Rally in China and Decent Earnings Lift Stocks Early, but Fed Meeting Starting Today Could Be Pivotal

(Tuesday Market Open) November is starting where October left off—with big gains for the stock market. But the Federal Reserve meeting kicking off today and finishing tomorrow afternoon with a rate announcement could determine whether this happy trend continues.

Much of the rally is built on thinking that the Federal Open Market Committee (FOMC) and Fed Chairman Jerome Powell will sound more dovish about the future even though a fourth-straight 75-basis point rate hike is a nearly 100% CME FedWatch certainty.  Many market participants could be disappointed by a less-hawkish Fed, but expectations range from the Fed keeping the foot on the brake to signaling a pivot and everything in between.

Ahead of tomorrow’s Fed decision, the market drew support from a rebound in the downtrodden Chinese stock market, a slight drop in U.S. Treasury yields, generally decent earnings, and a little dollar weakness. China’s strength follows social media chatter that the government could adjust might soften its zero COVID  policy. However, the country’s Foreign Ministry hasn’t said such a thing, so it should be treated as a rumor—meaning any market strength from this story could vanish instantaneously.

One of several major reports to watch is today’s JOLTS job openings data for September, due at 10 a.m ET. Job openings were just above 10 million in August. Bulls—and presumably the Fed—want to see that number continue to drop as an indication of slowing wage growth. After all, fewer job openings mean more people are competing for fewer jobs, leading to less pressure on employers to raise salaries to attract workers they need. Obviously, it’d be great if everyone could get the job they want at a great salary, but too much of that raises inflation, which arguably helps nobody.

Around the same time, investors expect the ISM Manufacturing Index for October and Construction Spending for September. See more below.

The Doctor Will See You Now

Here’s our quick take on a few things we learned before the open:

• Pfizer (PFE) earnings looked healthy all around. The company beat analysts’ earnings and revenue estimates and raised guidance. It also announced positive results on an experimental vaccine for the RSV respiratory virus. The vaccine is designed for expectant mothers and intended to protect their newborns. PFE shares rose more than 3% ahead of the open.
• Things weren’t so rosy at Eli Lilly (LLY), where shares fell more than 1% in premarket trading after the company issued disappointing 2022 earnings per share guidance.
• Rounding out the health care earnings trifecta this morning was Stryker (SYK). Shares tumbled more than 6% and the stock got an analyst downgrade after the company missed aearnings estimates and projected lower-than-expected earnings per share.
• One late-breaking story this morning. Shares of Abiomed (ABMD) went ballistic Tuesday, up more than 50%, after agreeing to be acquired by Johnson & Johnson (JNJ) for $380 a share. ABMD makes pumps to help peoples’ hearts circulate blood.
• Need a ride to the doctor (or elsewhere)? Uber (UBER) shares zoomed up more than 10% ahead of the open after reporting stronger than expected revenue and surprisingly robust bookings. UBER’s release sounded a positive note on the reopening economy and helped move shares of ride-share competitor Lyft (LYFT) as well.

Potential Market Movers

Two big economic reports bow just after the open, giving investors a look at the October ISM Manufacturing Index and September Construction Spending. Analysts expect the ISM to drop from September’s level of 50.9% to in October, according to Briefing.com. Construction spending is expected to fall -0.5% in September after a 0.7% decline in August.

A major consumer staples company, Clorox (CLX), is on this afternoon’s earnings calendar, and the trend to watch is prices. Not the price of the company’s stock, but the prices its customers have been paying—or more to the point, willing to pay—in these inflationary times. One positive trend this earnings season is staples companies reporting that demand didn’t lose momentum even as they raised prices for customers. This was the case for a variety of other staples firms including Coca-Cola (KO) and Procter & Gamble (PG) and suggests consumer resilience in tough times. And while air travel and restaurants aren’t in the “staples” category, we saw the same type of thing from McDonald’s (MCD) and many of the airlines reporting so far. This could be a trend to watch later this week when SBUX reports.

The last time CLX reported, it said the environment “remains difficult,” with consumer behavior “adapting” to challenges including inflation. Still, sales grew in three of the company’s four segments. Staples as a category has climbed about 7% over the last month, a bit more than the S&P 500 index (SPX).

• Some important companies expected to report in coming days include Advanced Micro Devices (AMD) after the close today, Roku (ROKU) after the close tomorrow, and Starbucks (SBUX) after the close Thursday. With AMD reporting this afternoon, recent U.S. restrictions on chip technology to China come back into focus.
• But beyond that, chip companies face pressure from declining personal computer sales, rising chip inventories, and falling video game demand. AMD and Intel (INTC) are among the industry leaders when it comes to PCs, and last week, INTC lowered its revenue outlook. AMD shares are already down about 60% this year, so some analysts wonder if all the bad news might already be built into the stock.
• Yesterday afternoon brought earnings from NXP Semiconductors (NXPI), which narrowly beat analysts’ revenue estimates but offered a cautious forecast, causing shares to fall. NXPI is a major supplier for the automotive industry, which has weathered this year’s economic storm pretty well. So NXPI’s earnings are a different animal from AMD or INTC, despite all of them being in the chips industry.

The chart below shows the S&P industrials sector just climbed above its 200-day moving average (MA). It’s not alone. The Russell 2000® (RUT) small-cap index is also within shouting distance of its own 200-day MA for the first time since mid-August after another positive session Monday. The area to watch with RUT is 1884, about 30 points above current levels. There’s nothing magical about moving averages, but they’re interesting areas to watch from a psychological point of view. Especially the 200-day MA, which is spread out more than shorter MAs and has more gravitas. However, staying above the 200-day MA has been challenging this year for sectors that achieved it, at least so far.

Seeing industrials and RUT climb after last week’s tech wipe-out has some analysts thinking “old economy” stocks like energy and manufacturing firms may be beneficiaries of money coming out of tech. Energy’s been strong all year, and industrial and materials companies with exposure to commodities may be seeing a positive impact.

Reviewing the Market Minutes

The Dow Jones Industrial Average® ($DJI) finished October up nearly 14%; its best month since January 1976, a time when its components included Eastman Kodak, F.W. Woolworth, Sears Roebuck, and American Smelting and Refining, among others. The $DJI fell about 0.4% on Monday to finish at 32,732.95.

For the full month, the $DJI easily outpaced the Nasdaq® ($COMP) and the S&P 500® index (SPX), which rose approximately 4% and 8%, respectively. Both fell on Monday, but analysts chalked this up to pre-Fed positioning and possible profit-taking at the end of a strong month. The Russell 2000® (RUT) bucked the trend, finishing yesterday with slight gains to keep up its positive pace but lost ground near the end of the session.

Declining stocks slightly led advancing ones yesterday on Wall Street.

CHART OF THE DAY: INDUSTRIOUS INDUSTRIALS: INDUSTRIOUS INDUSTRIALS. Today marks the release of the October ISM Manufacturing Index, so it’s a good day to check the S&P 500 Industrials sector index. As this year-to-date chart shows, the Industrials (candlestick—IXI) clawed back above their 200-day MA (blue line) early this week. The sector is up about 13% over the last month, nearly doubling the performance of the SPX. The last two times the sector matched its 200-day MA, it fell precipitously. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Breakfast with the FOMC: Data this morning could give Fed officials something to chew on besides muffins and bagels at today’s start of November’s FOMC meeting. Right after the opening bell comes the ISM Manufacturing Index for October and Construction Spending for September. Analysts think the ISM data will show U.S. manufacturing potentially fall into contraction mode for the first time in two years. Construction spending already fell in July and August, and analysts think today’s report will show the downward trend continued in September. Though two reports aren’t anything definitive, any sign of U.S. economic softness following weak Chinese data over the weekend and a light Chicago PMI reading yesterday could help shape what we hear from Fed Chairman Jerome Powell in tomorrow’s press conference. The $DJI had its best month since 1976 in October, based partly on hopes Powell would sound more dovish. If the data this week (including Friday’s jobs data) come in unexpectedly hot, investors might have to return to their drawing boards.

Greenback Wavers: Keep an eye on the U.S. Dollar Index ($DXY), which scraped against recent lows near 110 last week and is testing that area again this morning. The strong dollar is keeping pressure on gold, which fell in October for the seventh-straight month. But if you really want to know where it’s taking its toll, look no further than Q3 earnings. Many companies, especially multinationals with lots of overseas exposure, have been talking about the negative impact of foreign exchange on their profits. One study found that for every 1% increase in the U.S. dollar, there’s a 0.5% decline in S&P 500® earnings per share.

Speaking of which, S&P 500 companies are beating analysts’ estimates less often, as we mentioned yesterday. The ones that are beating estimates are doing so by far less of a percentage than a couple years ago when 15% to 20% beats were common. This season, average beats are more like 4% to 5%. And stocks of companies that do beat estimates aren’t being rewarded much by the market. Typically, companies beating estimates have seen their shares rise 0.5% or so, but companies reporting a miss are getting punished with drops in the range of 3%, which goes to show you that with earnings estimates already lowered so much, there’s a lot of pain for companies that can’t at least meet the low bar analysts have set.

Canary in a Coal Mine?’ It’s far from a mass-market mortgage problem, but American Banker reported that certain high-risk mortgage defaults are on the rise and could be “a canary in the coal mine” for signs of a weakening economy. The rate of early payment defaults—two or more missed payments in the first six months of a mortgage—has doubled during the past year, according to data on Federal Housing Administration-backed loans collected by mortgage-analytics firm Recursion. The firm stated that the trend is particularly evident among those in the lowest credit tier of FHA mortgage holders. For those with credit scores of 550 or less, Recursion said nearly 10% were in early-payment default as of October 1 compared with 5.5% a year ago and 4% before the start of the pandemic.

Notable Calendar Items

Nov. 2: FOMC rate decision and expected earnings from Allstate (ALL), CVS Health (CVS), Yum Brands (YUM), and Zimmer Biomet (ZBH)

Nov. 3: September Trade Balance and Factory Orders and expected earnings from Exelon (EXC), Hyatt Hotels (H), Illumina (ILMN), Starbucks (SBUX), Kellogg (K), Penn Entertainment (PENN), and Marriott (MAR)

Nov. 4: October Nonfarm Payrolls Report and expected earnings from Hershey (HSY), Cardinal Health (CAH), and Duke Energy (DUK)

Nov. 7: September Consumer Credit and expected earnings from Palantir (PLTR), Lyft (LYFT), and BioNTech (BNTX)

Nov. 8: Election Day and expected earnings from DuPont (DD), AMC Entertainment (AMC), Occidental (OXY), Walt Disney (DIS), and Wynn Resorts (WYNN)

Nov. 9: September Wholesale Inventories and expected earnings from D.R. Horton (DHI), Wendy’s (WEN), and Rivian (RIVN)

Nov. 10: October Consumer Price Index (CPI) and expected earnings from Ralph Lauren (RL), AstraZeneca (AZN), and Dillard’s (DDS)

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

Image sourced from Shutterstock

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