29 Nov Capital 19 Catch-Up

Thanksgiving Sales Overshadowed By New Covid Variant As Powell Regains Fed Chair

Markets held steady earlier in the week as Jerome Powell was renominated as Fed Chief for another four-year term. Bond yields rose for the next few sessions, which was great for the bank stocks but not so great for the technology stocks. However, in a shortened week, courtesy of the Thanksgiving holiday break on Thursday, stocks stumbled badly on Friday as news of yet another variant of Covid-19 hit the media and spooked investors.

The Powell news was a positive one for markets who appreciated the fact that future moves from the Federal Reserve would be “business as usual”. Wall Street has valued the market-friendly decisions of Powell’s four years at the helm and there were concerns that rival for the position, Dr Lael Brainard, a Democrat, would bring a more progressive style and higher regulation. Brainard instead will be Vice President, which should see the nominations passed by congress without delay.

The Fed decision caused bond yields to spike throughout the week which in turn saw financial stocks lead the markets. Bank of America (BAC) had gained 5.6% leading into the Friday session, while Goldman Sachs (GS) rose 4% and Wells Fargo (WFC) made 6.2%. Technology and reopen plays were hit hard in response – and this was only exacerbated when the Fed minutes were released on Wednesday. The minutes showed that members were ready to accelerate the timetable for slowing asset purchases and increase interest rates if inflation continued to climb higher.

In an attempt to curb rising inflation President Biden announced on Tuesday he would be releasing strategic petroleum reserves to help bring down oil prices. The US will release 50 million barrels of crude in a coordinated effort with India, China, The UK, South Korea, and Japan. Crude had been trading at a seven-year high of around $85 in recent weeks, which had dropped to $75.30 by Tuesday, and then down to a low of $68 on Friday as the Covid-19 news came to light.

On Friday everything changed as news of a new Covid variant coming out of South Africa frightened investors. The newly coined Omicron was labelled a “variant of concern” by the World Health Organisation’s technical advisory group, much like the Delta variant was. There is no detail as yet on whether this variant is any more dangerous or transmissible than the Delta version, but this didn’t stop stocks selling off globally. In what was only a half session in the US, following the Thanksgiving break, the S&P500 dropped 2.3%, the Dow lost 2.53%, and the Nasdaq fell 2.2%. It was the worst Black Friday performance for the major indices since 1950 when the sales period is believed to have first begun.

As expected all of the reopening plays suffered the most. Airlines such as United Airlines (UAL) and American Airlines (AAL) dropped 9.6% and 8.8% respectively, while amongst the cruise lines Royal Caribbean (RCL) lost 13%, and Norwegian Cruise(NCLH) dropped 11.4%. The Oil price dropped 13%, while 10-year Treasury yields fell to 1.484% in what was its largest daily decline since March 2020. Stay-at-home stocks were back in favour with Peloton (PTON) seeing some relief from recent falls with a gain of 5.67%, while Netflix (NFLX) made 1.1%, and Zoom Video (ZM) gained 5.72% after falling heavily on Tuesday following its earnings report.

Of course, little was known about the Omicron variant on Friday. And as I write this on Monday not much has changed. The sell-off on Friday was a case of “sell now – ask questions later” and one couldn’t help but think there was a fair amount of overreaction involved. At this stage, there’s nothing to suggest that it is any more dangerous than what we have already seen, and there’s no evidence that our current vaccines won’t be able to protect us against it. The WHO says we will know more in the next two weeks and while I expect markets will remain anxious as more facts come to hand, we could just as likely see a bounce back from Friday’s falls as investors reassess the threat level.

Away from the Fed nominations, oil strategies, and new Covid variants we also had some notable earnings reports throughout the week. Our favourite was the HP (HPQ) result which saw revenue up 12% from a year earlier to $63.5 million and profits of $3.75 per share which were well above expectations. Commercial PC revenue jumped 25% in the quarter, while commercial printing revenue was up by 19%. It was only at the end of October that we suggested in our stock report on HPQ that the stock was undervalued and would be a great buy point at these levels. The share price is now up 14.38% since then, boosted by a 10.1% jump after the earnings results were announced. I hope you jumped on board with us.

The other notable earnings names weren’t as successful. Zoom beat estimates but warned that growth would slow once the pandemic was over. Revenue increased by 35% which sounds impressive but slowed from 54% growth in the prior quarter. It was Zoom’s slowest growth since 2018 and the share price fell 14.7% in response, only saved in the Friday session by the Omicron news. Elsewhere Best Buy (BBY) topped estimates but worried investors over shipping costs and weaker demand for electronics, dropping 12.3%. Retailers Gap (GPS) and Nordstrum (JWN) also fell heavily after earnings misses. GPS lost almost a quarter of its value, down a hefty 24%, while JWN was worse, falling 29% as both were hit with supply chain issues in the quarter. Software maker Autodesk (ADSK) beat estimates on both the top and bottom line but fell 15.4% after offering disappointing guidance.

The economic data during the week was mixed, however weekly jobless claims surpassed all expectations. Initial unemployment numbers hit their lowest level in more than 50 years coming in at 199,000 for the prior week. It was November 1969 since the figure was this low, even though it is likely that seasonal adjustments may have artificially lowered the result. We may expect to see a little jump in the next few weeks. Elsewhere durable goods orders unexpectedly declined in October, while personal core consumption matched estimates of a 4.1% rise.

In the week ahead we’ll see the last few trading days of November and then we’ll be in the run home for Christmas. Obviously, all eyes will be on the particulars of the new variant and the impact this will have on reopening and the recovery timeline. OPEC will also meet this week, and then we’ll have the non-farm payrolls on Friday. Earnings will be released by Salesforce (CRM), Snowflake (SNOW), Crowdstrike (CRWD), Dollar General (DG), and Kroger (KR).

Have a great week.