Before The Bell
The U.S. equity market has been driven by news from Corporate America over the last fortnight —and that can be anticipated again today as another heavy slate of quarterly reports are flowing in this morning (more below). But the spotlight will also be on the economic beat today. At 8:30 A.M. (EDT), the Commerce Department reported that third-quarter GDP expanded by an annualized rate of just 2.0%; the most recent consensus expectation called for growth of around 2.8%. In addition, we learned that initial weekly unemployment claims came in at 281,000 for the week ending October 23rd, a pandemic-era low. Investors should also note that President Biden is expected to speak this morning on his spending bill, which has been closely watched by Wall Street. The futures, which were modestly higher heading into the economic releases, were still holding most of those gains following the mixed data.
This comes on the heels of a weak performance for stocks yesterday, with some late-session selling on the NASDAQ, which at one point was up more than 100 points on the strength of strong quarterly data from technology giants Alphabet (GOOG) and Microsoft (MSFT), wiping out all of the early gains by the closing bell. Those reports, along with a sharp drop in fixed-income yields (the rate on the 10-year Treasury note settled at 1.53% yesterday) provided some early support for the technology sector, but overall it was a down day for stocks, with declining issues outpacing advancers by more than a three-to-one ratio.
A pullback in oil prices yesterday (crude quotations are down again this morning, too) on an industry report showing crude oil stockpiles rose more than expected and fuel inventories unexpectedly increased last week in the United States, the world’s largest oil consumer, along with a strong auction for five-year Treasury bonds, pushed fixed-income yields lower. This prompted some selective rotation into the higher-growth stocks early in the day. Conversely, it was a weak session for the value-oriented cyclical stocks from the get-go. The Dow Jones Industrial Average fell 266 points, with a sharp drop in Visa (V) stock after the electronic payment giant reported its latest quarterly results. That stock was responsible for more than 100 points of the retreat in the index of 30 bellwether companies. A tightening of the yield curve, with the gap between the yields on two- and 30-year Treasury bonds narrowing considerably, hurt the financial stocks.
To date, the third-quarter earnings season has been a major catalyst for stocks. This morning, we received good quarterly reports pharmaceutical giant Merck & Co. (MRK) and Comcast (CMCSA), and shares of both stocks are heading higher in pre-market action. Those reports follow impressive results from Ford Motor (F) after yesterday’s closing bell. The shares of the automaker also looking at a nicely higher start today.
Overall, we think a mix of the mega-cap technology stocks, which are best positioned among the technology names with their massive cash positions and high-growth potential to weather any spike in inflation, with some of the inflation-trade equities may still prove to be a prudent investment strategy for the near-term horizon. Although much of Wall Street is not expecting a period of hyperinflation, which Twitter (TWTR) CEO Jack Dempsey said is a possibility, the likelihood of higher prices in the near-term must be considered with the current supply-chain disruptions, the Federal Reserve is likely to begin tapering its bond-buying activity next month, and a moderately expanding U.S. economy increasing demand for goods and services.
The companies best positioned to push these higher operating costs onto the consumer via price hikes may be best equipped to handle the jump in inflation. Given this backdrop, we would not be in rush to buy the stocks of the food processing companies and grocery store chains. With results from the retailing sector expected in a few weeks, we also think the retailers and apparel companies that were best positioned to raise prices will deliver the strongest quarterly results amongst the group. This also is something to consider with the all-important holiday shopping season for the retailers fast approaching.
The reports tomorrow on personal income and spending and consumer sentiment also may provide some clues as to how active the average consumer may be during the holiday shopping season. Earlier this week, we learned from the Conference board that consumer confidence increased in October, following declines in the previous three months, likely helped by less worries that the COVID-19 Delta variant will hurt the U.S. economy. With regard to the retailers, those best positioned to deal with the supply-chain disruptions and avoid long shipping delays may fare the best. In this environment, Amazon.com (AMZN) and Walmart (WMT) will their vast distribution networks may have a competitive advantage. Likewise, club store giant Costco (COST), with its immense warehouse space, has the ability to pre-buy and store merchandise ahead of the expected spike in holiday-related demand.
Elsewhere, the European Central Bank announced this morning that it will keep short-term interest rates the same and will continue its current pace of bond buying until March 2022. This comes ahead of the Federal Reserve’s two-day monetary policy meeting, which commences next Tuesday. The central bank’s monetary policy decision, which many pundits think may include the start of the monthly bond-buying tapering, will be closely watched by market participants and may have a big impact on the direction of trading. However, there is a sense that the expectation of a tapering announcement next week may already be priced into the market. We shall see in short order.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
