Key points to remember:
- Stocks recover without FAANG stocks, find strength in the energy sector
- Inflation continues to be a risk for the Fed and its reduction plans
- An outage in the communications sector could signal problems
Nike (NKE) was trading down 5% in pre-market action after reporting lower than expected revenue in the last quarter and slashing its revenue projections. The company cited strong demand for its sports equipment, but the disruption of the supply chain is causing problems for Nike in Vietnam and Indonesia. However, chemical company HB Fuller (FUL) traded up 2% in pre-market trade, with better-than-expected earnings. Costco (COST) also traded higher ahead of the opening with better than expected revenues, but warned that inflation, higher labor costs, higher freight and transportation costs. and delays in the supply chain could slow them down.
Members of the Fed, including President Jerome Powell, appear on the speaker circuit on Friday. Investors will likely listen to more clues about the timeline of the cut. August new home sales will be released after the opening. It is likely that the report will be similar to the building permits report earlier in the week, indicating higher demand but an inability to secure building supplies.
Stocks rallied on Thursday without the leadership of FAANG stocks. Instead, optimistic advice from Accenture
Energy stocks also provided a boost. The Energy Select Sector Index ($ IXE) was the first group with an increase of about 3.5% in response to a 1.2% increase in oil prices (/ CL). Exxon (XOM) and Chevron
The rise in oil, following the Fed’s more hawkish stance, pushed the 10-year Treasury index (TNX) up more than 5.5%. Rising yields helped trigger a rally in the Financial Select Sector Index ($ IXM) which includes companies like Citigroup
The bulls were able to achieve some technical gains. The S&P 500 (SPX) closed Monday’s gap and recovered the 50-day moving average. Apparently, “buy the dip” is not dead yet. Fed Chairman Jerome Powell appears to have been just hawkish enough for bond traders but dovish enough for stock traders. Messages from the Fed, the low likelihood of contagion with Evergrande’s debt problems, and declining jobless claims appear to give bulls reason to charge.
The Fed and inflation
The market began to rise even before Wednesday’s Fed meeting and has continued to gain roughly since then, with investors considering a possible short-term cut in Fed stimulus measures. A drop would probably be welcomed by some investors, who might see it as proof that the Fed is finally fighting worrisome growth in inflation.
Thinking back to Powell’s press conference on Wednesday, it looks like he thinks inflation is due to the bottlenecks reopening and will slow down next year. The market is not necessarily convinced, however. That said, it was reassuring to see the Fed raising its inflation forecast for 2021 to take into account current price pressures. You would like to think that the Fed is taking note of an issue that is really hurting a lot of businesses.
One question is how long the Fed’s tapping program could last once it begins. It is said on the street that it could be executed a little faster than in 2013, the last time it happened. Powell reinforced this idea by saying at his press conference that the economy is doing much better now than it was in 2013.
Powell also said that a cut announcement doesn’t necessarily mean a rate hike and that the economic bar is much higher for the hike than for the cut. What the rate hike “bar” might be is still a bit unclear.
Decent or not decent? It’s subjective
Powell (who is due to make opening remarks on Friday at a pandemic recovery-focused webcast event) also said he would like to see a “decent” September jobs report from the Department of Labor while he and others at the Fed contemplate when to cut back. Which begs the question of what is “decent” in terms of job growth.
The economy has created an average of 750,000 jobs per month over the past three months, but that figure fell below 300,000 in August in part because of the Delta variant and its impact on the travel and travel industries. Hobbies. However, even 200,000 new jobs created in one month were considered the gold standard before Covid closed and reopened.
What’s decent now might be in the eye of the beholder, but let’s imagine it should be at least in the range of 235,000 jobs created in September, and maybe more than that. Only Powell really knows that.
A break in communication: When the price of a security crosses below its trendline, it is not necessarily a bearish sign. This could be a sign that the safety will move sideways for some time. It makes sense for investors to look to take profits and rebalance their portfolios if growth has caused the sector to become a larger part of a portfolio.
The close relationship of telecoms with technology helps link their destinies on some level. Like technology, communications
Inflate earnings revisions: Charts are not the only way to identify changes in the strength of a sector, earnings revisions are also useful. One of the main drivers of a stock price is not only earnings forecasts, but earnings revisions as well. A revision occurs when analysts believe their past earnings are too high or too low. Positive revisions occur when the analyst projects better than expected earnings. Many fundamental analysts follow positive revisions to find stocks that have the potential to rise in the near term.
FactSet observed that the term “inflation” was cited a record 224 times in second quarter earnings calls for S&P 500 companies. So far, rising inflation has not been a problem for S&P 500 companies. many businesses because they were able to pass the additional costs on to consumers. Earnings estimates are currently expected to be higher in nine of the 11 sectors. By monitoring revisions to earnings estimates, investors can be alerted to changes that inflation may have on a company’s earnings.
About the Benjamin: The spike in the 10-year Treasury yield took the rate to 1.41%, breaking a short-term resistance level at 1.375%. If the breakout continues, rates could continue to rise for the 10-year rate and across the yield curve. Higher Treasury yields tend to draw yield-seeking investors to the United States, which normally strengthens the dollar.
A stronger dollar is complex. Generally, it increases the purchasing power of the consumer and helps fight inflation. This makes imports cheaper, but exports more expensive. Most of these effects will take time to develop.
But the strength of the dollar will also be different from the strength of other currencies. For example, earlier this month, when the European Central Bank announced a “mini-cone,” the euro appreciated against the dollar for a few days. So if other central banks shrink or tighten, currencies will change accordingly.
So, keep these complexities in mind when trying to digest the news. Some will claim that the strong dollar will be bad and some will claim that it will be good. Well, it depends.
TD Ameritrade® commentary for educational purposes only. SIPC member.