Capital 19 Catch-Up

Economy Shows Signs of Improvement and Inflation Better Than Expected Ahead of Important Fed Meeting This Week

The major indices dipped further into the red last week as the month of September proves to be a difficult one so far for stocks. This was despite the economic data mostly showing a bounce back from the recent delta variant malaise, and inflation coming in less than expected earlier in the week. In any other week, shares would have had cause for a boost, but a quadruple witching event on Friday put paid to any fightback.

Quadruple witching occurs towards the end of every quarter on the third Friday of the last month. It is the date on which derivatives of stock index futures, stock index options, stock options and single stock futures expire simultaneously. As you can imagine it creates a heavy amount of volume going through markets and quite often a fair bit of volatility as traders move in and out of expiring and new positions.

All of the major indices were positive for the week after the Thursday session, however heavy selling on the final day caused all to finish lower. The Dow was the closest to finishing in the green, losing less than 0.1% for the week. The Nasdaq was the next best, falling 0.5% over the five sessions. While the S&P500 was close behind with a 0.6% loss. For the month of September, all have lost ground. The Dow is worst off with a 2.2% loss. While the S&P500 and the Nasdaq have fallen 2% and 1.4% respectively.

All in all, there were a lot of positives to come out of the week. Average daily cases of covid in the US fell to 136,000 – down from 157,000 at the end of August. Reopening stocks and the energy sector held up the market accordingly. The empire state index from the NY Fed came in at 34.3, much better than the 18 expected by economists, while retail sales were up 0.7% in August when analysts were expecting a 0.8% fall.

Delta concerns and supply chain bottlenecks were expected to curtail consumer spending as in-demand goods were hard to find, however, sales were strong across the board, falling only in auto sales and flattening in bars and restaurants. Online sales, not surprisingly came to the forefront, up 5.3%, as people stayed at home and preferred to shop over the internet. Sales overall were up 15.1% from the same period a year ago with furniture and home furnishing, and general merchandise sales leading the way.

One week out from a crucial Federal Reserve meeting, where they will be deciding on the fate of the tapering of bond purchases, the CPI numbers that came out on Tuesday were always going to be closely watched. And Wall Street breathed a sigh of relief as they slowed from the previous month and came in under expectations. Prices were up only 0.3% in August, less than the 0.4% expected, while core CPI (minus food and energy)was up 0.1%, its lowest reading since February. Prices are still up 5.3% on where they were this time last year when the economy was still struggling with the initial coronavirus lockdowns. That’s a 13 year high. However, there are good signs that the numbers are abating as the Fed has predicted.

Oracle (ORCL) shares struggled as the software maker failed to meet revenue expectations at the beginning of the week. Sales of $9.73 billion was up 4% year on year but still down on the $9.77 billion expected. Earnings of $1.03 per share were better than the $0.97c expected, while guidance was slightly improved. In the earnings call the company said it was hoping to increase its investment in its cloud services. CEO Safra Catz stated, “cloud is fundamentally a more profitable business compared to on-premise, and as we look ahead to next year, we expect company operating margins will be the same or better than pre-pandemic levels”. ORCL lost 4%.

Apple (AAPL) held its annual product announcement during the week, however, it was held online instead of occurring in front of thousands of employees and product fans. The i company announced four new iPhones, two new iPads, and a new Apple Watch to add to its current collection. As usually happens after the event the Apple share price dropped a little over 1%. Fellow tech giant Microsoft (MSFT) was also in the news this week. The software provider announced an increase to its dividend and a $60 billion share repurchase programme. Investors rewarded the news with a 1.6% share price bump.

It was a tougher week for the casinos, especially those with a footprint in Macau. The Chinese government has warned it is likely to increase regulatory scrutiny on the industry which will no doubt be aimed at foreign companies. In what was a double whammy there was also a resurgence of covid cases in the area with businesses in danger of being shut down by health authorities. Wynn Resorts (WYNN) was down by more than 20% for the week, with competitor Las Vegas Sands (LVS) down 11%.

The week ahead will be all about the Federal Reserve meeting on Tuesday and Wednesday. I’m expecting they will keep bond tapering on hold for at least another month as the delta variant continues to impact the economy. This should be good for the stock market to close out the week. In DC the House will vote on increasing the debt ceiling, with the infrastructure bill expected to be voted on in the following week. Earnings reports will come from FedEx (FDX) and Nike (NKE).

Have a great week.