Another lesson I learned is that there is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. – Jesse Livermore, was an American stock trader
If there is anything certain about the stock and bond markets, it’s that volatility is here to stay. The wild swings in the markets were present again last week amid unprecedented uncertainty and by week’s end, the major stock averages posted healthy gains. The technology-heavy Nasdaq Composite Index led the way with a gain of over 5% while the S&P 500 Index surged 4.7% as the solid start to the third quarter earnings season continued. But the impressive gains in the stock market only put the S&P 500 Index at the same level it was about a month ago. Though financials such as Bank of America and Goldman Sachs continued their strong showing by reporting better than expected quarterly revenue and earnings, companies in other sectors of the market also posted excellent results. Blue chips such as Procter & Gamble, Johnson & Johnson, and IBM all topped expectations on both the top and bottom lines as investors breathed a sigh of relief that earnings results so far have not been as bad as feared. The bond market was also whipsawed during the week after both hawkish and dovish comments by Federal Reserve officials. On Thursday, Federal Reserve President Patrick Harker said that he expected the federal funds interest rate to rise well above 4% by year-end, which caused the 2-year Treasury yield to jump to over 4.6%. This comment coincides with the Fed’s plan to raise this interest rate by 75 basis points (a basis point is one hundredth of one percent) for the fourth straight time at its meeting on November 2nd, bringing it to a range of between 3.75% to 4%. However, a report from the Wall Street Journal on Friday indicated that some Fed officials were concerned about tightening too much with large rate hikes. This softening of their previous commitment with possibly smaller rate hikes sent the yield on the 2-year Treasury tumbling to below 4.5% and the stock market rallied on the news. While stocks are cheaper now than they were at the beginning of the year, they are more expensive relative to bonds and their higher yields than at the start of the year. Nevertheless, with better-than-feared earnings so far, low equity positioning, very negative investor sentiment and more reasonable valuations, stocks could be poised for a sustained rebound over the near-term.
Housing starts in September fell more than expected and existing home sales fell to a 10-year low as sharply higher mortgage rates are causing a severe slowdown in the housing market with the average rate of a 30-year fixed rate loan now over 7%. The National Association of Home Builders/Wells Fargo Housing Market Index in October fell to its lowest level since 2012. The Leading Economic Index in September fell more than expected, making a recession increasingly more likely. GDP growth will probably increase only about 1.5% in 2022 and could slow even further in the first half of next year. Industrial production in September bucked the weakness in economic data as it was much better than expected as the factory sector has held up well. Weekly jobless claims totaled 214,000, a decline of 12,000 from the previous week and less than the forecast of 230,000.
The Federal Reserve Beige Book, which is a summary of economic conditions in each of the 12 Fed districts, noted that the economy expanded modestly in most of its districts as supply chain disruptions eased. Although prices remain elevated, there also was some relief due to declines in commodity prices and fuel and freight costs.
For the week, the Dow Jones Industrial Average climbed 4.9% to close at 31,082 while the S&P 500 Index jumped 4.7% to close at 3,752. The Nasdaq Composite Index surged 5.2% to close at 10,859.
The preliminary estimate of third quarter GDP growth is expected to be 1.7% on an annual basis, compared to a contraction of 1.6% and 0.6% in the first two quarters of the year. New home sales for September are forecast to be far less than in August while September durable goods orders are expected to show a gain after declining slightly in the previous month. Both the October consumer confidence index and the University of Michigan consumer sentiment index are forecast to approximate levels from a month ago.
This will be the busiest week of the third quarter earnings season and the most prominent companies scheduled to report include Apple, Amazon, Alphabet (Google), Microsoft, Meta Platforms (Facebook), Intel, Texas Instruments, 3M, General Electric, General Motors, Ford Motor, Boeing, Waste Management, Honeywell International, Archer Daniels Midland, Coca-Cola, McDonald’s, Kimberly Clark, Bristol Myers Squibb, Abbvie, Merck, Visa, UPS, General Dynamics, Raytheon, Exxon Mobil and Chevron.
Not only will this be the busiest week of the third quarter earnings season, but all the world’s largest technology companies will be reporting their results as well. The technology sector comprises about 26% of the S&P 500 Index, easily the largest sector weighting of this benchmark. The S&P 500 is a market capitalization-weighted index, meaning the companies with the biggest market capitalizations (number of shares outstanding times the current market price of the stock) have the largest weightings in the index. The top four companies in the S&P 500 in terms of market-cap are Apple, Microsoft, Amazon and Alphabet (Google) and they comprise about 20% of the benchmark. With other technology companies such as Intel and Texas Instruments also on the agenda this week, at least 25% of the S&P 500’s total market value will be reporting their earnings. Last week, there were hopeful signs for technology profits this quarter as Netflix added 2.4 million subscribers, easily topping expectations, and earnings handily beat estimates. IBM also reported better than expected results on the top and bottom lines as its three main businesses – mainframes, software and consulting – all exhibited strong demand. Confronted with high inflation, rising interest rates, softening consumer spending, a strong dollar, lofty stock valuations and the possibility of a recession, the technology sector has been the worst performing sector of the market this year. Their earnings results this week could determine whether or not the worst is over for these stocks or if there is more downside.