end last week provided the leadership in a market that also saw sizable recoveries in the technology heavy NASDAQ Composite and the broader S&P 500 Index. It was a rather broad-based rally, though the small-cap Russell 2000 did give back nine points of Thursday’s rally, with a partial recovery in the 10-year Treasury note yield on Friday weighing on some of the higher-growth sectors. This morning, the futures, which were pointing higher last night, are now indicating some selling at the start of the new trading week, with slowing third-quarter growth in China (more below) weighing on stocks around the globe.
A confluence of factors was behind the rally on Wall Street last week. Most notably, the bullish move was prompted by a very strong start to third-quarter earnings season, with the big banks, including JPMorgan Chase (JPM) and Goldman Sachs (GS) posting strong quarterly results. That, along with good showings from Dow-30 components UnitedHealth Group (UNH) and Walgreens Boots Alliance (WBA) helped calm, at least for the moment, investors starring at a “wall of worry.” What has also pleased investors is the encouraging outlooks from most of the companies that reported results. Leading to earnings season, Wall Street had some concerns that the possibility of slowing growth in the broader economy would start to show up in Corporate America, but so far that has not been the case, and investors have responded in kind. The week ahead will bring a heavy slate of earnings reports, including the latest results from a number of Dow-30 components.
In addition to the glowing reports from the corporate world, investors were emboldened by some encouraging news from the business beat, including a sharp drop in initial weekly unemployment claims for the week ending October 9th and a better-than-expected reading on retail sales. Those reports, along with a less-than-anticipated rise in producer (wholesale) prices, which had pushed the yield on the benchmark 10-year Treasury note lower for a stretch last week, had investors again willing to take on more risk in their portfolios. The good economic news, coupled with the pushback of the debt-ceiling deadline to December also helped equities. Investors should note that the Dow Jones Transports Index, which is highly tied to the health of the domestic economy, jumped 1.7% on Friday.
This week will bring a number of important reports from the business beat, including the latest data on housing starts and building permits, existing home sales, initial weekly unemployment insurance, the leading indicators, and, in a few minutes, the September figures for industrial production and capacity utilization. We also will get the Federal Reserve’s latest Beige Book summation of economic conditions. This release will likely be scrutinized for more clues about inflation and what impact, if any, it will have on the central bank’s near-term monetary policy decisions. The prevailing thought is that the Fed will begin tapering its bond-buying program at the November FOMC meeting. Our sense is that some of the forthcoming cutback in asset purchases has already been priced into the market. And when the lead bank does begin its tapering, the amount will be rather modest initially. That said …
Investors should continue to give the cyclical—particularly the inflation-trade—sectors a close look. The yield on the 10-year Treasury note, which backed up last week, is again on the rise, rallying past the 1.60% mark this morning. Given the ongoing supply-chain disruptions, which are pushing operating costs and ultimately prices for goods higher, and the inventory shortages in the energy market, inflation is likely to remain on the rise over the final months of this year. Oil prices jumped to a three-year high (above $85 a barrel) on Friday, boosted by forecasts of a supply deficit over the next few months, as the easing of coronavirus-related travel restrictions and winter weather spurs demand. The energy commodity also is up again this morning, despite growth concerns in China, an event that would normally push crude quotations notably lower.
Before the bell, the equity futures, as noted above, are indicating a lower opening for the U.S. stock market when the new trading week commences stateside. Pressuring stocks was news that China's economy witnessed its slowest pace of growth in a year in the third quarter. Specifically, China’s GDP expanded by just 4.9% in the September quarter, which was below the consensus expectation of 5.2%. Output was hurt by power shortages and concerns about the country’s highly leveraged property sector. Growth worries for the world’s second-largest economy is likely to weigh on some of the other major economies, which are major trade partners of the Asian nation.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
