With The Fed On Deck, Investors Cheer FedEx Earnings, But Boeing Loses Altitude

With the Fed up to bat later this afternoon, buying interest in the stock market may be somewhat subdued until investors see what policymakers have to say, although the bias in stocks seems to be to the upside this morning.

This afternoon, the Fed is scheduled to release comments from its first policy meeting under its new flexible inflation target policy. While market participants aren’t expecting the Fed to do anything with rates, many may be curious whether the central bank will offer more comments about the policy. 

In economic news this morning, retail sales came in weaker than expected, rising by 0.6% in August when a Briefing.com consensus had expected a 1% rise. The prior reading was also revised lower, to 0.9% from 1.2%.

The lackluster August numbers represent the first month after the extra $600 per week in federal unemployment benefits came to an end and as Congress hasn’t worked out a new coronavirus aid package that would provide more stimulus money for Americans.

Turning to corporate news, FedEx Corporation FDX hit a home run in its earnings release after the market closed yesterday. The company saw increased revenue per package, and average daily package volume for FedEx Ground rose more than 30%. Earnings per share far exceeded analyst expectations, and revenue also beat forecasts. The company’s shares were up around 9% this morning.

Meanwhile, Boeing Co’s BA shares were pointing lower this morning following a scathing Congressional report about its beleaguered MAX jets that cited serious issues with the plane’s design and construction, as well as certification lapses at the Federal Aviation Authority.

Tech-Related Stocks Resume Leadership

Although the Dow Jones Industrial Average ($DJI) finished just slightly in positive territory on Tuesday, the other two made better headway. The tech heavy Nasdaq Composite (COMP) gained the most ground as tech-related companies continued to get their mojo back.  

The tech-led gains on Tuesday came despite mega-cap Apple Inc. AAPL paring its gains to end just slightly higher after its product event. AAPL shares had risen markedly in the previous session and were also up decently for a good bit of Tuesday’s trading. But after seeing the new products investors apparently thought enough had gotten baked into the cake—or the apple pie–and they were content to let the stock end near flat.  

The other FAANG names—Facebook, Inc. FB, Amazon.com, Inc. AMZN, Netflix Inc NFLX and Google parent Alphabet Inc GOOGL—gained much more strongly than AAPL on Tuesday. For reference, the NYSE FANG+ Index climbed 2.5% on the day. This could be a reflection that, though big-tech shares have had a tremendous run off the March lows, last week’s steep drop may be seen as too-much-too-quickly. 

While it’s good to see investors returning to these names that helped lead the market rally before getting hammered, the market would be stronger if there were broader sector participation. Yesterday, for example, several sectors—Staples, Health Care, Industrials, Materials, and Energy—were flat or lower. And Financials had a particularly rough day (see more below).  

Still, it’s possible that if the FAANGs really gain some momentum, that could translate into more solid participation from other segments of the market. 

Despite Optimism About The Fed, Financials Stumble

It seems that optimism about the Federal Reserve, which started its two-day policy-setting meeting yesterday and is scheduled to wrap it up later today, helped keep sentiment generally positive. Investors are apparently optimistic that the central bank will continue its ultra-accommodative stance while also being willing to let the economy run hot at times.

While those inflation expectations have helped cheer investors, it should be noted that we have to get there first. The economy has a ways to go before inflation could be considered hot, much less problematic to a degree that turns the Fed toward a hawkish stance. 

The gains for the market on Tuesday came despite headwinds for the Financials sector, which was the worst-performing of the 11 SPX sectors on concerns about net interest income. While that is a factor facing the broad banking industry, Citigroup Inc C has also stumbled on some company-specific news after the Wall Street Journal reported that federal regulators are preparing to reprimand the bank over its risk systems.

CHART OF THE DAY: FINANCIALS BEATEN DOWN. Even though financial stocks had a rough day yesterday, the Financials sector (IXM—candlestick) is still above its 50-day simple moving average (blue line). A break below that level could signal further weakness in the overall sector. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Headwinds For Banks: As the end of the quarter approaches and banks continue to face headwinds, the declines we’ve seen in the Financials sector could be reflective of a bit of caution ahead of earnings. Of course, the regulatory news about C wasn’t good, but at least it has been confined to one company. A bigger issue facing banks seems to be the net interest income issue amid weak loan demand and low interest rates. Banks got some reprieve as the yield curve steepened after the Fed announced its inflation averaging policy. Still, rates overall remain low and there doesn’t seem to be as much demand out there for loans. Citigroup said lower consumer borrowing will dent its third quarter revenue, and PNC Financial Services Group Inc’s PNC CEO said slower business activity is a headwind for lending, according to Reuters. Banks have also been socking away money to help cover potentially bad loans, also eating into profitability.  

Industrial Production Growth Wanes: When people have less money to spend, they buy fewer things and factories end up making fewer widgets. That fundamental economic truism seems to be in play as the pandemic drags on and continues to leave people out of work even as government stimulus money dries up. Main Street has been feeling the pinch more than Wall Street, which as a whole has benefited from the Fed’s largess and expectations of more. On Tuesday, data showed that industrial production in August grew less than expected. The latest print came in a 0.4% monthly growth when 1% had been expected in a Briefing.com consensus. Although it’s still nice to see growth, and it was good news that the prior month’s figure was revised to 3.5% from 3%, it’s still clear that growth is slowing. 

What Could Re-accelerate Manufacturing Growth? Although September manufacturing data from the Empire State on Tuesday came in much better than expected, it seems like the view from the national factory floor has been dimming. What might flip the switch and rev manufacturing growth back up? A coronavirus vaccine would probably go a long way toward making people feel more comfortable going out, giving the economy a shot in the arm and helping boost spending on stuff made in factories. But short of that, it seems like industrial production growth might not ramp back up without another round of government stimulus for Main street. But even stimulus could have limited effects on real manufacturing growth. Direct payments and other forms of Main street stimulus can help the numbers look good in the short term, but unless there’s a path to long-term growth (and a path to eradication of the virus), once the money is spent, we could be right back where we are today.  

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

Photo by Obi Onyeador on Unsplash