#1 - Stocks rip higher on earnings octaneFor a day, at least, investors cast aside their fears and anxieties and bid stocks higher across the board. Suddenly, higher interest rates, political instability, tariff troubles and an earnings slowdown seemed like, well, yesterday's news. Stocks rallied like it was springtime, posting their biggest gains since March. The catalyst, strong earnings. Banks like Goldman Sachs and Morgan Stanley reported better than expected results, sending their shares higher. Johnson & Johnson, a DJIA component and a great proxy for consumer spending, also beat expectations. J&J said sales of its over-the-counter meds like Tylenol, Motrin and Imodium were very strong, which makes sense given the volatility of late. We kid, kind of.Why it Matters: There is a lot of debate going on right now in the investing world about where we are in the economic and market cycles. In one camp are the historical realists who think we are closer to the end of an expansion when comparing it to other periods in history. They also think the extended Bull Market, the second longest in history by some measures, is fading. You can see this play out among institutional investors.In Bank of America Merrill Lynch's October Fund Manager Survey, these data points paint the picture: - Average cash balance holds steady at 5.1%, well above the 10-year average of 4.5%, as investors stay bearish
- A record 85% of survey respondents think the global economy is in the late cycle, 11 ppt above prior highs in Dec. '07
- When asked how the global economy will develop over the next year, net 38% of respondents expect deceleration, the worst outlook on global growth since Nov. '08
- Looking at corporate earnings, net 35% of respondents indicated they do not expect an improvement of 10% or more in the next year, a significant swing from net 35% expecting improvement from February's survey
- A net 20% of investors surveyed think global profits will deteriorate over the next 12 months, a 2-year low and major reversal from January's survey, when a net 39% noted they expected an improvement
On the flip side, we have indefatigable bulls who see no end to the party, despite the recent bursts of volatility.
They cite the following:
- The tariff war will end with a tea ceremony when Donald Trump and Xi Jinping meet in November
- Stock buybacks, which were on a record pace, will resume after earnings when it is safe to show confidence in your company by buying its stock
- Companies are sand-bagging their earnings. The classic under-promise and over-deliver trick that never fails to please the masses.
(Speaking of earnings, check out Netflix, which just crushed its estimates. Revenue was at $4 billion, EPS was 89 cents vs. average analyst estimates of 68 cents, and it said it signed up 1.09 million subscribers in the United States this quarter, above analysts' estimate of about 674,000, according to I/B/E/S data from Refinitiv. Shares were up 4% in after-market trading. As CEO Reed Hastings likes to say, "...Our only competition is sleep.")
We can't tell you who which camp will win. You have to decide that for yourself. We can help you learn how to manage your risk or diversify your portfolio, but being bullish or bearish is in the eyes of the individual investor.
What's Next: A pile of earnings coming up, with banks like M&T and Northern Trust Wednesday, and American Express and E-Trade Thursday. Remember, earnings reports are kind of like report cards that the students write themselves. Some companies are more candid with their investors, while others like to obfuscate their results. The fact that public companies have to report quarterly puts a lot of pressure on them to deliver near-term results. There is a growing drumbeat among some lawmakers and executives to make reporting semi-annual, but don't expect that anytime soon. Plus - it would be bad for our business, so no hurry there.
We'll also get the Fed minutes from its last meeting when it announced an interest rate hike and prepared us for at least two more this year. The minutes are basically a blow by blow of the decision making and reactions to the data the FOMC (Federal Open Market Committee) used to guide its decisions. We already know what was decided, but this is a deeper look at why the FOMC proceeded as it did. Remember, it was just a few days after the last Fed meeting and interest rate hike that President Trump called Fed Chair Jerome Powell, "loco". That won't be in the minutes, but today's rally should give you an added dose of perspective on comments like that.
Rally on!
Read more:
Who Are Netflix's Main Competitors? Why would a company buy back its own shares? Is volatility a good thing or a bad thing from the investor's point of view, and why? Chart of the Day: Four of the five FAANG stocks struggle in correction territory
Of the five 'FAANG' stocks – Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG) – all four of the original 'FANG' stocks (which initially excluded Apple) are well within bearish correction territory. This means that only AAPL has not fallen more than 10% from its recent highs, though it came pretty close last week. The chart below shows the relative three-month performance (% basis) as of Tuesday afternoon for the four FAANG stocks that are currently in correction.
For many growth investors and momentum stock traders, the fact that most of the FAANG stocks are in correction should come as no surprise. Tech stocks have been hit especially hard during the recent market volatility, particularly during the first half of October. Hardest hit has been a beleaguered Facebook, whose stock has fallen more than 27% from its July highs. NFLX is not too far behind at nearly a 20% correction from its June highs. Finally, AMZN and GOOG have corrected much less severely, both at around 12% as of Tuesday afternoon.  CONNECT WITH INVESTOPEDIA |
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