In a week that has thus far been dominated by a plethora of earnings reports from Corporate America (see below), we did get some news on the U.S. economy this morning. At 8:30 A.M. (EDT), the Commerce Department reported its initial estimate for third-quarter GDP, and it showed that the economy expanded notably (at an annualized rate of 4.9%), fueled by a still resilient consumer along with government spending. Of note, the Personal Consumption Expenditures (PCE) Price Index rose 2.4% (annualized) during the three-month period, which was slightly lower than the consensus estimate of 2.5%. In general, it was a very good report on the economy, but the strong growth may force the Federal Reserve to keep interest rates higher for a longer stretch to tame inflation. On the Continent, the European Central Bank decided to keep the region’s benchmark short-term interest rate unchanged this morning. The equity futures, which were down heading into the economic releases, have rallied a bit, but are still presaging a lower start to the trading day stateside after yesterday’s sharp selloff, particularly for the technology heavy NASDAQ Composite.
This morning, we also learned from the Labor Department that initial jobless claims for the week ending October 21st totaled 210,000. That figure was up from the prior week’s revised 200,000 tally, but still indicative of a tight labor market. Another positive reading came on durable goods orders. In September, durable goods order rose 4.7%, which was up sharply from the previous-month’s total. Durable goods are tangible products (i.e., cars, home appliances, and electronics) that can be stored or inventoried and have an average life of at least three years.
As noted, it has been a very busy week for quarterly earnings news. This includes a few big releases since the close of trading yesterday afternoon. The headline report came from Meta Platforms (META). The social media giant surpassed expectations for both revenues and earnings. The company also reported a return of ad revenue growth after a dismal performance in 2022. META stock initially rose after the release, but reversed lower, trading down this morning after Meta’s CFO warned of weaker advertising trends in the fourth quarter.
Meanwhile, IT software and consultancy services provider International Business Machines (IBM) reported third-quarter revenue and earnings that came in modestly above Wall Street’s forecasts. The gains were buoyed by stable demand for its software solutions and a stronger-than-expected mainframe business. While the company noted that it has seen a slowdown in the growth of its overall business compared to last year, management reiterated its annual target for revenue growth and free-cash-flow generation. Shares of Big Blue, unlike those of Meta Platforms, are trading nominally higher in pre-market action. Dow-30 component Merck & Co. (MRK) reported quarterly results that showed better-than-expected gains on both the top and bottom lines. Shares of the drug maker are seesawing back and forth around the neutral line in pre-market action.
After the close of trading today, we will get quarterly figures from Amazon.com (AMZN). This result may have a big impact on the technology and consumer discretionary sectors, which were under significant selling pressure yesterday. Market watchers will be closely examining the performance of the Amazon Web Services (AWS) business, as well as what the retailing giant says about consumer spending ahead of the fast-approaching holiday shopping season. In general, the forward-looking prognostications from the mega-cap tech companies have failed to impress investors.
In general, the recent performance of the U.S. equity market has been highly correlated to the results in the Treasury market. There has been an inverse relationship. When Treasury market yields move higher, equity prices fall and vice versa. The developments in the Treasury market have been driven by the news from the Federal Reserve and data on inflation. With that in mind, equity market participants will be closely watching the September report on personal income and spending, which is scheduled to be released at 8:30 A.M. (EDT) tomorrow. That report includes the latest monthly PCE Price Index reading, which is the assessment of the U.S. inflation situation most closely tracked by the Federal Reserve. The expectation is that the PCE and the core PCE, which excludes the volatile food and energy components, will show some easing in price growth last month. If the readings were to come in stronger than expected, it could drive Treasury market yields higher and pressure equities.
The worries about elevated interest rates, and the impact resultant higher borrowing costs will have on economic expansion have driven investors into safe-haven securities. (The yield on the 10-year Treasury note topped 5% earlier this week and the rate on the 30-year fixed mortgage recently exceeded 8%.) The price of gold has jumped on the “flight-to-safety” movement and there has been increased interest in defensive- oriented sectors, including the utilities and consumer staples groups. Conversely, some of the large-cap technology names have been under increased selling pressure lately, especially the stocks of the those companies that have issued outlooks that failed to impress Wall Street. On point, Alphabet (GOOG) shares were down yesterday following the release of its latest quarterly results on Tuesday afternoon. Alphabet beat on the revenue and earnings fronts, but fell short of forecasts for its cloud business, and that news rattled investors and weighed on the performance of many of the other major tech stocks.
The move toward safety in recent sessions is not overly surprising, as we have warned that stocks have historically not performed well in a rising interest-rate environment. Given this assumption, we have been recommending that investors target the stocks of high-quality companies that have demonstrated an ability to deliver steady earnings and cash flows even during uneven times for the U.S. economy. Investors should note that Value Line, with its stock-screening capabilities, can help subscribers quickly identify the stocks ranked 1 (Highest) and 2 (Above Average) for Safety™. Those high- and good-quality equities are likely to garner extra attention during this volatile stretch for stocks and bonds. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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