This morning, we received a number of reports on the U.S. economy, though none of them was expected to have a major impact on the direction of trading in the U.S. equity market, especially with earnings season starting to heat up (more below). At 8:30 A.M. (EDT), the Labor Department reported that initial jobless claims for the week ending October 14th totaled 198,000, which was down sharply from the previous week’s revised tally of 211,000 and still indicative of a tight labor market. We also learned that manufacturing activity in the Philadelphia area contracted in September. An hour into today’s trading session, at 10:00 A.M. (EDT), we will get data on existing home sales and the leading economic indicators. Those two reports will provide some additional insight into the health of the housing market and the overall economy. Equity futures are indicating a mixed start to the trading day stateside.
Corporate America is in the spotlight today, as we received several reports since the close of trading yesterday afternoon. Of note were the latest quarterly results from electric vehicle maker Tesla (TSLA) and streaming giant Netflix (NFLX), and Wall Street has had a very different reaction to the news. Tesla’s quarterly revenues and earnings fell short of expectations, with the bottom line hurt by weakening margins. However, the company reiterated its 2023 production goal of 1.8 million vehicles and said the much-anticipated Cybertruck deliveries are on track for later this year. Meeting the annual delivery goal would require a vibrant performance in the fourth quarter, which Wall Street feels may be too aggressive. Shares of Tesla are down sharply in pre-market action. Conversely, Netflix posted strong results, with revenues and earnings exceeding Wall Street’s forecasts. Investors cheered the addition of 8.76 million new subscribers. The figure far surpassed the consensus forecast of 5.49 million subscribers, and that, along with positive results from its password crackdown initiative and ad tier offerings, has the stock positioned for a notably higher opening this morning. The two reports headlined a busy stretch of earnings reports, which produced mixed results.
Meantime, another event that could potentially drive the direction of trading later today is commentary from a host of Federal Reserve senior officials, including Chairman Jerome Powell. At 12:00 P.M. (EDT), investors will be watching to see what the Fed leader has to say about inflation and where the central bank stands in its battle to stabilize prices. The current consensus on Wall Street is that the lead bank will keep the benchmark short-term interest rate steady, at 5.25%-5.50%, for the remainder of this year and see what the full effects of the most restrictive monetary policy course in decades will have on inflation over the next few months.
In general, the Treasury market seems to be doing the work for the Federal Reserve right now, as yields continue to move upward, including a sharp rise during yesterday’s session. Therein lies the rub for equity investors, as when rates move higher, stocks tend to move inversely. The higher Treasury yields were the primary reason behind yesterday’s selloff, along with rising geopolitical tensions in the Middle East. The stock market sold off sharply yesterday when the yield on the 30-year Treasury bond topped 5.00%. It was a tough day for equities, save for the energy stocks, with the Dow Jones Industrial Average, the tech-heavy NASDAQ Composite, and the broader S&P 500 Index falling 1.0%, 1.7%, and 1.3%, respectively.
Likewise, worries about a drawdown in U.S. crude inventories and possible global supply-chain disruptions for oil, due to the escalating fighting in the Middle East, have pushed crude prices both here and abroad higher recently, though quotations did pull back some this morning. The elevated energy quotes have hurt the stocks of the companies that rely heavily on oil and gas to run their businesses. In particular, the transportation and industrial stocks were down notably yesterday, driven by bearish performances from the trucking, airline, and industrial names. The Dow Transports average fell sharply during yesterday’s session.
The rising Treasury yields also are not a great backdrop for the higher-growth, but often less profitable, companies. That is because those entities are valued on their future cash-flow potential. Thus, when cash flows are discounted back to the present day at higher rates, it reduces the intrinsic value of the companies and investors are less likely to bid their stocks higher. (Intrinsic value is the measure of what an asset is worth.) This scenario hurt the higher-growth but often more risky small-cap issues yesterday, with the Russell 2000 Index falling more than 2% during the session.
Our sense is the performance of the U.S. stock market over the next fortnight will be driven by the developments in the Treasury market and the results from Corporate America. Given this backdrop, we continue to favor the stocks of quality companies that have historically demonstrated an ability to deliver steady earnings and cash flows even during uneven times. Along these lines, we have seen a movement into safe-haven equities and gold in recent days. In fact, the consumer staples stocks, which struggled mightily over the last six weeks, but are traditionally considered safe holdings during turbulent times for the market, rallied some yesterday in a notable “flight-to-safety” display among skittish investors. Investors tend to frown on uncertainty, and the market is dealing with a lot of near-term questions about the economy, inflation, and corporate earnings, as well as mounting concerns about the geopolitical landscape. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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