Despite Bumper Earnings, Banks May Lag Rest Of Market Amid Lower Treasury Yields

After another record-setting day in the stock market yesterday, it looks like things may start off a bit more subdued today. But the bias nonetheless appears to continue to be to the upside a day after the Dow Jones Industrial Average ($DJI) crossed into 34,000 territory for the first time.

A lot has been going right for Wall Street this week, as solid bank earnings have added to optimism from bumper economic data and a surprise pullback in Treasury yields yesterday.

This morning, the 10-year yield has recovered some ground but remains below the key 1.6% level, which probably will keep helping mega-cap tech and other growth stocks, although it’s not particularly helpful for the banks.

This morning, Morgan Stanley MS rounded out earnings reports for the big banks by beating expectations for sales and profit. Still, the stock was down around 1% in pre-market trading. Part of that pressure probably comes because the stock has already been on a tear, up about 40% since November. High expectations were likely baked into the cake. Investors may also have been disappointed because MS didn’t release updated guidance. 

Even a strong quarter doesn’t seem like it completely met what investors were pricing in, especially after MS rose earlier in the week after other banks reported strength in MS’ strong suits—investment banking and trading. 

The MS numbers come after Bank of America Corp BAC, Goldman Sachs Group Inc GS, Wells Fargo & Co WFC, and JPMorgan Chase & Co. JPM all beat expectations for their top and bottom lines. Citigroup Inc C results came in well ahead of expectations but revenue slightly missed.

Although we’ll have to wait and see whether stocks can finish an incredible week on another strong note, early indications seem to be pointing that way. 

Good Economic News And A Treasury-Market Surprise

Yesterday, two closely watched reports, retail sales and initial jobless claims, both came in well ahead of expectations, painting an optimistic picture for the economic recovery. Also, Treasury yields fell sharply, helping boost growth stocks that haven’t been as favored recently because of higher interest rates.

The monthly retail sales report for March showed a 9.8% rise, well ahead of the 5.3% gain expected in a Briefing.com consensus. At the same time, the weekly initial jobless claims report showed 576,000 new claims, well under the 695,000 expected. 

While 576,000 claims is still quite high compared with pre-pandemic levels, the figure represents a strong improvement from the previous number of 744,000, which had been revised lower.

The retail sales jump was particularly important as it falls in line with the optimistic view that more widespread vaccines and stimulus money will help encourage consumer spending, a key driver of the U.S. and global economies.

With such good news on the economic front, investors might have expected Treasury yields to rise. You’d think the risk-on sentiment in equities, inflation expectations, and thinking that the Fed might be more comfortable tightening monetary policy would serve to boost yields. But the opposite happened, and demand for U.S. government debt pushed the yield on the 10-year Treasury below the key 1.6% level. Short covering may have been behind the drop in yields.

Looking To Next Week

Next week’s economic data calendar is relatively light, but it could be especially interesting to see whether the jobs market can manage another big decrease in initial unemployment claims. That report, as usual, is scheduled for Thursday morning. 

Just a little while later that morning, the market is scheduled to get data on existing home sales in March. And new home sales data are scheduled for release the following morning. The supply of existing homes for sale has been quite low, and the supply of new homes for sale is also on the tight side. That’s been helping to push prices up in addition to higher mortgage rates. It could be interesting to see whether these trends continued into March. 

While the earnings calendar is a little on the light side, the corporate earnings schedule is pretty heavy. Consumer stalwarts Coca-Cola Co KO and Procter & Gamble Co PG open their books, and it could be interesting to see if those companies are seeing changes in consumer behavior as the vaccines take effect and people are getting out and about more. American Express Company AXP is also a company with its finger on the pulse of the American consumer and might offer insight when it reports earnings next week.

International Business Machines IBM, Intel Corporation INTC, and Netflix Inc NFLX offer more technological fare for investors, who will probably want to hear more about the global chip shortage from INTC and what NFLX executives might be thinking as the economy opens up and people may increasingly opt for other types of entertainment than binge watching TV shows in their living rooms. 

Meanwhile, Johnson & Johnson JNJ will probably be in the spotlight as concerns about blood clots connected with its single-dose vaccine have recently emerged, leading health officials to recommend a pause in use of the company’s vaccine. While the broader vaccine rollout still largely appears to be going well, the JNJ shot is a key component, and investors and the public alike probably want to know more about when the temporary halt might be lifted. 

Transportation companies CSX Corporation CSX, Old Dominion Freight Line Inc ODFL, and Union Pacific Corporation UNP are also scheduled to open their books, as are metals companies Steel Dynamics, Inc. STLD, Nucor Corporation NUE, and Reliance Steel & Aluminum Co RS. These firms sit squarely in the cyclical stock group that stands to benefit apace with the economic recovery. So it could be interesting to hear the outlook from their executives. 

CHART OF THE DAY: YIELD SIGN: The yield on the 10-year Treasury, as represented here by the 10-Year Treasury Note Yield Index (TNX—candlestick), fell sharply on Thursday. It appears that short-covering may have fueled the buying in government debt despite stronger economic data that might otherwise have caused selling in Treasuries because of inflation expectations and worries the Fed might raise rates. It also didn’t appear like safe-haven buying was behind the drop in yields because Wall Street’s main fear gauge, the Cboe Volatility Index (purple line—VIX) actually fell on the day. Data source: CBOE Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Gaining Altitude: In addition to ground transport companies reporting earnings next week, so do air transportation companies Alaska Air Group, Inc. ALK, United Airlines Holdings Inc UAL, American Airlines Group Inc AAL, and Southwest Airlines Co LUV. The curtailing of business and personal travel during the pandemic has been brutal for the airline industry. But the clouds seem to be parting to reveal sunnier skies, at least for business and leisure travel within the United States. Data from the Transportation Security Administration showed more than 1.1 million people passed through airport checkpoints on Wednesday. While that’s less than half the traveler throughput from the same date in 2019, it’s well up from the mere 90,784 we saw on the same date last year. 

Near and Far: While air travel within the United States appears to be gaining altitude, international air travel doesn’t look as promising at the moment. On Thursday, Delta Air Lines, Inc. DAL said in a press release accompanying its quarterly earnings that domestic passenger revenues were down 66 percent year on year while international passenger revenue was 81% lower than the March quarter in 2019 because of continued travel restrictions. “While we’re doing very well in the U.S. right now with case counts continuing to decline and vaccinations continuing to accelerate, that’s not the case all over the world yet,” DAL president Glen Hauenstein said Thursday at a conference, according to a transcript provided by Seeking Alpha. “So we think that’s going to be a spotty return. And hopefully, we can get towards late summer a reopening of the transatlantic, which would be the next thing we really need to achieve here.”

Green Shoots, Blue Skies: Major airlines DAL, AAL, and UAL aren’t yet trading above where they were just prior to the pandemic-sparked market selloff last year. But other airlines, including LUV and ALK, are. And in another sign of green shoots in the airline industry, LUV last month said it had completed discussions with Boeing Co BA for an order of 100 737-MAX 7 aircraft. The transaction is not only good for BA, but it also suggests a certain confidence in the expected rebound of the airline industry as COVID-19 fades. The airline industry won’t be able to fully recover until international borders fully reopen as the worldwide vaccine rollout continues. But at least it looks like there are now silver linings to the clouds that are continuing to part. 

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

Photo by Brendan Church on Unsplash