Before The Bell
The month of October, which has historically been a volatile one for stocks, started out in uneven fashion on worries about inflation and rising bond yields, but those concerns eventually gave way to a strong third-quarter earnings season, led by the big banks, and the major equity averages rallied notably over the last three weeks. The broader S&P 500 Index and the NASDAQ Composite finished October at record highs, fueled by respective monthly gains of 6.9% and 7.3%. The Dow Jones Industrials also fared well, climbing 5.8% during the month. The consumer discretionary, energy, and information technology sectors were the best performing groups in October. The equity futures are suggesting that the U.S. equity market will start November the way it left off last month, with the market bulls emboldened.
As noted, the main driver of trading over the last two-plus weeks has been the quarterly results from Corporate America. The solid showings have offset some mixed economic news, including a weaker-than-expected third-quarter GDP annualized advance of 2.0%. Surprisingly, Wall Street shrugged off disappointing results from mega-cap technology giants Apple (AAPL) and Amazon.com (AMZN) on Friday. News that Apple’s iPhone 13 sales missed expectations hurt Apple shares, along with the stocks of Apple’s suppliers, including Qualcomm (QCOM). Likewise, Amazon.com said that supply-chain disruptions and rising labor costs would add several billions of cost to the company’s profit statement in the fourth quarter, and the issue was down in response.
The earnings news will continue this week, but now with the bulk of reports having already been issued, Wall Street’s attention may partially shift away from the corporate world and toward the Federal Reserve, which commences its two-day monetary policy meeting tomorrow morning. The FOMC’s decision (the statement will be released at 2:00 P.M. (EDT) on Wednesday) will be closely watched by investors, as it may include the announcement that the central bank will begin tapering its monthly bond-buying program. Although the cutback in asset repurchases is expected to be modest (in the range of $15 million to $20 million), just the thought of a slightly more hawkish lead bank may put some pressure equities.
Meantime, one thing that could be taken away from last week’s GDP report from the Commerce Department was that price increases were quite formidable during the third quarter. That, along with the continued supply-chain issues and resultant higher operating costs, has brought the inflation talk back to the forefront of the investment community’s attention. In this environment, we would continue to give the inflation trade stocks a closer look. The financial and energy stocks would probably benefit the most from an uptick in prices and bond yields. The yield on the 10-year Treasury note (at 1.58% this morning) is pointing higher.
This week will also bring some very important economic data in addition to the Fed’s decision, including the latest report on jobs creation from the Labor Department on Friday. That report disappointed last month and investors will be looking to see if lessening concerns about the coronavirus Delta variant had a positive impact on job growth last month. Back-to-back weeks of sharp drops in initially weekly unemployment claims may be a positive sign for nonfarm payroll gains. Before we get to Friday’s jobs report, we will get data on nonmanufacturing activity, productivity, durable goods orders, and manufacturing activity, the latter of which will come at 10:00 A.M. (EDT) this morning. The manufacturing data may produce some movement in the industrial and materials sectors during today’s session.
Before the bell, the equity futures, as noted above, are pointing to a higher start to the new trading month and week. It will be a very busy week of news from Wall Street, but investors should note that barring any news from Capitol Hill on a spending bill, traders will likely be most interested to see what the Federal Reserve does—or doesn’t—with regard to the direction of U.S. monetary policy. Recall that last week the European Central Bank left interest the same and said that it will continue its current pace of monthly bond buying through March, 2022.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
