The futures market started off strong yesterday after a positive day of trading during the regular session. The markets got a boost from strong earnings reports from several companies, continuing a sharp rally over the past few days that has recovered a portion of the January market losses. Over the course of the day, the Dow Jones Industrial Average rose 274 points, the S&P 500 Index was up 31 points, and the NASDAQ climbed 106 points. After hours, the futures market continued to move to the upside, aided by strong earnings from a couple of companies that reported results after the close. Google’s parent company Alphabet (GOOG) announced record profits and a 20-for-1 stock split, which should help improve investor demand and may make it a candidate down the line for inclusion in the Dow 30.
By the time the January Automatic Data Processing (ADP) payroll report was released this morning, the futures markets were decidedly in the green. That report showed payrolls declined by 301,000 jobs, showing a significant slowdown across the economy in the wake of the Omicron variant of the coronavirus. This figure was significantly weaker than the December figure and was worse than estimates of slower job gains. Even so, the markets shrugged off this data, suggesting that traders did not put much weight on this report.
Overall, market breadth was positive yesterday, with advancers outpacing decliners by a 2.7-to-1.0 ratio. Energy issues were among the best performers, aided by positive movements in the related commodities. In particular, former Dow-30 component Exxon Mobil (XOM) recorded strong fourth-quarter results, thanks to higher oil prices. Conversely, utility equities were among the day’s weakest performers, despite a decline in interest rates. This, along with solid price action in consumer discretionary and technology sectors, suggests that traders are once again rebalancing their portfolios, and are now willing to add more risky assets.
In commodity news, as noted above, oil prices rose yesterday as demand for fuel increased, with several companies suggesting that supply and demand will remain out of balance. Meantime, U.S. Treasury bond yields were a mixed bag, as short-term rates rose and long-term durations fell. This is a negative for financial companies’ earnings, which borrow short and lend long. The VIX Volatility Index declined as demand for options protection fell, suggesting traders were unwilling to pay a premium to protect their equity positions.
Looking ahead, several economic reports will be released over the next few days. These include initial jobless claims and the ISM Services Index on Thursday, as well as nonfarm payrolls and the unemployment rate for January on Friday. On the earnings front, approximately 150 companies will report quarterly results on Thursday. However, there will be a significant decline in reports on Friday as we move further into the second half of the earnings season. Overall, we think that the market will be looking at earnings outlooks and the jobs report to determine market direction in the days ahead.
– John E. Seibert III
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
