Moderna Vaccine Goes Into FDA Panel Hearing Today, Raising Hope Of Another Tool Vs. Virus

In words we’ve never heard before, stocks are up this morning on stimulus hopes. 

That’s meant to be ironic, but it does feel like “deja vu all over again,” as baseball great Yogi Berra once said. Don’t be surprised, though, if negotiations go into the weekend (see more below). Legislators still haven’t dotted all the i’s and crossed all the t’s, and some negotiating could still take place, media reports said. 

Meanwhile, the other story of the morning might be bitcoin. It zoomed up above 23,000, continuing its parabolic gains. A week ago it was down near 18,000. The fundamentals that drive bitcoin are a bit mysterious, so you might want to be cautious if you’re considering trading it. 

Weekly initial jobless claims, unfortunately, continued to look disheartening, to say the least. They jumped to 885,000, well above Wall Street’s expectations for around 800,000. This marks the second disappointing week in a row for claims, and could potentially put a lid on the early market gains. 

It takes more than one or two reports to mark a trend, but if this continues, that’s obviously not good. The Wall Street Journal said these rising claims are another sign of the economy entering “a winter slowdown,” and it’s hard to not agree.

Vaccine Panel, Quadruple Witching, VIX, and More

A key COVID-19 development takes place today as a U.S. Food and Drug Administration (FDA) panel spends most of Thursday reviewing Moderna Inc’s MRNA vaccine. If the panel votes in favor of approval, the FDA is likely to follow their recommendation, so that would give doctors two tools to use in the virus fight. A lot of the positive vaccine news feels like it’s already built into the market, but you never know. It does seem like every new development gives stocks an upward jolt lately.

We’ve been talking all week about tomorrow being quadruple witching day and possible choppiness associated with that. It’s still possible, but so far this week has been tough for anyone who expected volatility to keep up last week’s torrid pace. The Cboe Volatility Index (VIX) continued to edge down yesterday toward 22, down from nearly 25 just a few days ago. 

Don’t be surprised to see VIX tick up over the coming days, especially if stimulus doesn’t get resolved quickly. Still, some consumer-oriented stocks like Amazon.com, Inc. AMZN and Shopify Inc SHOP got lifts yesterday from media reports that the stimulus could include direct payments to households. 

Speaking of VIX, there’s nothing like a potential government shutdown to raise Wall Street’s anxiety. If Congress can’t push through a new spending package tomorrow—whether it includes stimulus or not—the government would have to shut down. It’s unlikely to happen because Congress could always put through a continuing resolution to keep the lights on temporarily, but signs point to a possible long weekend in Washington as legislators try to put a final package together. It seems unlikely investors will have an answer on stimulus before going home tomorrow night.

Also tomorrow night (well, tomorrow after the close), comes earnings from Dow Jones Industrial Average ($DJI) component Nike Inc NKE. We’ll discuss that in more detail in Friday morning’s column. 

Meanwhile, U.S. crude climbed above $48 a barrel this morning to hit a nine-month high. Seems like only yesterday we were watching it fall toward $35, but it appears to be getting a lot of traction out of this fiscal stimulus talk. That’s positive news for the Energy sector, which has been clawing back from dramatic losses earlier this year.

Powell Talk

Looking over some of Fed Chair Jerome Powell’s remarks from after the Fed meeting yesterday, it’s encouraging to see the central bank projecting lower unemployment and somewhat higher inflation over the next year than the Fed had in past meetings. As Powell said, parts of the economy have recovered more quickly than expected from the pandemic, including housing, vehicle sales, and durable goods. It’s the services sector he worries about, and investors probably should keep that in mind. 

The Fed is already seeing evidence of less economic activity due to the new shutdowns. Things could improve dramatically once the vaccine gets out there, but Powell thinks the next four to five months will be tough. Services industries include many of the “reopening” companies like hotels, restaurants, casinos, cruise lines, and concert venues. 

Another takeaway from Powell’s press conference was some positive news for the Financial sector, as Powell said financial institutions remain strong and capital has held up well. While non-financial companies tend to be highly leveraged, low interest rates allow them to handle their debt loads, Powell added. Defaults are on the decline.

All this could support some analysts’ beliefs that the big financial companies may be able to take less protection from possible non-performing loans, helping their profitability in Q4 and beyond. That remains to be seen, but maybe it’s worth noting that Financials were one of several sectors to finish higher on Wednesday and are up nearly 16% over the last three months, outpacing all but one other sector (Energy) over that time period.

Speaking of earnings, they’re not all that far off and allow investors to peek under the economy’s hood (see more on expected earnings results below). Never underestimate the importance of earnings. Whatever happens with interest rates, pandemics, geopolitics, and all the other noise, the market ultimately makes its stand on company results.

CHART OF THE DAY: CHANNELING UP. CHANNELING UP. The 10-year Treasury Index (TNX—candlestick) has been trending up in a channel (yellow lines). While it’s still moving within the channel, it’s worth noting that it topped out below 1% (blue line) twice. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Too Early to Talk Earnings? We’re only a month away from Q4 earnings season, even if mid-January seems like it’s still far in the future. With that in mind, it’s not too early to start thinking about what kind of results to expect in a Q4 that so far has seen mixed economic data trends. Things don’t look too great if you look at the forecast from research firm FactSet, which predicts average S&P 500 earnings to descend 9.9% year-over-year. That would be the third-worst earnings quarter since 2009. Still, it’s a bit better than analysts had predicted for Q4 a few months ago. Also, recent quarterly results have had a pattern of finishing much better than most analysts had expected. 

Over the coming days, we’ll look into how analysts think different S&P 500 sectors might perform in Q4. For now, let’s just note that FactSet predicts overall calendar year 2020 earnings per share to fall a steep 13.7%. If that’s even close, it would be among the worst years on record, and the second year in a row of falling earnings for big companies (2019 saw earnings edge 0.1% lower from 2018). In fact, four of the last six years (including 2020) have been disappointing from an earnings standpoint, which is kind of head-scratching when you think of where the market is now vs. half a decade ago. 

Is Infrastructure Week Finally on Tap? Whatever your politics, it’s fair to say the notion of “infrastructure week” became a bit of a running punchline on Wall Street over the last few years. Both the administration and Congress talked about it but never really got down to doing it. The ironic thing about this is that both parties seem to support infrastructure spending, but for whatever reasons couldn’t get it done. Now with the new administration taking office next month, incoming Transportation Secretary Pete Buttigieg sounds like he wants to spearhead some spending on roads, bridges, and other brick-and-mortar items. “America has given this administration a mandate to build back better,” he said on Twitter Inc TWTR yesterday. “And step one in building back better, literally, is to build.” 

Obviously there’s a long road ahead between a tweet and boots on the ground, so to speak, but maybe things are starting to move in that direction. The Senate outcome could help determine how much ultimately gets allocated. Any move toward an infrastructure bill would likely benefit companies in the Industrial and Materials spaces (think big construction firms and steel companies), that would be trusted to move the earth and provide the materials for any new government initiatives. Something to monitor in 2021. 

Inflation Percolating: Earlier this week, we mentioned there’s still no sign of inflation approaching the Fed’s long-standing 2% goal. That remains true, but doesn’t mean the threat is completely gone. If you’re worried about rising prices, look no farther than the commodities markets, where crude and copper continue moving steadily higher. Copper futures, which sank to near $2 a pound back in March when the pandemic hit, now trade above $3.50. That’s the highest this key industrial commodity has been since early 2013, and may speak to rising demand for the metal, used in many electronic and battery parts. Crude futures, as most of us probably remember, sank below zero in April when supply completely overwhelmed demand. Now U.S. crude is flirting with $50 a barrel for the first time since February.

Almost all of us pay for products that use crude and copper, so eventually higher commodity prices can work their way to the consumer and inflation can go up. That’s why it makes sense to keep a close eye on both copper and crude in early 2021 to see if these trends continue. Rising commodity prices might be one factor that ultimately forces the Fed to start “thinking about thinking about” rate hikes, to use Chairman Powell’s own language.

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

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