Encouraging Deere Outlook Adds To Economic Optimism Amid Vaccine, Stimulus Hopes

A day after a lackluster session, stocks seem poised to bounce back as investors continue to be optimistic about a stimulus package from Washington and positive economic impact from the vaccine rollout.

Treasury Secretary Janet Yellen added fuel to the stimulus hopes after yesterday’s closing bell when she told CNBC that a large relief package is necessary for the economic recovery. On the vaccine front, a study of Israeli healthcare workers has shown that the Pfizer Inc. PFE-BioNTech BNTX shot is 85% effective after just one dose.

In another encouraging sign for the economy, farm and construction equipment maker Deere & Company DE handily beat earnings estimates as revenue also came in ahead of expectations. Perhaps more importantly, the economic bellwether company lifted its full-year earnings guidance. And like those old ads saying nothing runs like one, shares of DE are up more than 5% ahead of the bell.

With things generally looking brighter, Treasury yields are making their way higher, with the 10-year yield above 1.3% and the 30-year yield near 2.1%. In addition to investors selling government debt because they feel less of a need for the safe-haven investments at the moment, Treasury yields have been rising because of concerns over potentially higher inflation.

Higher yields can dim the attractiveness of tech and other growth stocks, and the threat of inflation also can make investors worried about potentially tighter monetary policy. Plus, mortgage rates—which track closely with Treasurys—have been trending higher. Freddie Mac reported yesterday that the average rate on a 30-yr fixed mortgage rose eight basis points over the past week.   

Still, interest rates are low by historical standards. And the Fed has said it has no plans to stop its $120 billion a month bond purchase program anytime soon while forecasting the next rate rise in terms of years, not months. 

Headwinds Sap Enthusiasm

Yesterday, investor optimism took a hit from retailing giant Walmart Inc. WMT. Although revenue surpassed expectations, the company’s earnings came up short as WMT’s decision to repay property tax relief in the U.K. cost it 7 cents a share on the bottom line. 

Perhaps the most disappointing thing for investors came from its outlook, with the company seeing a relatively tepid earnings picture for the 2022 fiscal year. Because WMT is such a heavyweight in retailing, especially for lower-income shoppers, that outlook may not bode too well for the trajectory of the economic recovery for some of those hit the hardest. 

The labor market also held some disappointing news yesterday as new unemployment claims rose to 861,000 in the latest week. That was way above a Wall Street consensus for 775,000, and up from an upwardly revised 848,000 the prior week.

While the jobless news isn’t good for the economy, it can also be interpreted as heightening the pressure on Washington to get a new stimulus package hammered out, which would likely be a bullish scenario for the economy and market. Adding to the nuanced picture, housing data on Thursday were mixed, with housing starts coming in below expectations but building permits exceeding forecasts. 

See also: How to Invest Your $1,400 Stimulus Check

Economic, Earnings Reports On Tap

Next week’s economic calendar is pretty full. On Monday, investors are scheduled to get the latest leading indicators report from the Conference Board. Tuesday brings consumer confidence data, and new home sale numbers are on tap for Wednesday. In addition to the weekly jobless claims number, Thursday holds reports on durable goods, pending home sales, and gross domestic profit. Friday’s calendar holds more inflation data, including the core personal consumption expenditures price index, which is the Fed’s preferred inflation gauge.

As for this earnings season, there are still plenty of companies that haven’t reported yet. Next week’s slate includes reports from Royal Caribbean Cruises Ltd RCL, Norwegian Cruise Line Holdings Ltd NCLH, Home Depot Inc HD, Toll Brothers Inc TOL, Lowe’s Companies Inc LOW, NVIDIA Corporation NVDA, and Moderna Inc MRNA.

Taking that last one first, it could be interesting if MRNA sheds any additional light into how its vaccine rollout is going, a process that is linked to the economic recovery Wall Street Seems to have been pricing in. The cruise line companies might be able to provide more clarity on the reopening trade, while NVIDIA’s fortunes might offer a glimpse into the global chip shortage. Meanwhile, HD, TOL, and LOW could add additional color to what’s going on in the housing market, especially interesting in light of what interest rates are doing.

CHART OF THE DAY: COPPER TOP? Copper futures have hit their highest point since 2011 and are near the psychologically important level of $4 per pound. The red metal is often seen as a leading indicator of economic prospects as the commodity is widely used for applications like pipes in houses and wiring in automobiles and appliances. It appears the metal is being supported by demand in China and expectations of tight supply as the global economy gets back on its feet. There may also be bullishness because of the push for a domestic infrastructure revamp and greener economy. Of course, with such a strong run up it’s also possible that speculative traders have been piling in, not wanting to miss out on the upward momentum. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Green Progress: There’s no doubt that the coronavirus pandemic has been a global tragedy in terms of lives and jobs lost, but there has been at least one major silver lining. The decline in travel and decreased demand for electricity as governments have sought to curb the spread of the disease have led to a decrease in harmful emissions. A new report from BloombergNEF and the Business Council for Sustainable Energy says energy demand in the United States for electricity and transportation fell by 3.8% and 14.4%, respectively, helping reduce the nation’s year-on-year harmful greenhouse gas emissions by 9%. “This fall in emissions is the most significant on record and puts the United States on track to meet its 2025 Paris Agreement commitment, though energy demand and emissions are expected to rebound with widespread vaccinations in 2021,” the groups said. At the same time that domestic greenhouse gas emissions were receding, natural gas and renewable generation kept expanding their share of the resource mix, with a record 33.6 gigawatts of wind and solar capacity added to the grid in 2020. 

Green Pressure: With clean energy on the rise but climate change still a threat, there’s increasing pressure for companies to be green. “Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy,” Larry Fink, CEO of BlackRock, Inc. BLK, said in his annual letter to CEOs. A net zero economy would emit no more carbon dioxide that it removes from the atmosphere, and Fink noted that companies that aren’t quickly preparing themselves for the transition to such an economy “will see their businesses and valuations suffer.” 

Green Profits: The latest update on the Carbon Clean 200 from As You Sow and Corporate Knights shows that the group of publicly traded companies ranked by green energy revenues has outperformed carbon-heavy indices. And that’s not just for 2020 when energy companies tanked because of the pandemic. From July 2016 through the end of last year, the Clean200 companies generated a total return of more than 113% compared to the broad global MSCI ACWI Index’s jump of more than 78% and handily outperforming the MSCI ACWI Energy Index’s decline of more than 13%. “While we’re not promising any home runs, we are happy to report that the Clean200 now has more than a four-year track record of outperforming its high-carbon global counterparts,” the report said. 

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

Photo by Jed Owen on Unsplash