Earnings Get Busy Later This Week As Broadcom, Adobe, Oracle Put Tech In Focus

A year ago, who would have thought the market would notch new all-time highs almost daily based on the prospect of something as elementary as vaccinations? But here we are, steadily setting fresh records mainly due to investor enthusiasm that normal times could be around the corner. 

That’s a very optimistic view, and it’s not because there’s doubt about vaccines eventually bringing life back. It’s just that logistically, the vaccine rollout is one of the biggest challenges in medical history. We’ve talked about this every day and it might sound like a broken record by now, but you can’t discount the chance of some hitches along the way. Any kind of setback in getting people vaccinated certainly has the chance of pushing back against this optimism. 

Also, you can’t ignore the fact that COVID-19 cases continue to set new highs and some states and cities are shutting down. Some experts say it could be a long winter. Additionally, there’s still no settlement on a fiscal stimulus, with competing proposals hitting the headlines. 

The point is, if you’re trading this market, exercise caution and consider getting in slowly and in smaller batches. This isn’t necessarily the right time to go “all-in” considering valuations and the overwhelming positive sentiment (which can be a contrary indicator).

Returning to the here and now, earnings get busier as we carve deeper into the week. It starts tomorrow morning with Adobe Inc ADBE and continues later with Broadcom Inc AVGO, Lululemon Athletica Inc LULU, Costco Wholesale Corporation COST, and Oracle Corporation ORCL. That’s a nice mix of Tech and consumer stocks. 

Looking more closely at COST, it’s been a great story from a same-store sales point of view, but last week the company said November sales rose 15.1%, down from 16% in October. That’s not too dramatic, but investors might want to pay attention to the company’s earnings call to see if management provides updates on consumer trends. 

Meanwhile, the “risk meter” has apparently been turned back into the “on” position this morning, judging from the market readings we’re getting early Wednesday. Gold and bonds are down, along with volatility. 

Basis-Point Blues? Not Necessarily

In the past, seeing the 10-year yield cross a major psychological boundary on the way up sometimes sent a note of alarm to stock traders. It might not be necessary this time, however. 

If the 10-year yield goes to 1% or even 1.5% due to expected vaccinations and economic reopening over the next six or eight months, that’s still historically low. An economy that’s making leaps and bounds toward normalcy ought to be able to handle a little higher price of borrowing, especially if the Fed continues to keep its hand off the rate-hike lever. Not even the slightest chance of a rate hike is priced into CME futures through next September. 

Earlier this week, the futures market had priced in a slight chance of a rate hike by September 2021, but that went away Tuesday and it’s back to 100% chance of no change by that month. We’ll see if next week’s Fed meeting brings any more insight into the path of rates. The meeting is one of the four annual ones that include the Fed forecast of rates in years to come.      

As it is, the 10-year yield actually dipped toward 0.91% Tuesday despite fresh record highs for some of the major indices (see chart below). This might be a contrary signal—seeing bonds rise along with stocks—perhaps suggesting Tuesday’s Wall Street rally didn’t impress everyone. Consider keeping an eye on the yield meter today and in days ahead if you’re actively trading, because it can sometimes be a decent risk barometer. 

Trend Monitor

Checking sector trends, just about everything is higher over the last week. The one exception is Utilities, but they’d been sizzling for so long they were bound to take a break at some point. Cyclical sectors like Energy and Financials that tend to do best in a recovering economy are up more than any others, and these sectors also include some of the so-called “value” companies that trade at relatively low price-to-earnings (P/E) ratios. 

With the forward P/E for the overall S&P 500 Index (SPX) still historically high—above 22 according to some projections—valuations are a potential concern that may be driving some investors into what have been under-performing sectors like Energy and Financials. However, both face major fundamental challenges which include weak crude prices (for Energy) and low interest rates and regulatory concerns (Financials). 

This week’s rally to new record highs hinges a bit on hopes of a fiscal stimulus, but be forewarned that failure to get there could disappoint Wall Street and bring some selling. A lot of people are talking about stimulus like it’s a done deal, but we know how unpredictable Washington can be, especially during a lame-duck session.    

Meanwhile, gold has been climbing recently after months of weakness. However, if you check the chart, it’s been a pattern of lower highs and lower lows for the metal, suggesting to some analysts that the downtrend remains in place. Meanwhile, the dollar edged up a bit on Tuesday but remains near two-year lows. A soft dollar can be supportive for many stocks, but also might suggest some trepidation about U.S. economic data—including last week’s less than stellar jobs report. 

Keep an eye on small-caps, by the way. They continue galloping higher and outpacing their bigger cousins. Strength in the regional banking sector, heavily represented in the Russell 2000 (RUT) small-cap index, helps explain some of the recent run higher for RUT. A firm housing market and hopes for a healthier economy once a vaccine program begins have helped the entire Financial sector. 

There may be some more bullish banter coming up as the week closes thanks in part to a U.S. Food and Drug Administration advisory panel’s planned meeting on Pfizer Inc.’s PFE vaccine scheduled for Thursday. The advisory panel’s job is to let the agency know if they think the product should be approved. Judging from the safety data released Tuesday, health analysts think the panel is highly likely to say yes, and that could potentially give the market another boost. However, there’s a lot of talk that things are getting “frothy,” meaning this could become a “buy the rumor, sell the fact” kind of event. 

Moderna Inc MRNA gets its panel hearing on Dec. 17. The questions after these panel hearings are

•  how long it takes for the FDA to authorize emergency use of the products and
•  how long it takes to start getting them distributed.

Logistics could end up being the main challenge from here on out.

CHART OF THE DAY: TREASURY YIELDS TRENDING...OR STALLING? The yield on the 10-year Treasury (TNX) has been in clear uptrend (yellow line) since summer, but it’s stalled out below the 1% level on two occasions. Data source: Cboe Global Markets.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

November Inflation Data Seen Soft: With the Fed meeting next week, it’s timely that investors (and the Fed) get a look at inflation data tomorrow and Friday. Unfortunately—or fortunately depending on how you see it—analysts still see few signs of prices rebounding in the November Consumer Price Index (CPI) data due tomorrow or the Producer Price Index (PPI) due Friday. The average Wall Street estimate for core CPI (which strips out food and energy) is 0.2%, according to research firm Briefing.com. Core PPI is also seen at 0.2%. Anyone seeking a sense of what the future might bring should consider a close look at PPI, because producer prices often move first and eventually spill over into consumer prices.

Soft inflation isn’t what the Fed wants, because rising prices frequently hint at an improving economy while flat inflation suggests slow growth. No one likes to pay more, of course, but inflation can reflect rising demand, which in turn can lead to job creation. The good thing about low inflation is that when readings stay down investors tend to worry less about the Fed stepping back from its aggressive low-rate policy. Those low rates allow companies to keep borrowing money for very little cost, and perhaps could spur corporate infrastructure and product investment or dial up some merger and acquisition activity. That’s in normal times. The difference now is all the uncertainty around COVID-19 and when a vaccine could get into widespread use. Some companies might be considering holding off on major investments until the picture gets clearer. 

Textbooks Look Right Again: Investors frequently hear about the potential benefits of diversification. Oddly enough, you could argue diversification hasn’t really helped over the last couple of years. Instead, two big U.S. stock sectors—Info Tech and Communication Services—have absolutely dominated, especially if you include Tesla Inc TSLA in the Tech basket. Anyone who simply stuck with the FAANGs, Microsoft Corporation MSFT, TSLA, and semiconductors probably did fine in 2019 and most of 2020 through good and bad periods for the overall market. Small-caps, overseas stocks, and other sectors just stayed in the background. At one point, most S&P 500 stocks were down for the year but the index was up thanks to the huge market-caps of FAANGs and MSFT.

The pendulum might be swinging. Over the last month, we’ve seen a broad rally covering a wider variety of sectors and stock types. Financials, Energy, and Industrials all outpaced Tech. No one is sure how long this might continue and whether it’s a short break or a new trend. However, when economies emerge from recessions, stocks that tend to benefit most are in more cyclical areas like Financials and Industrials. 

There’s been a lot of pent-up demand during the pandemic, whether it’s for traveling or going back to work. This could mean more opportunity for companies that didn’t enjoy much in 2020. One thing to keep in mind: If Tech and the “mega-caps” go back to leading by themselves, it probably doesn’t say good things about economic recovery. Tech has almost become a defensive sector over the last year. 

Why Next Payrolls Data Might Disappoint: Could more pain be in store for U.S. workers? Analysts note that last Friday’s November payrolls report didn’t necessarily reflect all the shutdowns that accelerated toward the end of the month. That means the December data might also look soft as it picks up more of the affected workers. We’ll have to wait and see.

Thinking ahead to that next payrolls report now that the last one is out of the way, it’s getting really hard to estimate what unemployment numbers are going to be with some states completely shut down and others completely open. It’s kind of like the confusion around payrolls projections when a major hurricane hits the Gulf Coast and some states have their economies devastated while others are unharmed. COVID-19, like a hurricane, can put payrolls numbers into some weird territory. We’ll talk more about it as we get closer.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Photo by Aditya Vyas on Unsplash