Lyft, GM Earnings Impress, Lifting Shares Ahead Of Uber's Report Slated For Later

If you wanted more evidence of reopening progress, Lyft’s LYFT earnings arguably provided it yesterday.

The ride-sharing company saw shares post big pre-market gains after reporting a narrower than expected loss, above consensus revenue and solid guidance for the rest of the year. Now Uber UBER, which reports this afternoon, has a tough act to follow. Shares of LYFT spiked more than 5% in pre-market trading. 

“More people started moving again” in Q1, LYFT’s chief financial officer said, which is the kind of thing you want to hear if you’re excited about getting back to normal. Average daily ride volume grew each month, Lyft said, with the steepest recovery in March. And for people who miss traveling by plane, the good news is that LYFT’s average daily airport rides were up more than 65% in April relative to January. 

What’s more impressive is that all this happened even when most people weren’t back at work yet. More companies are starting to talk about getting employees back to the office, so that could give ride-sharing companies an opportunity to do even better. 

Then this morning, General Motors GM easily beat Wall Street’s earnings expectations but came up just short of consensus on revenue. It looks like investors aren’t punishing the company for that small miss, as shares rose more than 3% in the pre-market hours. Maybe the fact that GM reaffirmed its 2021 guidance was enough to soothe any hurt feelings over revenue.

The reaffirmed guidance from GM included an impact from the global shortage of semiconductor chips, by the way, so it doesn’t look like that’s going to necessarily handicap the company. This was an important thing for them to get across. 

The solid earnings from these two appeared to help stabilize a market that was going downhill yesterday. Major indices built in slight gains ahead of the opening bell. Earnings drive stocks, and the nice run of earnings continues.

Forward progress early today might also reflect a bit of spillover buying after yesterday’s late comeback from the lowest points of the day, but it’s unclear how much buying interest remains with stocks still near record highs. It looks like we may bounce around in a range for a while as we get ready for the jobs report on Friday (see more below). There’s also ISM Services data later today.

Not Like Old Times: Yellen Rate Hike Talk Spooks Stocks

Maybe you remember that time when, as Fed Chair, Janet Yellen gave Wall Street a scare by talking about how rates might need to rise to make sure the economy doesn’t overheat. 

If you don’t, it’s understandable, because it’s hard to remember many occasions when Yellen—  a well-known dove—did that back in the day. While Yellen did raise rates slowly over the course of her time at the Fed, she did it very cautiously and without fireworks. Also, the economy really wasn’t in much danger then of overheating, with slow growth being the big problem. That’s why it might have felt a bit disconcerting to hear those words from her as Treasury Secretary yesterday, and helps explain the market’s subsequent dive.

It wouldn’t be fair, however, to just blame Yellen. First of all, she didn’t specifically call for a rate hike. She just said rates might have to rise to avoid the economy overheating, implying more of a natural progression considering the strong growth we’ve seen so far this year. Already, many analysts see the 10-year yield on a path back toward 2%, though that’s separate from the Fed raising rates. 

Yellen also walked back her words later Tuesday, according to The Wall Street Journal, saying she wasn’t predicting nor recommending that the Federal Reserve raise interest rates, and doesn’t think there’s going to be an inflation problem. 

Second, the market was on its heels even before Yellen spoke. Almost none of the big Tech companies got a lift last week despite overwhelmingly impressive earnings results, and some “mega-cap” Tech stocks like Apple AAPL and Tesla TSLA still haven’t made it back to their February highs even while the broader market posted all-time peaks in April. 

No Joy In Tech-Ville Once Again

It was gloomy again on the Tech stage yesterday, with the Nasdaq (COMP) leading all major indices on the wrong side of the ledger with a nearly 2% decline. All across Tech, you could see the slow bleed, from cloud stocks to semiconductors to software. There was no escaping on Tuesday. 

In fact, the semiconductor sector is on the verge of entering correction territory, defined as a 10% drop from the recent high point. The Philadelphia Semiconductor Index (SOX) is down 9% from its most recent peak posted a month ago, with stocks like Nvidia NVDA and Broadcom AVGO under pressure yesterday. 

The good news? Stocks did make a nice comeback from their lows by the end of the day Tuesday, maybe a sign that some “buy the dip” remains in the market. That’s been a near-constant throughout the year, preventing major sell-offs from gaining steam. At yesterday’s intraday low of 13,396, the COMP was still above its 50-day moving average of 13,334, and its failure to seriously test that technical level may be evidence of support. Meanwhile, the S&P 500 Index (SPX) also remained well above its 50-day moving average of 4014 on Tuesday. 

As we noted in yesterday’s chart, the 50-day moving average has been a major technical support level for the SPX all year, and it would probably take a drop below that to really change the tone of this market. Having said that, it does seem like there’s some exhaustion developing here, which isn’t too surprising when you consider the year we’ve had so far.

The SPX climbed more than 5% in April amid impressive earnings and data. Last week’s Q1 gross domestic product growth estimate from the government came in at a sizzling 6.4%, and companies are reporting about 45% Q1 earnings growth, on average. All this may have investors scratching their heads and wondering if most of the good news has already been priced in. Especially when you consider that after Q2, many analysts see slower earnings growth, with the Fed expecting GDP growth to ease after this year. 

That’s why you might be seeing more pressure on the high-flying Tech and other growth and “momentum” stocks. Instead, it’s Energy, Financials, Materials and Industrials picking up the ball and running with it these last few days, perhaps getting help from ideas that the government’s stimulus and proposed infrastructure spending could help those “cyclical” areas. 

Despite Rate Warning, Bonds Hold Their Ground

Yellen’s words yesterday may have given the Financials a little extra assistance, since higher rates would probably help their profit margins. The 10-year yield’s rally from 0.9% at the start of the year to current levels just below 1.6% already has helped the Financial sector post the second-best gains of any sector year-to-date at more than 20%. 

What’s kind of interesting is that despite Yellen’s warning, the bond market really didn’t lose much ground. The 10-year yield finished Tuesday at 1.58%, well below last week’s highs, so maybe investors realize that whatever Yellen may say, she’s not the one with her hand on the tiller any longer. 

That hand belongs to Fed Chairman Jerome Powell, who just last week reminded Wall Street why he doesn’t think it’s time to start “thinking about thinking about” tapering the Fed’s monetary support. 

So the jury could end up being Fed funds futures at the CME, which allow investors to trade the odds of a Fed rate move. By late Tuesday, futures showed an 11% chance of the Fed raising rates by the end of this year, down from 12% on Monday and from 15% a week ago.

Payrolls Loom Friday, With Meteoric Gains Expected

The Fed, like the rest of us, is probably going to have close eyes on Friday’s payrolls report. Analysts expect amazing job creation of around one million for the month of April, according to research firm Briefing.com. That’s after growth of 916,000 in March, led by a rebound in the services category as reopenings accelerated among restaurants, hotels and other consumer venues. 

Keep an eye on the services number in Friday’s report, because the huge gain in these kinds of jobs—which tend to be lower paying—actually helped push hourly wages down 0.1% in March. It could be important for future economic growth to see wages gain more ground, especially now that the stimulus checks have basically all been mailed and spent or saved. 

Higher-paying construction and manufacturing sector job growth rebounded last time out, but that was after slowness earlier this year. Hopefully, we’ll see those two sectors build on their March gains.

CHART OF THE DAY: RED SOX. The Philadelphia Semiconductor Index (SOX—candlestick), got slammed on Tuesday, falling below the 50-day moving average (blue line). The entire Tech sector has been under pressure, but chip stocks are among the worst-performing sub-sectors of Tech over the last half a month or so. Data source: Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Hey Mister, Need A Shine? Remember that old story about the investor who sold all his stocks just before the 1929 crash after a shoe-shine boy gave him a tip on a “hot stock” to buy? Consider this: Right now, 67% of money managers are bullish on stocks, according to a Barron’s survey. A separate survey—by the American Association of Individual Investors—showed that allocations to the stock market hit a nearly three-year high of 70% in March. Margin debt is at record levels, The Wall Street Journal reported, and nearly every time indices fell so far this year, a wave of “buying the dip” seems to roll in to take them back up. 

In the past, you’d see all of this and say, whoa, maybe it’s a sign of a market that’s about to top, like in 1929 when everyone wanted to buy. This time, it’s unclear if the contrarian signals still function the same way. A bunch of things work against it, including historically low bond yields, Fed policy (the old saying is “don’t fight the Fed,”), the emergence of the U.S. as one of the countries having the most successful vaccination and reopening economies, and FOMO, or “fear of missing out.” Also, investors are so used to gains, many of them might have forgotten or never experienced what it’s like to have a prolonged bear market, so they might be missing the message that they would have understood in the past. All this plays into thoughts that the contrarian signals often seen ahead of a major sell off may be less of a sure thing. 

How Long Can “Holding Pattern” Last With Yields? We’ve basically been in a holding pattern on rates, and everyone’s wondering how long it might last. The government’s first read on Q1 gross domestic product of 6.4% offered more evidence of a strong economy, but it was slightly below the average analyst estimate and way below some of the most optimistic ones of 7.5% or higher. This might give the market a little pause before bidding the 10-year Treasury yield up any further. Still, most analysts seem convinced we’re on the path toward 2%, well above where it’s been hanging out between 1.55% and 1.65% lately. 

As noted here before, a 2% or even 2.5% yield isn’t necessarily a huge impediment to future equities traction. In fact, it’s still historically low. As recently as 2018, the yield was above 3% for a while, and Q4 of that year saw stocks nearly fall into bear market territory (defined as down 20% from highs). So that, along with historically strong valuations of the major indices, might be on peoples’ minds as they nervously watch rates. There’s also the fact that “growth” stocks, including Tech, wallowed into a 10% correction back in February when yields were cruising steadily up.

Vaccines Could Improve Health In More Than One Way: Ever since the pandemic began, health companies have been handicapped by falling procedure demand as people stayed home. With people not getting screened as much for diseases like cancer, demand for drugs to treat those conditions also fell. Even as recently as Q1, this continued to be an issue. Merck MRK, in its recent earnings call, said cancer screenings remain lower than normal due to Covid, which has resulted in fewer patient diagnoses and reduced new patient starts for many oncology drugs, particularly in areas like lung cancer. 

In addition, Pfizer PFE said on its earnings call it’s seen increased enrollment in PFE’s Patient Assistance Program that provides drugs free of charge to low-income patients, especially in regards to Ibrance, a breast cancer drug. “We believe this increase is due to COVID-19-related economic hardships that are affecting particularly the demographics of the Ibrance patient population, and we do expect this to normalize over time as the economic impact from the pandemic subsides,” said Albert Bourla, Pfizer’s Chairman and Chief Executive Officer, during the call yesterday. 

With the rollout of the COVID vaccines, especially among the elderly with cancer, MRK also said it expects cancer screenings to get back to normal and raise demand for cancer therapies. PFE and MRK are two of the biggest, but the entire Health sector might be worth watching here for potential improved traction with so much progress on the vaccination front.

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

Image Sourced from Pixabay