Comeback

Comeback.  Stocks rallied yesterday on the heels of Wednesday’s route.  News of a bounce in GDP growth and better-than-expected jobless numbers helped propel stocks higher.

 

N O T E W O R T H Y

 

High-Vee.  Depending on where you are in the country you would probably respond differently to this tagline.  If you are from the Midwest, you are probably preparing to drop me a note reminding me that it is Hy-Vee (by the way I like your notes).  Don’t worry, I know the grocery store that goes by that name, but I couldn’t resist a play on it for this morning’s notables.  I am, of course, referring to the US economy.  We have been throwing around letters and symbols to describe the post-pandemic economic recovery from as early as last February, before we were even “officially” in a recession.  The most prominent one is the “V-shape” which refers to a sharp drop followed by a quick recovery.  That one is the most optimistic one, of course. Then there is the “W-shape” which features a double dip drop before a final recovery.  That would not be fun.  The most dreaded one is the “L-shape”, which basically would leave the economy in a long-term, extended recession.  There are plenty of others, but there is one more I want to mention, and that is a “K-shape” recovery.  That refers to some areas of the economy recovering while others languish.  Yesterday, the Bureau of Economic Analysis released its Annualized QoQ GDP for the third quarter and results showed an astonishing +33.1% growth, beating economist estimates for a still-pretty-quick growth of +32.0%.  Of course, it must be mentioned that the big jump came after a record-breaking -31.4% contraction in Q2.  If you were watching yesterday, you would have seen headlines all over the place referring to the “V-shape” recovery in response to the release.  The upbeat release was the primary driver for the stock rally in yesterday’s session. While the top line growth number is certainly impressive, it is important to note that the economy is still a ways off from where it was a year ago, before the pandemic.  More importantly, there are some below-the-surface signs of continued struggle.  If we look at the breakdown of expenditures we can see big yearly spikes in Motor Vehicles and Parts (+8.7%), Furnishings and Durable Household Equipment (+10.0%), and Recreational Goods and Vehicles (+22.7%).  So, we are buying lots of cars, wash machines, tennis rackets, and boats.  In contrast, services like Transportation (-23.2%), Recreational (-31.8%), Food/Accommodations (-19.5%) all remain significantly below last year’s levels.  So we are not flying, attending concerts, dining out, or staying at hotels.  To sum it up, we are consuming a lot more things than a year ago while spending a lot less on services.  Now, I am sure that is not a surprising revelation given that we are still in the midst of a restrictive pandemic, but it is important to note that in order for the economy to fully recover, the service industry must recover as well.  So, yeah, on the top level it looks like we are in a “V-shape” recovery, but a bit of further analysis reveals that we may be in a “K-shape” recovery.  Meanwhile, a recent spike in virus cases threatens to dampen further growth in the 4th quarter (the one we are in now) and spill into 2021. For now however, let us enjoy the progress made.

 

AAPL-sauce.  I am sure you may have already heard that Apple announced earnings after yesterday’s close.  The company beat estimates on both revenues and earnings, but the stock sank in after-market trade.  The primary reason for the pullback was a slowdown in iPhone shipments, which were lower than analysts hoped.  Also announcing last night were Google, Facebook, and Amazon.com.  All of them also beat Wall Street estimates and Alphabet/Google traded higher while Facebook and Amazon slipped.  While all of these tech heavies have done well and remain extremely healthy, it is important to note that investors have very high expectations from them, which is why even the slightest hint of weakness can send a stock of that type tumbling.  We have seen that quite a bit in the past few weeks, especially from the growth stocks that have soared year to date.  Though it is unnerving to watch some of these stocks falter, their growth will likely resume once market volatility diminishes, but until then we can expect the rocky road to continue, reminding us that there is a cost to great expected upside, and that is volatility.

 

THE MARKETS

 

Stocks rose yesterday on positive news about the US GDP and an upbeat weekly jobless number. The S&P500 rose by +1.19%, the Dow Jones Industrial Average advanced by +0.52%, the Russell 2000 Index climbed by +1.19%, and the Nasdaq Composite Index jumped by +1.64%.  Bonds slipped and 10-year treasury yields added +5 basis points to 0.82%.

 

NXT UP

 

– Personal Income (Sept) is expected to show a +0.4% gain compared to last month’s -2.7% drop.

– Personal Spending (Sept) is expected to have remained at a constant +1.0% growth.

– PCE Core Deflator (Sept) may have decreased slightly to +0.2% from the prior month’s +0.3%.

– University of Michigan Sentiment (Oct) is expected to come in at 81.2, in line with earlier estimates.

– This morning Weyerhaeuser, Aon, Honeywell, Chevron, Under Armour, Colgate-Palmolive, L3Harris, Pitney Bowes, Charter Communications, Altria, Philips 66, Exxon Mobil, and Goodyear all beat Wall Street estimates, but it might not be enough to turn markets around after futures fell overnight in response to post-market tech earnings.

– Next week is another big earnings week.  Additionally we will get numbers on manufacturing, Durable Goods Orders, services PMI, and the monthly employment numbers.  Did I mention that election day is on Tuesday and the Fed will hold a policy meeting?  It will be a big week, so check back on Monday for calendars and details.

daily chartbook 2020-10-30