Strong Deere Earnings, Buy-The-Dip Optimism Leading Late-Week Market Comeback

Late spring is often marked by the color green. Today it’s not just grass and trees greening up, but also those trading charts in the early going. And let’s not forget those big green tractors.

Bellwether cyclical stock Deere & Co. DE, which is often considered a proxy for wider economic health, was up more than 1.3% after knocking the cover off the ball on earnings. The farm and construction equipment maker also surpassed estimates for revenue and raised net income guidance for its 2021 fiscal year.

Across the pond, purchasing manager indexes showed strong eurozone business growth ahead of manufacturing and service sector surveys this morning from IHS Markit (INFO).  The brighter outlook for the economy seemed to help oil prices recoup some losses that hit black gold amid the possibility of Iranian oil returning to the market.

The fresh economic good news is coming alongside lower Treasury yields, helping to send investors back into growth stocks as the tug of war continues between those equities and value stocks. On days when investors aren’t so enthused, they turn to value stocks while on days like today they turn to growth.

It seems like this back and forth may continue in the coming months until the market gets more clarity on inflation, interest rates, and the Fed’s asset-purchase program. But for now, early indications this morning suggest the market may end the week on a high note.

An Oldie But Goodie

It looks like investors once again took a page out of the old buy-the-dip playbook on Thursday, continuing the momentum that helped the three major U.S. indices pare losses in the previous session.

Buying interest was enough yesterday to halt the indices’ three-day losing streak as big tech-related companies were in favor and stronger-than-forecast jobless claims helped boost optimism about the reopening economy.

Weekly initial jobless claims of 444,000 continued the lower trend that’s been going on for a few weeks now. It was the second straight week below 500,000 and a little under Wall Street’s consensus. 

Yield Sign

Despite that boost for the economy, Treasury yields declined. Perhaps investors were thinking the yield had gotten too high the previous session after Fed comments about potentially discussing adjusting the pace of asset purchases if the economy continues to rally. It may also be that investors are tending to believe the Fed’s narrative that a spike in inflation will only be transitory.

The lower Treasury yields on Thursday seemed to be that confidence-booster the market needed, and the result was a buy-the-dip rally in growth stocks such as the FAANG names and Microsoft SFT. While Amazon’s AMZN gains were relatively muted, MSFT, Facebook FB and Alphabet GOOGL rose more than 1% while Netflix NFLX and Apple AAPL gained more than 2%.

That helped boost the tech-heavy Nasdaq Composite Index (COMP) to the pole position for the day, substantially outperforming the other two main US indices. Growth stocks, such as tech companies, tend to fare worse in a rising interest rate environment because it makes debt more expensive and because it often comes along with higher inflation, which eats into expectations for future profits. 

Inflation And Jobs: The Rock And The Hard Place?

Also, it may be worth recalling that the Fed has a dual mandate. In addition to price stability, the central bank also has a mission to support maximum sustainable employment. 

With the latest employment situation report coming in well under expectations and weekly jobless claims still high by historical standards, it may be that policymakers are willing to let inflation run a little hot for a while. 

That especially seems to be the case under the Fed’s relatively new policy of inflation averaging. As long as prices rise on average of 2% per year, central bankers are willing to let times of higher inflation continue to balance out periods of lower inflation. 

It’s a balancing act, of course, as price-level uncertainty—inflation, if left unchecked—could undermine the price stability part of the dual mandate. 

CHART OF THE DAY: THE TAX MAN COMETH: Bitcoin futures (/BTC—candlestick), which has had a rough few days, managed to claw back some lost ground yesterday. But the world’s most popular cryptocurrency did pare those gains on a White House proposal that cryptocurrency transactions of more than $10,000 be reported to the IRS. The proposal, detailed by the Treasury Department on Thursday, is part of a broader Biden administration push to crack down on tax evasion. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Can I Borrow Your (Electric) Truck? As the electric vehicle market continues to heat up, so is the niche for electric pickup trucks. Ford Motor F this week unveiled its electric F-150 Lightning pickup. General Motors GM is taking reservations for its GMC Hummer EV. Tesla TSLA is developing production capacity for its Cybertruck. And privately held Rivian—which reportedly is planning an IPO this year—says deliveries of the Launch Edition of its R1T electric pickup truck start next month. The new EV pickup truck offering hopefully will make borrowing your friend’s truck to move to a new place more environmentally friendly.  

Electric Truck Sticker Shock: While none of these electric pickup trucks could be considered cheap, lower-priced options at less than $40,000 make Tesla and Ford models more friendly on the wallet. The R1T and Hummer vehicles are much pricier. With cars, Tesla’s lowest-price Model 3, at just over $40,000, has proven to be incredibly popular, but we’ll have to wait and see whether its Cybertruck or Ford’s comparably priced electric F-150 end up selling better than pricier pickup options. “While Rivian and GM are targeting the upper end of the market, and Tesla is making promises that look challenging to deliver on, Ford is clearly aiming to be affordable and accessible for the mass market,” a Bespoke Investment Group note said. “We don’t have a strong view on which strategy will work long-term, but it does appear to us that the modular approach ranging from ‘bare bones’ to ‘tricked out’ across the F-150 Lightning product lineup has a greater chance of mass-market success than the high-price Hummer EV without the risk of relying on upstart Rivian or Elon Musk’s over-promise attitude.”

Trade Winds: In addition to electric vehicles, another part of the green economy includes increasing reliance on renewable sources of electricity such as solar and wind. While the United States lags only China and the European Union in installed land-based wind generating capacity, domestic offshore wind development is just in its nascent stage compared with Europe and Asia. It wasn’t until this month that the U.S. government greenlighted the nation’s first large-scale offshore wind farm off the coast of Massachusetts—a project called Vineyard Wind 1 that is a joint venture between Copenhagen Infrastructure Partners and Avangrid AGR. That project will use turbines made by General Electric GE. Dominion Energy D, Public Service Enterprise Group EG, and Eversource ES are also among U.S. companies that seem likely to benefit under the Biden administration’s push to deploy 30 gigawatts of offshore wind capacity by 2030. At the moment, two small wind farms off the East Coast have a total capacity of 42 megawatts, and the Vineyard project will add another 800 megawatts.