The investment community’s attention will turn to the Federal Reserve later today, as the U.S. central bank concludes its two-day monetary policy meeting this afternoon and releases its statement at 2:00 P.M. (EST). The consensus is that the Federal Open Market Committee (FOMC) will cut the federal funds rate by a quarter point, to 4.50%-4.75%, owing to the recent soft labor market data and the continued downward trend in inflation. Before we get to the Fed’s decision, we learned that the Bank of England cut its benchmark short-term interest rate by a quarter point, and received a few key reports from the Labor Department, including data showing that initial jobless claims for the week ending November 2nd totaled 221,000, in line with expectations and still indicative of a tight labor market. We also learned that productivity increased 2.2% in September, which was slightly below expectations, and unit labor costs rose.
The equity futures are indicating that the stock market will look to build on yesterday’s outsized gains, though they backed off of earlier highs after the aforementioned productivity report showed some potential reacceleration in inflation. All of the major averages skyrocketed yesterday after former President Donald J. Trump was re-elected and will take the oath of office on January 20th. The battle for control in the Senate also went to the Republican Party, which will make it easier for the new President to implement his policies. Control of the House of Representatives has still not been decided. The market reacted positively to the election results, as the outcome ensures that the corporate tax rate will not be raised and that many regulations on Corporate America will be rolled back or eliminated. This expectation, along with the simple reduction in uncertainty, fueled the buying on Wall Street, with the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index finishing 1508, 544, and 146 points higher, respectively.
The bullish sentiment yesterday gave a big jolt to a number of sectors, most notably the financial group. The stocks of the big banks rose sharply on hopes that deregulation will lead to more M&A activity, which will require the help of the investment banks. Likewise, the energy stocks got a boost from President-elect Trump’s promise to roll back the Biden Administration regulations on oil and natural gas production. Conversely, the stocks of the green energy companies fell during yesterday session, as many of those entities’ prospects depended significantly on supportive government regulations and subsidies; the likely increased supply of oil and gas under the Trump Administration will result in less demand for alternative energy sources.
Meanwhile, we did get a few notable earnings reports since the close of trading yesterday afternoon. The headline report came from semiconductor company Qualcomm (QCOM), which surpassed earnings-per-share forecasts and raised its prognostications. Shares of the chip maker are looking at a higher start when trading kicks off stateside. Fellow semiconductor company Arm Holdings (ARM) posted strong top- and bottom-line results, but shares of the chip maker are headed lower in pre-market action on disappointing fiscal third-quarter revenue guidance. Meantime, the stock of Moderna (MRNA) is rallying in extended hours trading after the pharmaceutical company better-than-expected quarterly results, which included a surprising earnings-per-share gain of $0.03. The Wall Street consensus was estimating a share loss of nearly $2.00 for the company during the three-month period. Likewise, shares of Lyft (LYFT) are trading sharply higher in pre-market action after the ride-sharing company posted strong quarterly results and raised its forecasts.
The Treasury market remains a focus of the investment community, as yields continue to move higher despite the central bank commencing on a less restrictive monetary policy course. We think the recent lack of appeal for bonds—and resultant uptick in yields—is derived from investors thinking the economy is growing faster than most would have anticipated at this time and some underlying fears that the uptick may lead to a reacceleration in inflation. The yield on the 10-year Treasury note, which is used to estimate long-term lending rates, has risen sharply over the last fortnight. Not surprisingly, the rate on the 30-year fixed mortgage also is rising and this is making housing affordability more difficult. This was reflected in D.R. Horton’s (DHI) September-quarter results and near-term outlook. Shares of the nation’s largest homebuilders were lower yesterday despite the broad-based buying during the session.
Investors should also note that recent U.S. Treasury bond auctions have produced soft results and this is also putting upward pressure on yields. Wall Street has seen an increase in bond vigilantes, who are investors that sell bonds to protect against fiscal or monetary policies that they consider inflationary. In general, an increase in bond vigilantes suggests that investors are concerned about inflation and credit risk, and are demanding higher yields to compensate. It can lead to a rise in yields and a fall in bond prices, which increases the cost of borrowing. This is not an ideal backdrop for the higher growth, nor for less-profitable companies that are valued based on their cash flows. That said, we have yet to see this interest-rate environment become a major headwind for the higher-growth companies and their stocks. – William G. Ferguson
At the time of this article’s writing, the author hold positions in one or more of the companies mentioned.
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