Capital 19 Catch-Up

Wall Street Bounces back After Tough September

After a poor performance in September and a terrible start to October on the first trading day of the year, Wall Street fought back last week to get the markets back on track. Another debt ceiling cut off loomed over the markets, as did rising bond yields and oil prices, yet investors saw through the gloom which saw the S&P500 fall 4.8% last month to see all of the major indices finish with gains.

The Nasdaq just scraped by, however, inching out a 0.1% gain for the week. The tech-laden index has been hit heavily over the last month and as money moved quickly out of pandemic stocks and into reopening stocks. Rising bond yields have been the main factor as the 10-year Treasury yield has hit levels not seen since June. Growth stocks tend to underperform when there is less money to go around.

The Dow, on the other hand, continued to surge, jumping 1.2% for the week and having its best five days since June. Nike (NKE) and Microsoft (MSFT) were standouts, gaining 3.7% and 3.5% respectively. While Chevron (CVX), Goldman Sachs (GS), and Apple (AAPL) also outperformed, rising 2.6%, 2.3%, and 1.5%. Goldman is still the leader of the Dow so far in 2021. It’s up 44.1% for the year, closely followed by its financial sector compatriot American Express (AXP) with a 48.36% gain. Another financial company, big bank JP Morgan Chase comes in third with a 31.53% gain. Down at the bottom end, we have Verizon (VZ), Amgen (AMGN), and Wal-Mart (WMT) with losses of 7.57%, 6.96%, and 4.93% respectively for 2021.

The S&P500 fell in between the other majors. It rose 0.8% for the week as the energy sector gained 5.02% off the back of the oil price which cleared $80 per barrel on Friday, its highest level since November 2014. Energy stocks are now up 18.7% for the last month, and up 50.09% for the year to date. The banks were also strong with the financial sector making 2.26% over the five days, while Industrials, Utilities, and Consumer staples all gained more than 1%. Real estate stocks are struggling at the moment. They lost 0.77% for the week and are now down 7.33% over the last month.

Recently investors have been dealing with an unusually complex number of issues when deciding what to pay for stocks. Despite the obvious Covid 19 reopening confusion, we’ve got Fed monetary policy decisions imminent, supply chain problems, the potential for tax increases, rising inflation, and lately the debt ceiling cut off date. This last one was sorted out at the end of last week and has now been pushed to the end of December which should hopefully calm some nerves. However, it’s not surprising that markets have had a pause recently. More than half of the S&P500 are off by more than 10%.

The good news is we’re coming into what is traditionally a great time to be an investor. The fourth quarter is generally a bumper one culminating in the aptly titled “Santa Rally” to finish off the year. The S&P500 gains an average of 3.9% for the final three months of the year and has been higher for four out of every five years since World War 2. That’s a pretty impressive record over a long period of time. No guarantees of course but circumstances seem to be clearing just in time for a run.

The Fed tapering announcement is one we are all waiting for yet Jerome Powell is expecting employment to pick up before making a move. The non-farm payrolls for September, which came out on Friday, certainly weren’t a clear cut sign that jobs were back on track. The numbers were down considerably for the second month in a row as new jobs counted 144,000 when economists were expecting 500,000. The August numbers were revised higher, however, up from 235,000 to 360,000. And unemployment fell to 4.8% which is its lowest since 2016, however doesn’t fully reflect the state of the job market. The positive side is that markets are expecting tapering to begin in November or December so an announcement won’t rock markets too hard. However, if the Fed decides to hold off we could really see a hard move higher.

The scene is now set for the upcoming earnings season which will be crucial for a strong fourth-quarter market. Second-quarter earnings were at historical highs thanks to poor results in the corresponding quarter of 2020 as the pandemic shutdowns dawned. For the third quarter, predictions are for a more modest growth of 28% YoY. Any increase, however, will be the fifth quarter increase in a row and be the longest streak since 2005.

More importantly, perhaps, will be companies forward guidance. Continually in the previous quarter, we saw companies beat on the top and bottom lines and get punished for disappointing guidance. With supply chain disruptions still occurring, higher costs abounding, and economic reopenings not quite back in full swing this will be the main danger to stock prices.

The first week of earnings these days is always about the financials. All the big boys will be presenting their numbers including JP Morgan, Goldman Sachs, Bank of America (BAC), Citigroup (C), Morgan Stanley (MS) and Wells Fargo (WFC). There are 20 S&P500 companies reporting in total however including Fastenal (FAST), Delta Airlines (DAL), Domino’s Pizza (DPZ), and the old bellwether earnings stock Alcoa (AA).

Data wise we’ll get the latest inflation numbers out, which are always closely watched by the Fed. We’ll also see job openings, retail sales, and import and export prices. It may also be a big week for vaccine manufacturers Moderna (MRNA) and Johnson & Johnson (JNJ) as the FDA meet to decide on the need for booster shots going forward.

Have a great week.