Firm Results from Disney, Cisco Help Market Back After Thursday's Slide

After a week that’s been all over the place, stocks begin Friday with a firmer tone thanks to two sturdy earnings reports. 

Walt Disney Co DIS and Cisco Systems, Inc. CSCO led the charge in pre-market trading. Both surprised investors with stronger than expected results late Thursday, and CSCO also provided a hefty dose of positive guidance. Shares of DIS rose 4% before the bell and CSCO rose 7%. 

CSCO had a really, really nice report. They’re a company with a great grasp on business conditions worldwide, so when they talk about things getting better, it often gives people confidence. 

We say it often, but be ready for a choppy ride that could last the rest of the year. This week has plenty of examples, though volatility eased early today as the Cboe Volatility Index (VIX) fell below 25. The market soared Monday and plunged Thursday as sentiment quickly changed based on virus developments. Now it looks like Friday has a chance to move back into the green. Investors could be in for a lot more of this see-saw ride in weeks to come.

Thursday’s slide wasn’t all that surprising considering the negative headlines about potential and actual shutdowns as COVID-19 cases keep steadily rising around the country. There was a lot of hope earlier this year that Q4 could be a time of economic recovery. It’s a bit harder to imagine that now as restaurants, gyms, airlines, and other businesses face virus-related pressures. 

It’s beginning to dawn on many people that while a vaccine could ultimately be great, a lot of logistics go on around it. Who’s going to get it first? How does it get distributed? It may be May or June before it’s widely available to the least vulnerable people, meaning some analysts now don’t see things getting back toward normal till late summer or fall. 

Disney Results Reflect Bifurcated Nature Of Company

That would be bad news for DIS. Theme parks have become its number-one source of revenue, and those continue to suffer, along with the movie franchise being off a bit. The launch of Disney+ streaming ended up being fortuitous timing for DIS, but now is overshadowed a bit by strict rules in California that might prevent Disneyland from reopening for quite some time. Company leaders expressed disappointment on that front.

Generally, it looked like a good quarter despite the theme park struggles. Investors sent shares higher in pre-market trading in response to a nice gain in Disney+ subscribers, lower than expected losses and better than expected revenue. The parks and entertainment segments remained under huge pressure during the company’s Q4. Media networks and direct-to-consumer did well. It’s kind of a bifurcated company until the virus dies down. 

DIS also has a big business in China. Stocks there have chopped around for several months since that amazing summer rally, and recently came under pressure from regulatory fears surrounding China’s tech sector. Alibaba Group Holding Ltd BABA remains in the spotlight as Beijing seems to be locking horns with the company’s leader. This remains worth watching for any potential impact not only on Chinese tech stocks but on many U.S. tech stocks with exposure there. 

On a positive note, both sides in Washington still seem to want some sort of stimulus before the end of the year. It’s looking less likely that Democrats will get the large number they wanted, considering how close the election ended up being. Either way, getting some money back into the economy could help, especially if it’s a long wait for the vaccine. 

Fed Chairman Jerome Powell on Thursday reiterated the Fed’s desire for a stimulus package. He also said it could be tough sledding for the economy in coming months, which probably weighed on stocks. So, apparently, did comments from the Republican Senate majority leader that he prefers a smaller stimulus than Democrats proposed. 

Treasury yields drew back from recent highs in the 0.95% range for the 10-year, but don’t seem to be on a swift ride back toward the lows, either. The yield of 0.88% early Friday probably reflects recent firm economic data, including lower than expected weekly jobless claims. 

While claims continue falling, there’s not much relief for the travel sector. Those stocks have been all over the place this week depending on virus and vaccine news, so care is warranted for anyone investing there unless you’re ready for a lot of fast swings. These companies remain fragile in the current environment, to say the least. Some cruise stocks ended Thursday down as much as 30% from their Monday highs.

Less Taxing Holiday Season Ahead?

One healthy development for stocks could be less pressure toward the end of the year from tax-related selling. The same close election that probably doomed a huge stimulus package might also have reduced chances of any major tax legislation next year. Before the election, there was concern a potential “blue wave” might raise chances of rising corporate and capital gains taxes in 2021, preceded by some investors rushing toward the exits before the end of 2020 to take advantage of the old rules. 

The way it looks now, there might be some tax legislation introduced in the next Congress, but the close political divide makes any dramatic changes appear less likely. Meaning, perhaps, less selling pressure late this year than we might have seen otherwise. Lack of a major new tax bill could also mean less of a brake on the economy next year, which might be one factor behind the recent strength in Treasury yields. The good thing that’s not really publicized much around higher rates is that they allow the Financial sector to potentially come out and play a bit more, and that’s the second-largest sector in the S&P 500 Index (SPX). 

Speaking of the SPX, it still hasn’t managed to close above its all-time high finish of 3580 record in early September. Failure to top that close in a couple of rallies early this week means it remains the technical level to watch. A finish above that—which would take a pretty strong move today—might suggest further gains to come. However, valuations remain near historic highs despite what’s been a generally nice earnings season, so that might be a barrier. 

Looking ahead to next week, retail earnings come into focus as Walmart Inc WMT and Target Corporation TGT report. Data-wise, the standouts include retail sales and existing home sales for October.

CHART OF THE DAY: LOWER HIGHS FOR TECH, STAPLES CATCHING UP. One sign of technical weakness analysts often track is a series of lower highs. This chart of the Tech sector (IXT—candlestick) shows it struggling to make new highs over the last three months. Meanwhile, the Consumer Staples sector (IXR—purple line)—which generally is seen as a more conservative place to invest—is nibbling at Tech’s feet with only a slightly worse performance over that time frame. 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.  

No News Not Good News: Yesterday’s consumer price index (CPI) for October was as flat as a pancake, and that’s not the best thing to hear. Both the headline and core inflation numbers resembled a famous movie frat brother’s grade point average: 0.0. Investors, and the Fed, for that matter, had probably been hoping for something a little bigger, because inflation tends to be a sign of economic growth. While no single month is a trend, these numbers didn’t deliver. On the one hand, you could say flat prices are good for the market because they leave pressure off the Fed to consider raising rates, but that’s in normal times. The times we’re in aren’t normal, and the Fed has said it could let inflation swing above 2% for a while to get employment back on track. Numbers like these don’t get you there. 

What’s in Your Basket? You might read that note above on inflation and ask how it’s possible CPI could be so low when your receipts tell a different story. Fair enough. There’s long been people calling for the government to change how it measures inflation, saying it doesn’t fully account for the average costs of many goods and services. Maybe the price of a television, for instance, went down, but who buys a television every time they go to the store? 

Some argue that the inflation report doesn’t measure more meaningful things like how much you pay for your daily commute on the train (have you checked those prices now vs. 10 years ago?) or how much you fork out for your kids’ college education. The Fed, for that matter, has long said that its favorite inflation measure isn’t the monthly CPI and producer price index (PPI) reports, but the Personal Consumption Expenditures (PCE) report. This monthly data breaks down expenditures on goods and services a little more than the CPI, and also adjusts for changes in consumer behavior. That said, recent PCE reports haven’t shown much inflation, either, so if that leaves you grumbling, you might still not be satisfied with the accuracy. 

Note From Washington: While this isn’t a political column, it’s obvious that Washington remains on a lot of investors’ minds. Some market participants question how volatility could be down so much since the election even while drama continues around the results. The VIX finished up moderately Thursday amid the virus worries, but ended well below its early peak near 27. It’s quite a bit below peaks of 40 in the lead-up to the election. 

Without any attempt to take sides, let’s just say the market (meaning the sum of everyone participating) appears to be communicating that it’s not concerned with these legal challenges to the election results. If things changed and the results did get unwound (which, from an objective standpoint, seems unlikely), that would probably inject a ton of volatility into the mix. Volatility staying in check (for now, anyway) likely reflects widespread sentiment that ultimately things will proceed normally. If there’s any change in that sentiment, it would probably show up first in VIX, so it’s worth watching.

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

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