Bank Of America And Goldman Sachs Results In Focus Along With Yellen Hearing

The elephant in the room is tomorrow’s inauguration. Beyond that, there’s plenty going on this week, including a fresh batch of bank earnings and a FAANG sighting. But everything else could take a back seat to events in Washington as investors look ahead to big changes in policy and outlook from a new administration. 

One of those policies could be more stimulus, which might partly explain why stocks surged in pre-market trading coming off of last week’s losses. With bank earnings in focus, it’s kind of interesting that the person likely to be their regulator in coming years appears in front of Congress today. Janet Yellen—President-elect Biden’s pick for Treasury secretary—has a confirmation hearing with the Senate Finance Committee starting at 10 a.m. ET. She’s expected to take a more hands-on approach than the current Treasury secretary, raising some concerns for both banks and insurance companies after they were allowed lots of flexibility the last four years. 

Yellen will probably get asked about Biden’s stimulus plan and its potential impact on the national debt, according to media reports this morning. She might also be asked to discuss the dollar, which the current administration vocally tried to weaken at times. Yellen’s likely to say Biden’s administration will go back to more traditional methods of not talking down the currency, The Wall Street Journal reported. It’s possible this expectation could be playing into the dollar’s recent bounce off of nearly three-year lows. 

Another item this morning is strong economic growth in China, and that’s apparently giving stocks some early support, too. You’ve got to put an asterisk next to any data from Beijing, but the numbers they released showed China’s economy accelerating into the end of the year. If that’s the case, it’s great news from a macro perspective. 

Bank Of America, Goldman Sachs Go One For Two

This morning’s big bank earnings batted .500, to borrow a baseball term. Meaning they arguably went one for two, though it wasn’t completely cut and dry. Bank of America Corp BAC shares ticked lower in the pre-market hours after disappointing investors with revenue below Wall Street’s expectations. But Goldman Sachs Group Inc GS hit a solid double as trading results helped the company beat analysts’ earnings and revenue outlook. 

The good news for BAC investors was the bank releasing some of the credit reserves it had built up in case of possible loan defaults and announcing a stock buyback plan. Still, the company came up short on trading revenue in Q4, mainly on the fixed income side. Trading wasn’t a problem for GS, however, as that part of the business blew through Street expectations. Uncertain times typically mean heavy trading volume and increased demand for investment banking services, which has helped both GS and JPMorgan Chase & Co. JPM over the last couple of quarters. 

The earnings action continues this afternoon when the first FAANG to report, Netflix Inc NFLX, steps to the plate. After NFLX added more than 28.3 million new subscribers to an already hefty base in the first three quarters of 2020, analysts are anxious to hear how the streaming giant ended the year from a subscriber standpoint. Then Morgan Stanley MS reports tomorrow morning. 

We’re very early in the earnings season and so far things are moderate—not great but not bad. We’ll have a better idea about the lay of the land by the end of the week. One thing to keep in mind is that when a company beats on revenue, it can hide a lot of mistakes. So it’s important to look below the top line and check the quality of that revenue. When a company misses on revenue, it tends to get punished. 

Shades Of Halloween In January

Major indices retreated last week for the first time since early December, with the SPX falling into its worst slump going back to late October. Still, the index finished Friday down just 1.5% from the all-time intraday high of 3826 posted Jan. 7 and didn’t suffer too much from a chart perspective, so to speak. 

Friday’s settlement of 3768 meant the SPX went home for the weekend without a drop below 3750, where many analysts see key technical support. A close beneath that could set up more selling, but “buying the dip” hasn’t lost its luster and can’t be ruled out on further declines, analysts say. 

Many believe as long as the Fed remains dovish—and Fed Chairman Jerome Powell reinforced that in his remarks last week—the stock market might continue to find buyers on any pullbacks. Still, it’s definitely a change of pace to see the SPX slightly underwater year-to-date after the way it stormed back most of 2020 following all the craziness in February and March. 

Another number to watch this week besides 3750 for the SPX is 1% for the 10-year Treasury yield. After scampering quickly from around 0.95% at the end of 2020 to nearly 1.19% at its peak last week, the yield quickly pulled back below 1.09% to finish things on Friday. Analysts said this could reflect consolidation after the initial rally went a bit too far, too fast, and that as long as the yield stays above 1% the uptrend could stay intact. That means 30-year mortgage rates could soon tick above 3%, housing market experts say. They were at around 2.9% as of the end of last week, still historically low. 

More progress on the vaccine rollout and hopes for additional stimulus could give yields another chance to move higher, which could again pressure some of the large growth stocks that often catch a cold from higher rates. It sounds like the stimulus plan is going to be one of Biden’s first priorities, so investors are probably going to see very soon how that plays out in this closely divided new Congress. 

Small-Caps Keep Surging

While the overall SPX had a week to forget, the sector scoreboard didn’t look all that bad. Only Communication Services really took a licking and that might be attributed to concerns about the social media space with the unsettled situation in Washington. Energy and Financials continued to lead the way as investors appear to be embracing companies that tend to do better during economic recoveries, and the small-cap Russell 2000 Index (RUT) also managed to keep its head above water. Small-cap stocks, banks and insurance companies, and oil and natural gas firms all could conceivably benefit if the country gets more stimulus. Crude stumbled Friday but remains near 11-month highs.

Despite last week’s downturn, some companies managed to enjoy decent gains. General Motors Company GM is on a roll, helped by its growing profile in the electric vehicle space. Bed Bath & Beyond Inc. BBBY surged amid management changes, and Tilray Inc TLRY has been smoking (sorry) thanks in part to hopes that Democratic control could help ease cannabis regulation, CNBC reported Friday.

CHART OF THE DAY: SPX 3750 SUPPORT HELD. The S&P 500 Index (SPX—candlestick) has bounced off its 20-day simple moving average (blue line) a few times since early December. The index met the resistance again on Friday after its move above 3800 early this year. Some chart watchers may be heartened by the test—but close above—a key support level at 3750 (blue line). Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

’Tis the Season: Earnings really kicks into gear now, highlighted by Morgan Stanley MS and Procter & Gamble Co PG—both expected tomorrow—followed later this week by Intel Corporation INTC and IBM Common Stock IBM. Those last two provide a fresh look at the chip and cloud sectors. (See more below) 

INTC recently announced a leadership change at the very top, which helped lift shares last week. INTC’s earnings call likely gives investors a chance for insight on that as well as on the company’s manufacturing plans, which have been under close scrutiny. 

PG may not seem like the most exciting company with products like detergents and paper towels, but it shouldn’t be ignored considering its large market cap and the company’s lens into consumer habits during these unprecedented times. The company got an unexpected boost in 2020 from higher than expected sales of cleaning supplies and raised its dividend 6% last April. 

Vaccination Daily Dose: With the new administration taking office tomorrow and promising 100 million vaccine doses in the first 100 days, it seems fitting that soon we’ll have more data from Johnson & Johnson JNJ on its single-dose vaccine. Analysts expect this by the end of the month, though more clarity could emerge when JNJ reports earnings next week. This will be key Phase 3 data that the company hopes can lead to quick U.S. approval. Analysts expect JNJ’s efficacy to be a bit lower than the kind we’ve seen from Moderna Inc MRNA and Pfizer Inc. PFE-BioNTech SE BNTX, because it’s a different type of vaccine made by more traditional methods. The obvious advantage is that it’s a single dose and should be easier to store and transport. However, analysts think efficacy could be below 90%, compared with highs of around 95% for vaccines on the market. 

The other advantage of MRNA and PFE/BNTX vaccines over JNJ is that it can be easier to make slight adjustments to the products to deal with any changes the virus throws at the medical community. So far, the current vaccine seems to work against variations of the virus, and soon doctors might have the new JNJ product in their toolbox. One other note: PFE is working on a powdered form of its vaccine that would be easier to transport and store, so keep an eye out for any developments on that initiative when they report earnings.

Plains and Trains: Big banks and Netflix Inc NFLX take a lot of the earnings spotlight this week, but investors should also consider monitoring a bunch of other companies that report. This includes United Airlines Holdings Inc UAL tomorrow. Recently, trade publication Freight Waves said, “The jump in passenger traffic for U.S. airlines during the Thanksgiving and Christmas holidays was a mirage, not a sustainable source of revenue for overcoming the coronavirus crisis.” So that doesn’t necessarily bode well for UAL or other airlines reporting later this earnings season.

It appears to be the opposite fundamental story for railroads like CSX Corporation CSX and Union Pacific Corporation UNP, which both are expected to report this week. U.S. freight rates surged in December, Freight Waves reported, “setting the stage for a powerful pricing tailwind in 2021.” The recent injection of around $900 billion in stimulus and chances for even more could boost gross domestic product (GDP) growth and, by extension, freight volumes and pricing, the publication quoted an analyst saying. UNP’s last earnings report failed to impress Wall Street amid concern about revenue and volumes. However, the company has been reducing costs, and said going into Q4 it saw continued momentum in a number of economic areas its business touches. The company added that an infrastructure package (one was proposed by President-elect Biden last week) might be helpful to business this year. However, the recent retail sales slump might be a new hill to climb for UNP, CSX, and other freight haulers.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Photo by Alejandro Barba on Unsplash