Before The Bell
The U.S. equity market’s attention was on the Federal Reserve’s monetary policy decision announced in the press conference yesterday afternoon by Chairman Jerome Powell, and investors clearly took what they heard from the central bank and its leader in stride. The policy-making Federal Open Market Committee (or FOMC) announced that it will begin its anticipated bond-buying tapering later this month, reducing monthly asset purchases by $15 billion, but also kept the fed funds rate steady (at near zero) and gave no indication that it is in a rush to raise interest rates. Shortly after this disclosure, investors picked up the pace of buying, and the losses for the Dow Jones Industrial Average and S&P 500 Index heading into the Fed statement were quickly erased. Those large-cap indexes, along with the tech-heavy NASDAQ Composite and small-cap Russell 2000, then went on to finish the session at record highs. This morning, the economic data, which showed that initial weekly unemployment claims fell to a pandemic-era low (at 269,000) and productivity declined sharply last month (-5%), had little impact on the equity futures, which were modestly higher heading into the releases.
The reaction in the fixed-income market to the Fed’s decision was also quite orderly, and we think this calmness may have given investors another reason to increase their positions in stocks during the final two hours of yesterday’s session. The yields on the long end of the curve moved higher, while some of the shorter duration notes pulled back a bit. The yield on the benchmark 10-year Treasury note, which has often dictated the direction of trading in the equity market or at least prompted some sector rotation, held relatively steady, closing the day below the 1.60% level and that, along with no sense that the Federal Reserve plans to act aggressively on the interest-rate front, gave a boost to the high-growth sectors. To this point, the small-cap stocks led the market higher yesterday, advancing 1.9%, and the technology issues, including the mega-cap names, recorded nice gains. The aforementioned steepening of the yield curve following yesterday’s Fed statement also gave a lift to the financial sector, including the stocks of the big banks. A similar trading pattern is looking possible today, with the futures suggesting the biggest gains on the NASDAQ.
The less-hawkish-than-expected stance from the Federal Reserve and the Fed Chairman’s ability to telegraph to the market what the central bank would like to do over the next 12 months further mollified investors. That, along with a strong third-quarter earnings season, which has seen more than 80% of the S&P 500 companies beat expectations in the latest quarter, is looking like the perfect combination for investors who are still showing a healthy appetite for riskier assets. The CBOE Volatility Index (or VIX) now sits at its 2021 low following the recent buying spree on Wall Street.
After yesterday’s closing bell, the earnings news again, for the most part, did not disappoint, with stout results from semiconductor supplier Qualcomm (QCOM) and online travel agency Booking Holdings (BKNG) producing the biggest headlines. Conversely, the stock of entertainment streaming services company Roku (ROKU), which was a big winner during the height of the coronavirus pandemic with most people sheltering in place, was lower in afterhours trading after the company’s top-line miss and weak guidance disappointed Wall Street. Online crafts marketplace Etsy (ETSY) also is looking at a down opening after the company gave a fourth-quarter outlook that failed to invigorate investors. There is divergent view on two biopharmaceutical companies this morning. After reporting quarterly results, the stocks of Regeneron Pharmaceuticals (REGN) and Moderna (MRNA) are headed in opposite directions in pre-market action.
Meantime, the latest quarterly data from online ridesharing company Lyft, Inc. (LYFT) received a lot of attention from Wall Street yesterday. The better-than-anticipated results, combined with commentary from Lyft’s management that more people are getting back to normal, using car services to go to events and restaurants, gave a big lift to the consumer discretionary sector. Some of the recent concerns about the COVID-19 Delta variant and its potential negative impact on the U.S. economy appear to be dissipating a bit, as more people get vaccinated. This may give a boost to economic output over the next few quarters after the initial estimate on September-quarter GDP showed that annualized growth fell to just 2.0%. Yesterday’s strong reading on October nonmanufacturing activity from the Institute for Supply Management and the better-than-expected private payrolls data from Automatic Data Processing (ADP) only adds to this narrative of a possible pickup in growth during the final quarter. That said …
Will the ongoing supply-chain disruptions and labor shortages threaten a pickup in activity during the all-important holiday shopping season? What we know that it has done is caused a notable spike in inflation, and Federal Reserve Chairman Powell admitted yesterday that the higher prices will persist for longer than the central bank initially expected. However, the Fed leader did state that the lead bank believes that the inflationary pressures are being driven by a supply imbalance caused by the pandemic and will eventually dissipate and that the central bank doesn’t see troubling signs in wage inflation.
Calls to OPEC+ from world leaders to increase supplies of crude oil when the oil-producing group meets today, would, if heeded, help some on the inflation front, especially as a large portion of the world heads into the winter heating season, but the expectation is the group will likely not make major production changes. With these ongoing inflationary pressures still very much in play, we would continue to give the inflation-trade and cyclical sectors (i.e., energy, materials, and financials) a closer look. Tomorrow’s October jobs report will be closely watched for signs of labor shortages and inflation, with economists keying in on the labor participation rate and the average hourly wage figure. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
