CVS This Morning, Powell At Midday, And Cisco After The Bell As Earnings Roll On

Things can’t keep going straight up forever, but the elevator we’re on now only seems to know one direction. U.S. stocks look green again early Wednesday after major indices hit new record highs yesterday.  

The amazing resilience of this market continues to be impressive. Some of the things you can attribute it to include strong economic data, increasing investor confidence that governments are taking the right steps to fight coronavirus, the Fed’s promise of continued low interest rates, and better than expected Q4 earnings. The S&P 500 Index (INDEXSP: .INX) and Nasdaq (INDEXNASDAQ: .IXIC) were up in six of the last seven sessions.  

That old phrase, “Don’t fight the Fed” looms over the markets this week as Fed Chair Jerome Powell continues his testimony to Congress. The Fed has telegraphed its intentions to keep monetary policy dovish, and that tends to help the stock market by keeping borrowing costs low for corporations and consumers. 

At the same time, there’s almost no sign of worrisome inflation, and the economy is in a “very good place,” Powell said yesterday. The futures market shows no chance of a rate hike any time this year, but nearly 80% chances of at least a 25-basis-point rate cut. 

Crude and bond yields are both higher this morning and the Cboe Volatility Index VXS is down below 15. These all could be signs of less fear around the markets after spikes in bonds and volatility earlier this month due in part to the virus. The 10-year yield inched above 1.6% today, so we’ll see if it can test recent highs near 1.65%. Any move higher in the 10-year would probably indicate economic optimism, but keep in mind that the yield remains historically low.

In earnings news this morning, CVS Health Corp CVS surpassed Wall Street analysts’ estimates and shares rose in pre-market trading. Guidance looked a bit light, but same-store sales looked pretty good. 

Speaking of health, the market seems to be getting part of its lift this morning from news out of China that the rate of new infections is slowing down.

Cisco Looms After Bell

Mark your calendars this afternoon for Cisco Systems, Inc. CSCO (see more below). This is a company many people watch because it can tell us so much about the economy and business spending, especially around technology. How CSCO performs often reflects broader trends.

The trends were a little harder to read in yesterday’s Wall Street action, and that muddled outcome showed up in the crude market. U.S. crude finished the day just below $50 a barrel, a level that’s been psychologically significant for a while. The weekly U.S. inventory report comes out later this morning, and analysts expect supplies to build.

Any significant moves down from $50 could reflect investor caution about the coronavirus and its potential impact on transportation demand. However, if crude starts putting on weight here, it might mean people are less worried. It seems like no one could make up their minds yesterday, so we’ll see how things go today with crude still near 13-month lows. 

Crude is weak in part because of worries about the virus cutting into travel demand. However, the major cruise ship companies—which all got taken out to the woodshed by the virus in recent days—saw a little life return Tuesday as investors washed away some of their virus fears. Norwegian Cruise Line NCLH, Royal Caribbean Cruises LLC RCL, and Carnival Corp CCL all rose solidly.

So did shares of casino owners Wynn Resorts, Ltd WYNN, and MGM Resorts, International MGM, both of which have casino exposure in Macau. MGM is scheduled to report earnings after the close today, and could offer more insight into the situation across the Pacific.

Apple Inc AAPL and Microsoft Corporation MSFT ran out of breath yesterday after some Monday gains. This could partly reflect Tuesday’s news that the Federal Trade Commission might have some recent acquisitions by big-tech companies under scrutiny. It’s notable that when AAPL and MSFT deflated, the market seemed to lose some of its early spark. That could reinforce ideas that the biggest tech companies are having a major influence on overall direction. 

Grim Repo

Another interesting aspect of yesterday’s session was seeing the major U.S. stock indices hit new record highs right around when Fed Chair Jerome Powell told Congress the Fed plans to continue its bill purchases at least into Q2 and repo operations at least into April. 

As a reminder, Repo is short for “repurchase agreement.”  Repurchase agreements are essentially collateralized, short-term loans between two parties where one party sells the other party a security (usually Treasuries) with the understanding they’ll buy it back at a specified time and price. 

The Fed began injecting liquidity into the money markets last September after overnight lending rates briefly soared as high as 10%. Since then, the Fed has been buying short-term Treasuries every month, which basically injects reserves into the system and keeps short-term rates under pressure. The stock market’s recent rally started around the time the Fed announced this move, which it contends isn’t the same as “quantitative easing.” That was a method it used in the past specifically to stimulate the economy.

Now some analysts worry that the current Fed purchases are becoming kind of like a security blanket for investors, another sign that the Fed “has their back,” so to speak and will continue taking action to keep rates low. Powell’s words to Congress yesterday apparently reaffirmed some investors’ hopes that this wasn’t going away anytime soon, and could help explain the morning rally. 

Powell noted that eventually the Fed won’t have to be involved in what he called “open market operations,” and that as reserves rise due to the Fed’s bill purchases, the need for repo will decline. He thinks ample reserves could be reached by mid-year. These things can sound complex to the average investor, but anyone hoping to understand what the market is doing probably needs to keep an eye on this issue over the next few months and watch the Fed’s next moves.

CHART OF THE DAY: SOMETHING BREWING IN BIOTECH: The Nasdaq Biotech Index (NBI—candlestick) made a new high yesterday just a bit above its previous peak in December. The NBI is also holding onto a slight recent premium it’s achieved vs. its 50-day moving average (blue line). Biotech is a sector that often does well when investors feel confident about taking their chances with some more volatile stocks, so if NBI can keep cooking here and stay above its 50-day, that might be a good sign for the rest of the market. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Can Cisco Enlighten Us on IT Spending? Earnings and a conference call after the close today from CSCO arguably deserve a close look and listen. Why? Not just for fundamentals at the company itself, but for executives’ views on business in general. CSCO tends to have a full grasp on the global economic situation simply because it has exposure in so many different places and with so many kinds of corporate customers.  The company’s executives might also have insight into how the coronavirus situation in China is affecting demand and supply chains there. 

Last fall, Goldman Sachs Group Inc GS raised eyebrows with a report saying demand trends from companies for the type of enterprise technology CSCO sells had “deteriorated” over the prior months. CSCO also said last summer that the trade war with China was having a negative impact on its business. All this helped drive some analysts to predict slowing information technology (IT) spending growth this year. With the trade war on hold for the moment and a phase one deal signed last month, has that changed anything for CSCO and its competitors? Are companies powering up their technology purchases again with tariffs less of a concern? All of this could be worth tracking when CSCO reports.

Fresh Look at Inflation: From a data standpoint, there’s not too much on the calendar today. That changes tomorrow morning when we get a look at consumer prices for January. Analysts expect a 0.2% rise in both the headline and core CPI according to Briefing.com. In December, headline CPI rose 0.2% and core, which leaves out energy and food, inched up 0.1%. Consider also checking year-over-year gains, which stood at 2.3% for core and headline last month. CPI has been outpacing the Personal Consumption Expenditure (PCE) inflation monitor that the Fed tends to watch more closely and which has stayed below 2%. 

Other things to be on the lookout for tomorrow include earnings in the morning from PepsiCo, Inc. PEP and Chinese e-commerce giant Alibaba Group Holding Ltd BABA. That second one might get more focus than usual as investors look for clues into how China’s consumer demand is doing amid the virus.

Red Ink: With deficit worries back in the news recently and Fed Chair Jerome Powell starting his second day of Q&A with Congress, more focus could turn to the national debt. Yesterday, Powell told Congress that trillion-dollar annual deficits are “unsustainable.” To date, it’s arguable that the red budget numbers haven’t hurt the economy too much, in part because interest rates remain low here and overseas. However, there’s a potential scenario where Europe starts emerging from a long slumber and its rates turn positive.

If that happens, would the U.S. face a situation where investors could potentially be less interested in buying its debt. That could cause rates here to swing higher and interest payments on the debt to rise, possibly forcing tough spending choices on Congress even as higher rates conceivably slow the stock market rally. Powell’s thoughts on all this might be interesting, if the topic comes up again today.

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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