As Wall Street Awaits Main Earnings Season, Trade, Tesla Appear To Be In Focus

As the last trading day of the month and quarter gets up and running, there is little in the way of earnings to focus on and Wall Street seems to be focusing elsewhere. 

The United States and its northern neighbor have yet to reach an agreement on including Canada in a deal with Mexico that would replace the North American Free Trade Agreement (NAFTA). Worries about trade between the U.S. and key partners including China have dogged Wall Street for some time amid concerns the fallout could dent global economic growth.

In corporate news, the Securities and Exchange Commission charged Tesla Inc. TSLA CEO Elon Musk with fraud in connection with what securities regulators said was “a series of false and misleading tweets about a potential transaction to take Tesla private.” Musk said in a statement reported by media outlets that the action is “unjustified” and that he has “always taken action in the best interests of truth, transparency and investors.” The company’s shares were down more than 12 percent in pre-market trading.

Wall Street rebounded Thursday, seemingly helped by the Fed’s strong opinion of the economy, a day after it raised interest rates and removed the word “accommodative” from the accompanying policy statement. It looks like central bankers are confident enough in the economy to say that it doesn’t need to be propped up any longer by an accommodative policy of ultra-low interest rates.

In economic data, the headline number for durable goods orders came in well ahead of expectations and the government’s latest estimate for 2Q GDP stood at an unrevised 4.2 percent, a fairly robust number. (See more on both below.)

Thinking About Volatility

With the Fed’s third rate hike of the year out of the way, investors may increasingly focus on the chances of a fourth rate hike in December, the prospect of new tariffs, and the midterm elections. Perhaps look for increased volatility based on headlines between now and the main grouping of upcoming corporate earnings.

Sometimes, when there isn’t much fundamental news for the economy or companies, ups and downs in trading can pick up as investors make short-term decisions based on the headlines of the moment, whether they’re about trade or politics.

But as of Thursday, volatility was relatively subdued, with Wall Street’s fear gauge, the Cboe Volatility Index (VIX), dropping more than 3.7% to 12.41. 

Sector Overview

In sector news, utilities led the S&P 500 in gains Thursday even though the 10-year Treasury yield gained slightly. It’s possible that some investors were using Thursday as an opportunity for some bargain hunting after the sector lost ground recently as rates moved higher.

Utilities can move inversely with fixed income yields as those stocks are often considered “bond proxies.” That means they can compete with bonds when yields are low because the stocks often pay dividends and have a track record of steady growth. So when yields rise, that can make these equities, which are often considered riskier than bonds, look less attractive. 

The second biggest gainer on the day came from the newly constituted communication services sector, which contains Alphabet Inc. GOOG GOOGL, Netflix, Inc. NFLX and Facebook, Inc. FB. All three performed well Thursday, helping boost the sector 0.8 percent.

Another FAANG name, Apple Inc. AAPL, also did well yesterday, helping to lift the information technology sector 0.54 percent to tie with the consumer discretionary sector for the day’s third biggest sector gains. Rounding out the FAANG names, Amazon (AMZN) also closed in the green.

Figure 1: A Pause, But For How Long? Both the dollar index and 10-year Treasury yields (purple line) had shown signs of strength going into the Fed meeting, but both leveled off a bit immediately after the rate hike decision. Both might get close attention in weeks to come as earnings season looms. Data Sources: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Durable Goods Orders

Orders for longer lasting factory goods picked up in August, with durable goods orders rising 4.5 percent, according to a government report. That was well ahead of the 1.8 percent Briefing.com consensus expectation. The gain was primarily driven by orders of non-defense aircraft and parts. While plane manufacturers certainly contribute to GDP, the segment can cause volatility in the overall durable goods reading. Stripping out transportation orders revealed that durable goods orders rose by just 0.1 percent, which was under the 0.4 percent Briefing.com consensus expectation and was a bit softer than the readings for the previous three months. Still, the number was in positive territory, so it won’t detract from GDP unless it gets revised into negative territory.

Looking Toward 3Q GDP

Speaking of GDP, investors on Thursday got the government’s last official GDP estimate until late next month. The government’s third estimate for Q2 GDP came in at a seasonally and inflation-adjusted annual rate of 4.2 percent. That was slightly less than a consensus estimate of 4.3 percent provided by Briefing.com but was the same as the government’s prior estimate. We’re scheduled to see the government’s first estimate for 3Q GDP on Oct. 26. Until then, investors can check out the Atlanta Fed’s GDPNow forecasting model. The latest “nowcast,” released Thursday, pointed to a 3.8 percent seasonally adjusted annual rate in 3Q. Although that number would be below 4 percent, it’s still enough to indicate that the U.S. economy is running along well. 

Healthcare Outperforming

As of late Thursday, it was looking like the healthcare sector may end the quarter as the best performing of the S&P 500 sectors, with a gain of more than 12 percent. While there may not be one simple answer behind this outperformance, several factors seem to be coming together to make healthcare a strong performer. One of them is the speeding up of the time it takes to get a drug from research and development to approval by the Food and Drug Administration. Another is the combination of healthcare and technology, such as robotics. Also, as the population of the United States ages, it’s perhaps natural for people to become more interested in healthcare and to want to invest in stocks that can potentially make their lives better and longer lasting.

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