Capital markets perspective: Fearing the best, hoping for the worst
Capital markets perspective: Fearing the best, hoping for the worst
Capital markets perspective: Fearing the best, hoping for the worst
That’s the kind of thing you might say about a toxic ex, a romantic rival or...I don’t know, the Kansas City Chiefs maybe. But from time to time that’s exactly what the market does, especially around those awkward periods when bad news is actually seen as good news. That’s most common when the Federal Reserve (the Fed) is in play, and we’ve been bouncing back and forth between “bad news is good” and its inverse for weeks now.
Last week seemed to fit the “good news is bad” mode best. Consider last week’s labor market data: On Tuesday, the Bureau of Labor Statistics reported that the number of job openings had fallen to 7.44 million and the ratio of jobs- to job-seekers had inched back toward 1.0.1 That’s bad news if you’re a job-seeker or an economist, but apparently not problem if you’re the US equity market — stocks did just fine after the release. Then on Wednesday, ADP’s national employment release came in better than expected, suggesting the labor market might not have cooled at all. That in turn created all sorts of fear that Friday’s payroll number might come in hot too, causing the Fed to back off any chance of its super-size cut in September. Add in so-so earnings from a few market darlings (more on that below), you got a fairly big sell-off on Thursday.
Then on Friday, those fears evaporated faster than a jump-scare in a Halloween movie when the actual payroll number came in at a cycle low of just 12,000 jobs. Markets rose on the ‘bad’ news, retracing a portion of Thursday’s losses in the process. In retrospect, any fears of a big payroll print might have been misplaced to begin with. After all, ADP’s numbers don’t correlate all that well to the Bureau of Labor Statistics’ (especially now that response rates for the BLS’ household survey are now poor enough to rate their own comment in Friday’s press release), and October’s figure was skewed by storms and an ongoing strike at Boeing. (The conclusion of which, by the way, could put more than 30,000 jobs back into the figure as soon as next month given last week’s endorsement by the union and this week’s vote by the rank-and-file). But Friday certainly felt like a small relief rally, with some of the sectors hit hardest by Thursday’s Halloween freak-out also bouncing back biggest on Friday’s benign payroll number.
There’s plenty more from last week to cover. We could, for example, point out that the Bureau of Economic Analysis’ first guess at third quarter GDP was indeed driven higher by a spendy U.S. consumer,2 but that was made obvious weeks ago by retail spending data (and last weeks’ income-and-outlays report3). Or we could go into great detail discussing how the manufacturing sector is still under stress, illustrated by still-weak ISM4 and PMI5 reports (and a downright anemic MNI Chicago PMI6), but that would feel like piling on: That these and similar data have been saying pretty much the same thing for months.
Now, about those earnings...
Macro data often takes a back seat when earnings season is in full-swing, and it’s easy to guess that last week’s results were a mixed bag. Enthusiasm for AI doesn’t seemed to have waned much, because Amazon, Alphabet/Google, Meta and Microsoft each hinted that they would continue to spend hand-over-fist to build out the AI ecosphere, even as returns to the theme remained underwhelming for some in the here-and-now. As far as the consumer is concerned, payments powerhouses Visa and Mastercard each assured us that the U.S. consumer was healthy and still happy to spend (which was, for the most part, echoed in Thursday’s income-and-outlays report, which showed spending growth once again outpaced income growth7). But any positive read-thru was muddied by weak guidance in autos (Ford, on Monday) and travel (Jet Blue, on Tuesday). And if the new home market is your preferred way to read into consumer trends, the news wasn’t great: DH Horton missed estimates and pushed expectations lower for the coming year, partially because it’s having to incentivize buyers with rate buydowns to move homes — to the detriment of its own profit margins.
For its part, Starbucks — purveyor of one of the most discretionary spends in consumer discretionary — seemed to tell its customers “cool it with the no-foam double whip,” because it’s making a deliberate effort to rein in drink customization and retool its menu as it refines its staffing model in a bid to reduce costs to contend with slower store traffic. Sales were particularly pressured in China, where the economy is grappling with a property crisis and a dramatic slowdown in consumer spending. Trouble in China also pressured Caterpillar — one of my favorite ways to triangulate global growth — when it missed the current quarter and revised its guidance lower as a result of weak sales to the Middle Kingdom.
But for those looking for a sign that we might be turning a corner down a dark(er) alley, maybe one of the most important earnings releases from last week came and went somewhat unnoticed, on Saturday. That’s when Warren Buffet’s Berkshire Hathaway reported its highest cash balance ever: $325 billion and change. Buffet’s company paused not only buying other companies, but also buying its own shares — which is sometimes viewed as a signal that management is less-than-constructive in its outlook. The Oracle of Omaha (as some of his shareholders have nicknamed Buffett) still gets a lot of props for his acumen, making Saturday’s release — with a third of a trillion dollars of cash in reserve — something of an eyebrow-raiser.
So far, third-quarter earnings season has fallen somewhere between ‘okay’ and ‘almost weak enough to take notice’ when viewed in aggregate. The number of S&P 500 companies beating estimates stands at roughly 75%; that sounds good, but it’s also the lowest since mid-2022, when recession talk was all the rage.8 On the other hand, the number of companies actually missing estimates is only slightly higher than in past quarters. So there’s no reason to panic yet, especially since those figures are less-than-terrible and we’ve still got a week or two to go before earnings season winds all the way down. But it’s probably the whole “bad news is good news” thing doesn’t really apply to earnings, so it would feel a whole lot better to me if we could finish strong. Stay tuned.
What to watch this week
It’s finally here!
No, not the Holiday season (although by Saturday my neighborhood Lowe’s had already ditched its Halloween display and replaced it with Christmas decorations...sheesh!). Instead what I’m referring to is the Wednesday after election day — that magical morning when we all wake up and no longer have to worry about our mailboxes being over-stuffed with postcards from our favorite (or not-so-favorite) political parties, or proponents/opponents of ballot measure such-and-such jamming our text messages with emotional appeals to vote yes or no, or ceaseless (and slightly nauseating) attack ads aimed at anyone and everyone campaigning for even the most inconsequential of public offices. Gone, too, will be the breathless media coverage that we instantly grew sick of months ago when they started broadcasting it.
We’ve said in the past that while elections can sometimes drive performance at the company-, industry, and sector-level, it’s really hard to find much evidence that who wins the White House or loses Congress will drive broad market performance for more than a few days. There’s little reason to expect this one to be much different, although it would be a mistake to totally ignore the idea that the unusually ugly political environment we find ourselves mired in introduces a few tail risks that feel unique, at least here in the first-world. But either way, we will probably wake up Wednesday to a calmer, saner world where it's safe to turn on your TV or listen to your car radio again.
Or at least let’s hope so.
Assuming that election day and its aftermath are both a non-event, the biggest thing on the radar this week will be Wednesday’s rate announcement from the Federal Reserve. Market expectations have bobbed-and-weaved since Powell’s super-cut in September, but an overwhelming consensus has now formed around a 0.25% cut this week. Somewhat less overwhelming (but still consensus) is for another quarter-point in December when the FOMC holds its last scheduled meeting of 2024. That aligns market expectations with September’s dot-plot fairly well and seems consistent with a Fed committed to the measured removal of policy restriction and not overly concerned with downhill momentum in the labor market. As always, watch the post-decision press conference for any clues that Powell and his Committee are overly concerned about inflation, jobs, or both — that could signal another big shift in expectations (and possible another spate of market volatility).
Beyond those two events there isn’t really much to cover. Earnings season has entered the phase where the biggest, flashiest names have mostly released results and there are simply too many smaller companies scheduled to report to adequately mention even the highlights. That comes with the standard disclaimer, however: Any one of these companies theoretically has the power to perturb markets if its results are remarkable enough or its post-earnings conference call has exactly the right (or wrong) kind of fireworks. So stay tuned this week for the 1,500 or so public companies on this week’s earnings calendar.
In terms of macro data, probably the only things remotely close to worth spilling ink over are Friday’s mid-month consumer sentiment survey from the University of Michigan (which will hopefully be the last one overtly tainted by election passions for at least a little while, or Tuesday’s Institute for Supply Management/Purchasing Managers reports for the services sector. As discussed above, manufacturing remains in contraction while services — a much bigger (but less cyclically-sensitive) sector is still picking up the slack. The ‘flash’ Purchasing Managers Indices report about from S&P Global roughly two weeks ago seemed to suggest that was still the case, and this week’s data will very likely show the same. At some point, manufacturing and services will have to align in one direction or the other, but until then, let’s hope services can continue to pull the manufacturing sector along with it.
Get financially happy.
Put your money to work for life and play.
1 https://www.bls.gov/news.release/jolts.nr0.htm
2 https://www.bea.gov/news/2024/gross-domestic-product-third-quarter-2024-advance-estimate
3 https://www.bea.gov/sites/default/files/2024-10/pi0924.pdf
5 https://www.pmi.spglobal.com/Public/Home/PressRelease/53eef529be314fe59fb612aff2df366c
6 https://chicago.ismworld.org/news-publications/reports/research-survey/
7 https://www.bea.gov/sites/default/files/2024-10/pi0924.pdf
8 Data: Bloomberg Intelligence, 11/4/24
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