Tilray Shares Rocket Higher After Combining With Aphria To Form Largest Cannabis Firm

Can “turnaround Tuesday” extend to Wednesday? Early signs are pointing green. Spillover optimism rules the roost as investors wait to see if there’s a stimulus deal. The other big question of the day is whether the Fed can put together the right combination of words and deeds to keep things humming as it wraps up its meeting later on. 

November’s retail sales came out before the open and didn’t do much for the optimism trade, falling more sharply than Wall Street had expected. The 1.1% decline was steeper than the negative-0.3% average estimate, but might actually put more pressure on Congress to act. Shutdowns and job losses appear to be taking a toll on consumers.

Besides stimulus and the Fed, Friday’s quadruple witching looms. All this combined raises the chance of some quick movements one way or the other over the next few days, so keep your seatbelts strapped. Tesla Inc TSLA being added to the S&P 500 is another factor that could have large traders moving in and out of the market. 

Volume could also pick up after the Fed meeting, as it sometimes does. The Fed is widely expected to leave things alone, but also to project a soothing vibe before going home for the holidays. That could mean pivoting to buy more longer-term bonds to keep mortgage and other borrowing costs down, but it’s not a slam dunk that will happen today. See more on the Fed below. 

Another thing to consider in these final weeks of 2021 is a recent Bank of America Corp BAC survey showing that money managers overseeing $534 billion in total are underweight cash for the first time since May 2013. The news, reported by Bloomberg, could be a contrarian signal because it shows optimism at high levels around “risk-on” assets like stocks. When so much cash is already in the market, there’s less around to potentially take things even higher. 

Also keep an eye on crude. It’s flat for now, but some analysts wonder if it might start to flirt with $50 a barrel. That wouldn’t be the best news for airlines and other transportation companies. Airlines continue to deal with weak demand, but we’ll have to monitor and see how travel is over the holidays.

Fed Ahead, With Asset Purchase Program Front And Center

Today’s focus turns to the Fed as Chairman Jerome Powell and company wrap up their meeting at 2 p.m. ET, followed by Powell’s press conference. We’ll have more later on what happens, but the likelihood of any rate move is about as dim as the chances of the New York Jets making the playoffs this year (they’re mathematically eliminated).

Instead, investors may be listening for any hint of the Fed’s plans on asset purchases. Some analysts think the Fed might want to turn up the volume on asset buys in order to keep yields from gaining too much ground, or maybe pivot toward purchasing more longer-term bonds. The 10-year yield sits near 0.9%, which is historically soft but about double where it was at the all-time lows earlier this year when the pandemic first hit and investors ran toward bonds. If the 10-year climbs above a certain point, it could slow demand a little when the Fed wants consumers and companies to spend as much as possible to keep the economy growing. 

On the other hand, some analysts think the Fed might be relatively happy with where things are now, and might not hint at any changes in its asset-purchase program. The idea could be to wait and see, something the Fed often does. It could be more inclined to do that now with rates still low and a new administration taking office next month. Maybe they won’t want to upset the apple cart with so much other change going on, and might also want to monitor if a fiscal stimulus (assuming it happens) has any impact. 

The other thing we get from the Fed today is a longer-term policy path chart (aka the “dot-plot”), something it releases once a quarter. These are educated guesses, because even the smartest minds can’t be certain what might happen to the economy between now and, say, 2024. However, if there are signs of Fed officials starting to agree on when rates might trend higher, it could be worth a little attention. Remember, the Fed has promised to keep rates near zero for the long-term. There’s no real reason to think they’re ready to move away from that anytime soon. 

The Fed also is scheduled to release updated economic projections. These might get a close look from Wall Street, especially because some of the recent economic data haven’t been much to write home about. 

Apple Shines Again

After shyly hanging out on the sidelines for a few months, Apple Inc AAPL shares stormed back in a big way yesterday with a 5% gain. That means the stock is still below its all-time high of around $134 reached in early September, but up almost 20% from recent lows. Part of this is related to the news we alluded to yesterday about signs of improving iPhone demand, but there’s more to the story. 

The rise in AAPL accompanies recent gains in other manufacturing stocks amid optimism that the economy can recover next year and raise consumer demand for actual objects, not just stuff we do in cyberspace. This could be very supportive for AAPL, because when you think about it, most of AAPL’s revenue comes from stuff you can hold or touch. 

That’s not necessarily the case with some of the other mega-cap companies like Alphabet Inc GOOGL or Facebook, Inc. FB, and those two also probably face more regulatory pressure than AAPL in both the U.S. and in Europe. Even Amazon.com, Inc. AMZN isn’t as much of an “object” seller now, since the cloud is one of its key divisions even though it continues to sell books and groceries.

In other corporate news, shares of cannabis firm Tilray Inc TLRY jumped 28% in pre-market trading after the announcement of a plan to combine with Aphria Inc APHA to become the largest cannabis company in the world, according to media reports. 

CHART OF THE DAY: C IS FOR CRUDE, COPPER. Over the last three months, both crude (/CL—purple line) and copper (/HG—candlestick) have been steadily climbing. This coule be seen as a sign of investor faith that the industrial economy is improving, since both these commodities are widely used in manufacturing and transportation. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Has Santa Already Come to Town? Investors hoping for a so-called “Santa Claus rally” in the final week of the year might not want to leave too many stockings pinned to the wall. While there’s no way to be sure where things might go, one school of thought is that the typical end-of-the year rally might have gotten pulled forward a few weeks. Since closing the month of October at 3270, the SPX has roared back to 12.6% gains through Tuesday, and is now up more than 60% from the March lows. Which has some analysts wondering if we’re set up for a possible “buy the rumor, sell the fact” type of situation if and when a stimulus comes through.

Santa also may face a tough time getting down Wall Street’s chimney this year thanks in part to the coming change in Washington on Jan. 20. As we’ve noted here a couple times, investors might be worried about possible changes to the tax code under soon-to-be President Biden, some of which conceivably wouldn’t favor investors as much as what we have now. This could lead to a little profit taking in the final two weeks of the year as a portion of investors seek to sell under the current tax regime. Which stocks might be most prone to pressure from tax-related selling before Jan. 1? Potentially the ones that had the biggest run-ups in 2020. You can probably guess which those are, and hopefully, you had a few in your stocking last Christmas. 

Staking Claims: The Fed meeting dominates today’s news calendar, but focus quickly shifts to tomorrow morning’s weekly initial jobless claims data. Last week’s report spooked the market a bit, rising 19% from the prior week to 853,000, the highest in more than a month. Heading into Thursday, analysts expect a slight drop to 795,000, according to research firm Briefing.com, but that’s still above some recent weeks where claims dropped to nearly 700,000.

A little perspective here: To some extent, none of these numbers are anywhere near where economists would like to see them. Whether it’s 700,000 or 800,000, it’s bad news either way. The number had been below 300,000 a week for years before the COVID-19 crisis came along. Second, no single week is a trend. If claims dropped last week, great, but it’s not something to necessarily hang your hat on. The trend has been downward even when you take last week’s bad number into account. What everyone wants to see is a steady drop week to week, but that almost never happens. There are just too many variables. One worry is that all the recent shutdowns put more people out of work, and there’s the looming concern that if Congress doesn’t act soon, things could get worse before they get better. 

Small Caps Keep Their Lead: It’s easy to look at how well the S&P 500 Index (SPX) has done since the election (up double digits to new record highs) and get the wrong idea about where things stand. First of all, the SPX is up just 3% from Sept. 1, because September and October were pretty rough. Second, the Russell 2000 Index (RUT) of small-cap stocks has absolutely pounded the SPX since Sept. 1, rising more than 24%. 

This likely reflects the move toward “value” and “cyclical” stocks you’ve probably heard about, and those types of companies tend to be in cyclical sectors like Financials and Industrials. Those two happen to be among the heaviest-weighted sectors in the RUT. 

Tuesday saw this trend continue, with the RUT’s gains nearly doubling the SPX. These gains could be related to hopes for a fiscal stimulus putting more money in peoples’ and businesses’ pockets. Cyclicals tend to do best when the economy is growing, and small-caps are more exposed to the domestic economy, where any fiscal stimulus would probably have the biggest impact. The RUT is actually outpacing the SPX for the year, something that hasn’t happened since 2016.

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

Photo by Jason Briscoe on Unsplash