Market Overview

Decision Day: Fed On Tap Later, Followed by Apple, Facebook After Close

Decision Day: Fed On Tap Later, Followed by Apple, Facebook After Close

It’s decision day. Or is it? 

The market seems to have made up its mind a long time ago about what the Fed is likely to do this afternoon, so the rate decision this afternoon seems almost pre-ordained. Futures prices indicate a 98% chance that by the end of the day, the Fed funds target rate will be 25 basis points lower than it is now. Nothing is ever certain in the markets, but that’s about as close to a guarantee as you’ll ever likely see.

The Fed decision dominates this afternoon, but this morning offered a nugget for Fed officials and investors to chew on as the government released its first estimate for Q3 gross domestic product (GDP). It turned out to be a positive surprise at 1.9%, up from the 1.5% that analysts had predicted. That’s still down from 2% in Q2, but not by much. A lot of the strength was driven by consumer spending.

With two estimates left, it’s too early to say this growth will hold, but for now it does look like economists might have gotten too negative going in. A reading like this might actually give the market a lift, as it could point toward more consumer resilience. On the downside, the GDP report did show continued softness in business spending, and consumer spending on housing materials and automobiles didn’t look strong, either. 

A lot of the GDP beat was based on consumer and government spending. It’s good to see consumers out there, but the government side of the ledger is harder to get takeaways from. The question is whether that’s scaleable, which government spending isn’t always going to be.

Despite the upside on GDP,  markets might hang out right around unchanged and tread water this morning, as they often do ahead of a Fed decision. The Cboe Volatility Index (VIX) is just above 13 after touching 20 last month, maybe a sign that investors aren’t too nervous. However, sometimes a low VIX can be a contrarian signal. The last couple times it’s been down here, it bounced back pretty quickly. With Apple Inc (NASDAQ: AAPL) and Facebook, Inc. (NASDAQ: FB) due to report after the close, maybe that might provide a bit more drama.

If there’s any drama right at 2 p.m. ET today when the Fed decision headlines pop up, it’s probably going to be in the Fed’s statement and in Fed Chair Jerome Powell’s press conference. Fed officials, including Powell, have made it clear that rates aren’t on a pre-ordained path. A number of Fed speakers have also said lately they aren’t sure if more cuts are needed anytime soon. The markets have dimmed the outlook for more accommodation beyond today, and chances for another easing have fallen below 50-50.

However, recent economic data have continued to look a bit sluggish, and inflation remains pretty much a non-factor. That could give the Fed room to cut more if it wants to. What the Fed says about the economy, especially the state of business spending, might be worth a look. 

Another thing the Fed might have in mind is keeping some firepower unused in case it’s needed later. The lower rates go, the less ability the Fed has to counter a recession by making borrowing cheaper. It’s also possible Fed officials might want to see how lower rates play out for a few months. It typically takes time for them to work their way through the economy. We’ll see what Powell and company have to say this afternoon. 

Healthier Trends

Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc.’s (NYSE: MRK) strong earnings helped make Health Care easily the leading sector Tuesday, a rare day of excitement and dominance for a sector that’s been coughing and sneezing much of the year.

The positive quarters both these companies hand probably testifies at least in part to how well they run their businesses. Think about it. We’re heading into an election year where candidates from both the major parties have the industry in their crosshairs, and MRK and PFE are out there raising estimates. They both have good management teams who seem to be able to dance around the punches.

PFE beat analysts’ estimates on every single area of their business except one, and both PFE and MRK were big beneficiaries of cancer drug sales. While it’s too bad these products are needed, and hopefully science will eventually defeat that disease, it’s been a strong part of both companies’ businesses.

Taking a closer look at PFE, even though their revenue fell year-over-year, they did beat on earnings and raised estimates. The company has done a good job cleaning house and saying if a drug’s not profitable, it’s gone. 

One good day in Health Care doesn’t make up for what’s been a tepid year, partly because of the fear of government crackdowns. At this point, the sector is up just 7.5% year-to-date, outpacing only Energy for worst performance among the 11 S&P 500 sectors. The S&P 500 Index (SPX) is up more than 20% in 2019.

Indigestion for Food Stocks

While long-established big pharma companies topped the leaderboard Tuesday, it was a rough day on the other side of the links for some smaller, newer companies in a different industry: Food. One dramatic drop was GrubHub Inc (NYSE: GRUB)—more on that below. Beyond Meat Inc (NASDAQ: BYND) also saw shares get slammed despite reporting a profit. The stock dived more than 20% as investors appeared to get worried about the end of the “lockup” period, during which insiders are prevented from selling shares.

Though BYND shares didn’t show it, the quarter looked pretty strong and the company also raised its full-year revenue outlook. Also, the CEO said he’s not selling his shares. It could be interesting to see if any of this starts to resonate in the stock over the next few days once this concern about the lockup period is behind.

It also rained on Technology’s parade Tuesday after Alphabet Inc (NASDAQ: GOOG) reported a quarter that didn’t seem to satisfy investors. Apple and Facebook Inc earnings loom large after the bell today.

On the data side yesterday, consumer confidence came in slightly below analysts’ expectations but really didn’t change much from the previous month and remains at solid levels.

The SPX did touch a new intraday record high yesterday and starts Wednesday not far from there. Also General Electric Company (NYSE: GE) shares rose in pre-market trading today even though the company reported lower revenue than Wall Street analysts had expected. It beat on earnings and raised its outlook. It did cite “headwinds” from Boeing Co’s (NYSE: BA) 737-MAX troubles and tariffs.

CHART OF THE DAY: COPPER RECOVERY? Over the last three months, gold prices (/GC-candlestick) have flattened from recent highs, while copper prices (/HG-purple line) have started to show signs of revival. Copper has rallied before only to fall back, so it’s not a done deal. However, some analysts say the strength in copper and flatter gold prices might indicate growing optimism about a possible U.S./China trade deal. Data Source: CME Group.  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.

Fed Feud: You know that long-running game show where families battle it out? The Federal Open Market Committee’s (FOMC) meetings aren’t televised, but maybe there’s a bit of extra drama going on as today’s decision nears. That’s because the last two meetings saw several members dissent from the Fed’s decisions to reduce rates by 25 basis points. At the most recent meeting in September, three of them didn’t go along with the move. One wanted a 50-basis point cut, while two wanted no cut at all. Dissenters included some of the usual hawks and doves.

Will we see that again today? It could be interesting, because if dissent grows, it could provide more clarity about what’s next. Already, investors don’t seem to expect another cut in December, judging from futures market action, and skepticism about the odds of more easing stretches out into next March’s meeting. On another note, St. Louis Fed President James Bullard—who dissented last time because he wanted 50 points chopped off rates—seems likely to get his wish if the Fed does cut another 25 out of the cake today. He just had to wait a month.

Fireworks Follow Fed: Today’s Fed meeting is arguably the third biggest story of the week after earnings and two reports both due Friday morning: ISM Manufacturing and payrolls. We’ll take one at a time, looking at payrolls today and ISM tomorrow. As of mid-week, consensus for payroll growth looks pretty slow compared to what people might have gotten used to over the last few years. Analysts project that the U.S. economy created just 80,000 jobs in October, said. The research firm’s own estimate is slightly higher at 105,000, but either figure would be well below the 136,000 in September and 168,000 in August. The average for 2019 is 157,000 a month, down from around 200,000 in 2018. And if October comes in as low as analysts expect, it would be the slowest month for job creation since May.

Why so slow? Maybe the recent softness in some business-related data like manufacturing and durable goods orders might be starting to hit the labor market. Another possibility is lack of business spending due to uncertainty around the China trade situation. A third idea is that the economy has basically hit full employment and doesn’t necessarily need so many new workers each month. It could be a combination of these and other factors. Whatever the case, it could be more important to watch hourly wages to see if falling demand for employees starts to hit peoples’ pocketbooks and maybe weigh on consumer spending. Consensus is for 0.2% hourly wage growth in October, up from a flat reading in September, said.

Chow Time: GrubHub shares hit the frying pan Tuesday, sliding 40% after earnings and outlook appeared to disappoint investors. The bad news really was an eye-opener in some ways for the entire food-delivery industry, where competition is growing as companies seek to deliver food for some of the biggest fast food restaurants. Where you once saw some delivery companies have exclusive relationships, that’s changing. McDonald’s Corp (NYSE: MCD), for instance, works with several delivery companies, including GRUB. Consolidation could be coming in this industry, possibly with some big restaurant companies acquiring one of the food delivery firms and keeping it in-house. That seems more likely than two or three of the delivery companies banding together. 

It’s wonderful for interest in the market that many of these unicorns went public, but with markets at an all-time high and some analysts concerned about possible slower economic growth, the pressure is on for proof that the business model really works. If you’re new to the market, you’re not getting a free pass. People are going to ask tough questions about where you’ll be in six months or a year, and that’s the biggest change in the market over the last six months.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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