(Monday Market Open) Markets begin another critical week with a tentative move higher, not too surprising since many political analysts predict gridlock as the result of tomorrow’s elections. There’s also some hope that Thursday’s October Consumer Price Index (CPI) could show a pullback.

Historically, political gridlock is viewed as positive for stocks. It typically means less likelihood of massive legislation getting passed in Congress, which generally means fewer regulations on large companies. As noted Friday, we don’t cover politics, but there’s no way to ignore the potential impact of Tuesday’s midterms on industries and the market as a whole, as control of Congress and legislative priorities hang in the balance. 

Turning from Washington to Asia, the latest economic data from China indicates that slowdown is growing, not slowing.  Trading Economics reports that China’s trade surplus was $85.2 billion in October, little changed from the same month the prior year and missing market forecasts of a surplus of $95.95 billion. Exports fell 0.3% year over year, the first drop since May 2020, amid lackluster overseas demand as cost pressures grew globally. 

Also in the China realm, Apple AAPL shares fell below $140 this morning after AAPL confirmed last week’s rumors by announcing that continuing COVID-19 restrictions in China are limiting iPhone production at two plants there. AAPL, with its high-level market capitalization, can have an outsized impact on major stock indexes, and it’s now sitting not far above its 52-week low.

For distraction, investors can focus on a week packed with scheduled appearances by Fed speakers, including three today, two Wednesday, and three more on Thursday, all with potential to move shares.  And while Q3 earnings season is winding down, a couple of influential companies are in the director’s chair Tuesday and Wednesday.

In all, we have a full, busy few days ahead of Friday’s Veteran’s Day bank holiday. The stock market is open Friday, but volume might be thinner than normal, which can sometimes mean steeper than normal gains and losses. However, volatility has been dropping for several weeks—before Monday’s open, the VIX was parked around 25.

Potential Market Movers

October’s CPI report Thursday will likely be a major touchpoint for investors and Fed Chair Jerome Powell himself, as he called out the CPI as a report the Fed will watch closely as it prepares for the next Federal Open Market Committee (FOMC) meeting December 13-14. The FOMC will actually have two CPI reports to parse by that time with the November report due December 13.

But we’re getting ahead of ourselves. Back to the CPI data ahead this week, which arrives after August and September reports were hotter than expected. In short, don’t be surprised if trading gets volatile Wednesday and stocks and bonds come under some pressure ahead of the data.

• In September, headline CPI rose 0.4% and core CPI, which strips out energy and food, was up 0.6%. Total CPI rose 8.2% year over year.  
• Early consensus on Wall Street is for a possible slight drop in core CPI to 0.5% in October, according to Briefing.com, which might be viewed as progress. However, higher crude oil prices could mean a rise to 0.7% in headline CPI.
• Food and shelter were leading inflation growth categories in the September report, so investors should be prepared to check those categories Thursday for any sign of slowing price growth.

Last week’s Nonfarm Payrolls data for October may be in the rearview mirror, but that doesn’t mean it won’t continue to have an impact. You can almost sense Powell’s frustration about this data revealing a job market that just won’t say uncle after months of central bank rate hikes. Unemployment ticked up slightly, but otherwise, it’s hard to find anything market- or Fed-friendly, including labor market participation dipping another notch to 62.2% from September’s 62.3%.

The Fed almost certainly wants to see higher participation numbers because more workers competing for fewer jobs could potentially moderate the hefty wage gains that are now driving higher household spending and pushing inflation even higher. Powell made it clear that taming prices is his biggest job right now. Hourly earnings rose 0.4% in October, by the way, up from 0.3% a month earlier and up 4.7% year over year. Again, what’s great for workers in the short term may not be so great for them long term if openings shrink in a rate environment that could keep moving upward for some time.  

House and Mouse Earnings Ahead

Earnings season is continuing with the finish line is in sight. Here’s a fresh scorecard:

• About 85% of S&P 500® companies have now reported, and 70% have reported a positive earnings per share (EPS) surprise, FactSet reported Friday afternoon.
• Additionally, 71% of S&P 500 companies have reported a positive revenue surprise.
• FactSet now sees Q3 S&P 500 earnings growth at 2.2%, which would mark the lowest earnings growth rate since Q3 2020

FactSet also noted that about twice as many S&P companies have projected negative EPS guidance for Q4 as companies projecting positive EPS guidance for Q4:

• Analysts expect almost no year-over-year change in Q4 earnings, with estimates averaging about -1%.
• That’s down dramatically from June 30, when analysts expected 9.1% Q4 earnings growth.
• Overall, eight of the 11 sectors are now projected to report a year-over-year decrease in earnings for the fourth quarter, led by the materials (-18.0%), communication services (-15.4%), and consumer discretionary (-14.4%) sectors.

Still, big names remain. Entertainment giant Walt Disney DIS is scheduled to report tomorrow after the close, and homebuilder D.R. Horton DHI will share results before the opening bell on Wednesday.

DIS offered solid results during its previous quarter, beating analysts’ estimates on revenue and EPS. Subscription growth at streaming service Disney+ rose more than expected to 152.1 million during its fiscal Q3, and spending at theme parks appeared to impress investors. However, the market may not care so much about that, but instead wonder more about what the sector has done lately.

Travel, casino, and hotel companies have offered generally decent earnings so far this quarter and their executives stress that consumer spending appears focused more on “experiences” as people emerge from the pandemic. DIS could be another beneficiary of in-person travel and entertainment but faces tough competition in the streaming segment of its business from Netflix NFLX, which added far more subscribers than expected last quarter. If NFLX saw growth because of organic market strength, that’s one thing. But if it gained market share over DIS and others, that’s another.

Meanwhile, the housing market has been reeling from Federal Reserve rate hikes that recently pushed average 30-year mortgage rates above 7%. In its last quarterly report, D.R. Horton missed analysts’ revenue estimates and cut guidance. Considering U.S. new home sales fell nearly 11% in October, homebuilders like DHI aren’t in an envious spot. However, demand has remained relatively strong for new homes, and prices have been sustained in part by lower inventories. The DHI earnings call will give investors a chance to get a porch-eye view of the housing market.

Reviewing the Market Minutes

After a mostly unimpressive start Friday on Wall Street, stocks sprinted near the close to a much higher finish.

• The Dow Jones Industrial Average® ($DJI) rose 401 points, or 1.26%, to finish at 32,403.22.
• The Nasdaq® ($COMP) climbed 1.28% to 10,475.25. The Russell 2000® (RUT) rose 0.93% to 1,795.88, and the S&P 500® index (SPX) climbed 1.36% to 3,770.55.

The late bull run in stocks might have reflected some easing in Treasury yields after several Fed speakers sounded a bit less hawkish Friday. Still, yields finished the week higher across the spectrum, with the 2-year Treasury yield up 25 basis points to 4.67% and the 10-year Treasury yield (TNX) up 15 points to 4.16%.

Weakness in the U.S. Dollar Index ($DXY) Friday also might have eased pressure on stocks (see the chart below).

Three Things to Watch

Amazon’s AMZN distressing stretch continued last week. Shares fell 2% to lows not seen since the pandemic sell-off in March 2020 as the company announced a hiring freeze for its corporate workforce. In a statement, AMZN blamed an “uncertain” economy and said the freeze could last several months. It’s a timely message as major retailers report earnings mid-month and holiday shoppers are set to return to brick-and-mortar stores in the greatest numbers since the COVID-19 lockdowns. The latter is not particularly helpful news if you’re AMZN. The company’s statement didn’t cite specific issues related to any particular business, so it’s hard to tell if this move reflects problems on the retail or cloud side of the company. Could it be both?

Whatever the case, one complaint some investors have had about AMZN shares from all the way back to the late-1990s is the high price of the stock versus the amount of profits the company collects. So did this latest blow bring AMZN’s price-to-earnings (P/E) ratio to levels that might quiet some of the complaints? There’s no way to please everyone, of course, but AMZN’s current P/E is still near 80, according to analyst calculations, so even at the current price, no one will be likely to confuse AMZN shares with value stocks known for their low P/E. As for AMZN’s current P/E levels, they’re even a standout within the so-called “FAANG” category of stocks. None of the other FAANGs even come close.

Beating the Taxman: As a new federal tax on companies buying back stock goes into effect in 2023, major businesses look like they’re trying to get ahead of Washington by ramping up buybacks by year-end. According to a new report from Goldman Sachs’ (GS) corporate trading desk, firms are on track to repurchase about $1 trillion of U.S. stocks this year—the most in history and above 2021’s $992 billion record. Despite broader market volatility, the rate of buybacks points to the still-robust health of U.S. companies, according to GS corporate trading chief Neil Kearns. A late-year buyback boom might also be welcomed by investors who’ve been struggling with bear markets on Wall Street. Kearns thinks the new tax might be “a little painful” for companies but added that the impact of rising rates on the economy and the path of corporate earnings will have the most profound impact on capital allocation.

Hit the Ceiling: One longer-term item worth noting as voters go to polls tomorrow is the possible impact of a potential Republican Congressional victory on next year’s U.S. debt ceiling deadline, Barron’s recently noted. Several times in the recent past, debt ceiling battles raged when Republicans controlled all or part of Congress while a Democrat occupied the White House. In 2011, several credit rating agencies lowered their ratings on the U.S. federal government under that scenario. The United States has never defaulted, of course, but this perennial battle—if election results go that way—could take the spotlight soon if divided control returns Washington. If it’s a repeat of 2011, the stock market might see a negative impact.

Notable Calendar Items

Nov. 8: Election Day and expected earnings from DuPont (DD), AMC Entertainment (AMC), Occidental (OXY), Walt Disney (DIS), and Wynn Resorts (WYNN)

Nov. 9: September Wholesale Inventories and expected earnings from D.R. Horton (DHI), Wendy’s (WEN), and Rivian (RIVN)

Nov. 10: October Consumer Price Index (CPI) and expected earnings from Ralph Lauren (RL), AstraZeneca (AZN), and Dillard’s (DDS)

Nov. 11: Preliminary November University of Michigan Consumer Sentiment

Nov. 14: Expected earnings from Tyson Foods (TSN)

Nov. 15: October Producer Price Index (PPI), November Empire State Manufacturing, and expected earnings from Home Depot (HD) and Walmart (WMT)

Nov. 16: October Retail Sales and Industrial Production, and expected earnings from Lowe’s (LOW) and Target (TGT)

Nov. 17: October Housing Starts and Building Permits, November Philadelphia Fed Index, and expected earnings from Ali Baba (BABA), Kohl’s (KSS), and Macy’s (M)

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

 

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