Although investors fear that higher interest rates, inflation, and energy prices are potential headwinds, these indicators reflect economic vibrancy, supporting higher stock prices.
*The growthy names will get a boost not just from some of the earnings stuff but because interest rates are lower. Interest rates are temporarily lower because of the fact that there is some uncertainty from the tax perspective and what that might do. We do know the Fed is going to taper, that has pretty much been priced in but now you have a lot of talk about what the future of the Federal Reserve may look like.*
*In contrast, the flattening curve served to weaken financials, while a drop in crude prices after data on U.S. stockpiles pulled energy names lower, with both sectors suffering their biggest one-day percentage decline in five weeks. JP Morgan shares fell 2.08% and Exxon Mobil (XOM.N) declined 2.60%.*
A solid start to earnings season has helped push the S&P 500 (.SPX) and the Dow (.DJI) to all-time highs this week, as investor concerns over the ability of companies to navigate supply-chain bottlenecks, labor shortages and rising price pressures have been allayed for now.
*Profits for S&P 500 companies are expected to grow 37.6% year-on-year in the third quarter. Out of the 192 companies that have reported earnings, 82.8% have topped analyst expectations, while 79% have exceeded revenue estimates.*
This earnings season has been about pricing momentum and whether consumers are able to handle surging costs, So far it seems the consumer can handle it.
Strong results have been key to pushing the major averages to new highs. The S&P 500 has rallied 5.6% in October, on track for its best monthly performance since November 2020. The equity benchmark reached its 57th record close of 2021 on Tuesday.
*The move into the growth names like technology stocks was also triggered after some U.S. Senate Democrats proposed taxing billionaires' unrealized gains from their assets, while concerns around the timing of rate hikes resurfaced ahead of the Federal Reserve's policy meeting next week.*
*Meanwhile, in a surprise move Wednesday, the Bank of Canada said it would abruptly end its bond buying program and warned of prolonged inflation through 2023, while also signaling it may hike interest rates sooner than expected, the second quarter of 2022.*
Jim Vogel, fixed-income strategist at FHN Financial, attributed sharp moves lower in long dated U.S. Treasury yields on Wednesday, their biggest decline since July, to an “over reaction” by investors to the sudden change of tone by the Bank of Canada, adding that “most were looking to the ECB tomorrow for possible dovish central bank messaging, not north for actual hawks today,” in emailed commentary.
*The worry for investors is that global central banks are in a “Catch-22” situation, with inflation threats at one end, but if a correction occurs, they also may be less willing to step in to backstop markets. It may be that inflation is the bigger threat of the two.*
*Lower U.S. Treasury yields helped to support technology stocks whose valuations are sensitive to bond yields, while good earnings reports from Google and Microsoft late Tuesday also helped the Nasdaq to eke out a gain Wednesday.*
*Long bonds continued to outperform shorter-maturity U.S. debt ahead of the government’s auctions of five-year notes Wednesday and a seven-year sale Thursday. The yield difference between 5- and 30-year bonds narrowed to as little as 78 basis points, the lowest since March 2020.*
Several other global indicators also look favorable for U.S. stocks, including excess global liquidity and retreating global shipping rates from highs set in early October, which could indicate the worst of supply-chain bottlenecks could be behind us.
We are in a Goldilocks range, not just for tomorrow, but likely in the next five months.
By: via @AlliesFin Serve Stock Market
