Capital 19 Catch-Up

“Risk On” Mode Returns To Wall Street As Delta Spread Slows And Fed Eases Rate Rise Fears

Wall Street seemed to move back into “risk-on” mode during the last week as analysts predicted the delta variant was reaching its peak in the US and as Jerome Powell prepared to address the Jackson Hole Symposium. Stocks had had a tough time of it in the previous week, however, optimism came roaring back as we head into the final four months of 2021.

We had some great news to start the week as the US Food and Drug Administration (FDA) granted full approval for the Pfizer-BioNTech covid-19 vaccine. Up until now, the drug has been used only under an Emergency Use Authorization. It is hoped that the tick of confidence will encourage unvaccinated Americans who have been previously hesitant of the vaccines to get the jab, while also encouraging more private businesses to implement vaccine mandates. Pfizer (PFE) jumped 2.4% on the news and BioNTech gained 9.5%. Rival Moderna (MRNA) also made 7.5% in anticipation of approval of its own vaccine.

The news came as hopes that the delta variant may finally be peaking in the US hit the headlines. Just a few weeks ago cases were surging by more than 30% but have now slowed to be growing at around 10% in what authorities hope is an important turning point. Importantly, cases are flat or dropping in some of the countries hardest hit areas including Louisiana, Missouri and Florida. Experts point to the large number that have already been infected, and the strong growth in vaccination numbers, as reasons why the virus is having a hard time finding new people to infect.

The optimism helped reopening stocks bounce back from a tough few weeks. Travel companies and airlines all rose, as did the cruise lines. While energy stocks, especially oil-related ones, bounced back strongly after recently suffering their largest pullback since 2019. Casino operators were also experiencing significant gains on the delta news and were also boosted by news that Macau would be easing travel restrictions as the covid-19 situation in China also improved.

There was further good news for investors out of the Jackson Hole Economic Symposium where Fed Reserve members took centre stage to discuss monetary policy. The overwhelming theme was that while the tapering of bond purchases will begin possibly as early as September, the raising of interest rates is definitely not on the table at the current time. Jerome Powell in his keynote speech on Friday reiterated “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” The Fed is happy with the inflation rate sitting at around 2% and the fact that the recent bump is likely to be transitory, while also confirming that in terms of maximum employment, “there is much ground to cover” and “substantial further progress” is needed before an interest rate rise will be on the table.

The Covid and Fed Reserve news was music to investor’s ears and looks likely to set us up for a strong end to the year on Wall Street. Earnings season has been one of the strongest in decades, economies have been slowly reopening, and economists can finally see some fresh air ahead. The statistics point to a great end of year run as well. In the last 31 years, there have been nine instances where the S&P500 has risen by more than 10% in the first eight months of the year. Of those nine, stocks have risen every single year for the following four months, with the average percentage gains in those years sitting at an impressive 8.3%. Anyone up for a Santa rally?

The weekly jobless claims came in at 353,000 this week. That’s slightly up on the 349,000 from last week and just 3,000 more than expected. Second-quarter GDP was revised up to 6.6% from 6.5%, a little under the 6.7% expected. While the Federal Reserves preferred inflation gauge, the personal consumption expenditure index (PCE), jumped to its highest level since 1990 in July hitting 4.2%. Core PCE was up 3.6% from the year before, while personal income was stronger than expected at 1.1%.

Earnings reports were a mixed bag with the highlight being Dick’s Sporting Goods (DKS) who hit an all-time high after announcing a standout quarter and jumping 13.3% higher. Financial software provider Workday (WDAY) was also impressive, reporting a 19% increase in revenue to $1.26 billion and jumping 9% after the announcement. While CRM provider Salesforce (CRM) was another winner, rising 2.6% after it increased revenue by 23% following its takeover of Slack.

Electronics retailer Best Buy (BBY) said it had benefitted from consumers permanently embracing working from home and streaming TV by growing sales 20% in the second quarter. Shares closed 8.32% higher on the news as CEO Corie Barry stated “Over the longer term, we are fundamentally in a stronger position than we expected just two years ago. There has been a dramatic and structural increase in the need for technology” due to the Covid 19 pandemic. Not so successful was Best Buy’s fellow retailers, with fitness equipment maker Peleton (PTON) falling 8.5% on disappointing numbers, and clothing seller Abercrombie and Fitch (ANF) and discount retailer Dollar General (DG) dropping 10.3% and 3.7% respectively after missing estimates.

In the week ahead we’ll have a raft of new economic data to sift through including pending home sales, consumer confidence and the ADP employment report. This will all culminate in the all-important non-farm payroll numbers which come out on Friday, which will instruct the Fed on how far they are away from the “full employment” figure they are looking for. We’ll also see earnings reports from the likes of Zoom Video (ZOOM), NetEase (NTES), Chewy (CHWY), Hewlett Packard (HPE), DocuSign (DOCU) and Lululemon (LULU).