With Investors Less Worried About Coronavirus, Focus Shifts To Earnings, Fed

As investors continue to monitor the coronavirus outbreak, it appears that fears have eased somewhat after selling in recent days, allowing market participants to focus on earnings and an interest rate decision from the Federal Reserve.

Of course, we’re not out of the woods with the coronavirus, as the death toll rises, the list of infected lengthens, and airlines cut back or cancel routes. With British Airways announcing the cancelation of all flights to or from China during the outbreak, you might think the news would spark more selling in the market. But the muted reaction this morning has been refreshing because it suggests investors, while remaining cautious, aren’t panicking. 

Later today, the United States’ official target for the federal funds rate is expected to remain unchanged in the 1.5%–1.75% range when the Fed announces the result of its rate-setting meeting later today. 

This morning, the futures market was showing about an 87% chance of the central bank standing pat on the Fed funds rate. There was no likelihood—at least from the futures market—that the Fed might cut rates, but a small chance built in of a 25-basis point rise. (We’ll keep you updated with a report shortly after the Fed’s announcement.)

Big Week In The Earnings Parade

Barring something unexpected from the Fed or a dramatic worsening of the coronavirus situation, market action today could focus on earnings. This season may be turning out better than expected—in terms of quarterly earnings results anyway—with big names like Starbucks Corporation SBUX, McDonald’s Corporation MCD, AT&T Inc. T, and General Electric Company GE reporting earnings that beat expectations. 

But it’s with an asterisk, which may explain why three of these big names saw shares that fell post-earnings. Though MCD’s and SBUX’s global same-store sales were better than expected, execs from both retail food giants expressed virus-related caution going forward, suggesting the outbreak and quarantines might cut into revenue in the coming quarters. Though T eked out a beat on the top line, its revenue fell short of consensus. GE, however, surprised to the upside, after a big earnings beat and a positive 2020 outlook from CEO Larry Culp. GE shares begin the day up a respectable 7%.  

Meanwhile, the bad news kept on coming for Boeing Co BA. The aircraft manufacturer reported its first yearly loss since 1997. But the company’s new CEO said in an interview with CNBC that he thinks regulators will let the company’s 737 Max get back in the air by the middle of this year. BA shares are up 3% this morning.

But much of the market’s focus has been on Apple Inc AAPL, both yesterday before it opened its books, and this morning as investors cheer the iPhone maker’s bumper quarter. Still, the coronavirus cast a shadow over future earnings from the tech giant.

Virus Uncertainty Infects Apple Guidance

Investors anticipating solid results from AAPL might have breathed a sigh of relief after the iPhone maker easily beat Wall Street expectations for earnings and revenue. While Its 2.8% rally yesterday and nearly 2% follow-through in extended trading puts it right around the all-time high of $323 from last week, considering the incredible run the stock has been on these past six months, holding the line might not be such a bad thing.    

Despite the blowout quarter, the company issued Q2 revenue guidance of $63 billion to $67 billion, with the company’s CEO in an interview with CNBC attributing the wider-than-usual range to uncertainty about the coronavirus.

Previously, during the trading session, shares in AAPL, which has a significant footprint in the world’s second-largest economy, surged as fears about the coronavirus ebbed in the wider market. Because AAPL is so widely held, it can be an important leader in market action.

In addition to easing coronavirus fears, Apple supplier Foxconn said in an interview with tech news network The Verge that it has measures in place ensuring the company can meet its global manufacturing obligations despite the outbreak. 

Turnaround Tuesday

In yesterday’s session investor fears about the coronavirus appeared to ease a little. Although the outbreak has stoked worries about the global economy and corporate profits of companies exposed to China, which has seen businesses closed and travel limited, the World Health Organization’s director-general reportedly expressed confidence in the Asian nation’s ability to contain the spread of the illness.

It also appears that investors wanted to buy the dip, which is probably a good sign for the market’s health overall. It could also be argued that the coronavirus outbreak, while alarming and bringing up memories of the SARS outbreak, has also been an excuse to book some profits.

That means the market might be steadier for a while unless there’s some kind of dire turn for the worse in terms of the outbreak’s severity or adverse affect on travel and corporate supply chains.

As the concern level on Wall Street subsided, its main fear gauge, the Cboe Volatility Index (VIX) dropped along with it, as did demand for the traditional safe havens of U.S. government debt and gold. Meanwhile, as risk tolerance rebounded and worries about the virus’ impact on the Chinese economy eased, crude oil gained in price.

Consumers Optimistic

Economic data also seemed to help lift the spirits of investors and traders, as consumer confidence figures came in well ahead of expectations. The Conference Board’s Consumer Confidence Index jumped to 131.6 from an upwardly revised 128.2 figure from December. 

The U.S. consumer has helped the domestic economy weather a bruising trade war, as shoppers have been emboldened by low interest rates and a strong jobs market. 

As more earnings results come in and company executives have a chance to talk about their quarters, we could get a deeper look into the health of the domestic consumer, especially as Amazon.com, Inc. AMZN reports results later this week. 

FIGURE 1: OIL SNAPS BACK.Crude oil futures (/CL) regained some ground on Tuesday as Wall Street’s fears about the coronavirus eased. It appeared there wasn’t as much worry about the damage it might do to the Chinese economy and its demand for oil. Plus, appetite for riskier assets seemed to play a role. However, crude is still well off levels from earlier in the month.  Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Want a Pay Raise? Check Growth First: If like a lot of people you want to see wages rise, it would help to have an economy that’s growing quickly. Tomorrow morning brings the government’s first estimate of Q4 gross domestic product, and the Atlanta Fed’s GDP Now indicator projects a tepid 1.9%, down from 2.1% in Q3. A lot plays into this sluggish growth, and it’s essentially a rear-view check because we’re talking about what the economy did between October and December, not what it’s doing now.

Back then, the easing in the trade war was still to come, and the tariff dispute seemed to sap corporate spending. Though consumer confidence stayed high through that period, the manufacturing sector looked weak. A question in the markets now is whether the phase one deal might spark more spending by corporations, something that investors might get an answer to by paying close attention to what executives say on their earnings calls. It would be nice to feel optimistic, but watching analysts keep dropping their earnings estimates for 2020 doesn’t exactly build lots of confidence for stronger growth in the economy. Neither does all the concern about the coronavirus.

Whisper Gallery: Speaking of earnings, if you see a company report what appears to be a good quarter but the stock falls anyway, it may be a head-scratcher, especially if guidance is good. The problem is that some companies attract a lot of what people call “whisper” numbers, which often set loftier expectations on earnings, revenue, or guidance than the consensus Wall Street estimate. You might see shares of a company ride higher the day before earnings, then fall when the report comes out. Sometimes it’s because even if the data were good enough to make or beat consensus, they didn’t have what it took to beat those “whispers.” 

How do you find out the whisper numbers and which companies they affect? It’s more of an art than a science. However, the more well-known a company is, the more likely they are to get a lot of attention and enthusiasm, which sometimes translates into people hoping for amazing earnings that don’t necessarily happen. Think about some of the most popular companies out there, especially ones whose stocks have been flying high, and you might have a better idea which ones could end up getting tripped by a missed whisper.

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.

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