Stocks look to add to Tuesday’s gains as equity index futures are pointing higher before the open. However, there’s some uneasiness as President Joe Biden warns that Russia could invade Ukraine. According to The Wall Street Journal, Russia has had an unusual amount of troop movement near its Ukrainian border. Many believe that President Putin is posturing because he wants to push through Russia’s Nord Stream 2 natural gas pipeline into Europe, but Ukraine is blocking its development. European natural gas price rose about 6% overnight and U.S. natural gas futures (/NG) are trading 4.18% higher before the open.
Outside of these tensions, Pfizer PFE and BioNTech BNTX released information showing that they won’t need to change their vaccine for the Omicron variant and that a third dose of the vaccine offers the protection people need. Pfizer rallied 0.73% on the news before the open but BioNTech was down 0.59% in premarket trading.
Despite earnings season being over, there are a few companies still releasing their previous quarter results. Campbell Soup CPB missed on revenue estimates because people are eating fewer meals at home and going back to restaurants. The miss on revenue didn’t keep the company from achieving better than expected earnings. The stock rallied about 1% in premarket action on the news.
RV maker Thor Industries THO also announced earnings beating on both top and bottom lines. The company saw a 56% increase in net sales compared to a year ago, which helped the company increase its gross profit margins by 16.6%. The stock rose 3.86% in premarket trading.
Stocks saw a broad rally on Tuesday with the NYSE advancers outnumbering decliners about 5 to 1, and the Nasdaq advancers outnumbering decliners about 4 to 1. Additionally, the Russell 2000 (RUT) Index rallied 2.28%. However, the small-cap index rallied to its 200-day moving average and failed to sustain a break. If the bulls are unable to break this level, rally breadth could suffer.
The major stock indices all closed higher, led by the Nasdaq Composite DIBS, which closed more than 3% higher on the day. Of course, movement like this in the Nasdaq usually reflects a strong rally in the technology sector. The Technology Select Sector Index ($IXT) rallied more than 3.5% higher on the strength of the semiconductor industry group. The PHLX Semiconductor Index (SOX) was up nearly 5% on the day.
Additionally, the S&P 500 (SPX) rallied more than 2% on the day and is less than half a percent from its all-time high. The Dow Jones Industrial Average ($DJI) also closed higher by 1.4%.
Raising the Roof
Lawmakers appear to have reached a deal to increase the debt ceiling. Briefing.com reported that House Speaker Nancy Pelosi plans to hold the vote in her chamber Tuesday evening, and Senate Minority Leader Mitch McConnell said that the majority of Republicans and Democrats have reached an agreement. This could be a nice change for the markets compared to two months ago when fights, arguments, and accusations of brinkmanship clouded the process.
Inflation & Productivity
As investors eye Friday’s Consumer Price Index (CPI) for news on inflation, the U.S. Unit Labor Cost report was released on Tuesday, revealing that the cost in labor increased more than expected. Analysts forecasted an increase of 8.3%, and the Bureau of Labor Statistics reported an increase of 9.6%. Unit labor costs are part of the Nonfarm Productivity report that was more negative than expected. Lower productivity is a leading indicator of inflation. With these two pieces of news, some analysts are concerned that Friday’s CPI report could be worse than forecasted.
Of course, inflation hawks spend a lot of time monitoring oil prices because of the influence oil has on all prices. On Tuesday, the U.S. Energy Information Administration (EIA) Short-Term Energy Outlook revealed that the EIA is forecasting lower demand for oil and gasoline in 2022 due to the Omicron variant. It also expects oil prices to decline with the lower demand. The report also projected increasing rig counts to help increase the supply of oil.
Oil prices (/CL) were already moving higher before the EIA report and were little moved by the news. However, oil prices did trade off their highs, closing at $71.73 for the day. Oil regained an important technical level by closing back above its 200-day moving average as well.
CHART OF THE DAY: PRODUCING INFLATION. Productivity as measured by output per hour (blue) has climbed over time, but during the Great Inflation from 1965 to 1982, productivity stalled more often. When oil and other commodities rose from 2008 through 2013, productivity also experienced times of slowing despite big production and efficiency gains from technological development. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Price Cutters: Many investors have gotten used to the idea of the Fed trying to control inflation using monetary policy. However, sometimes the best cure for high prices is high prices. The reason why this is the case is that high prices entice entrepreneurs to enter a market and find ways to do it better, which usually means more efficiently and cheaply. The new entrants cause an existing business to find ways to be more competitive. This is one reason productivity tends to be a leading indicator of inflation.
Therefore, some of the best policies for fighting inflation are to remove or reduce the barriers to entry that keep competition out of certain markets, promote productivity through technology and automation, allow for specialization where people and groups can focus on what they are best at, and outsource remedial tasks to less skilled and cheaper workforces. Of course, many of these practices can be controversial because they often result in uprooting and retraining workforces.
Automators: Most technology companies help in automation and efficiency one way or another. The Thomas Register of American Manufacturers used to publish these big green books of manufacturers but now it goes by thomasnet.com, which is an online platform that helps connect businesses. Its top 10 list of automation suppliers include Emerson Electric EMR, Applied Materials AMAT, Rockwell Automation ROK, Cognex CGNX, Teradyne TER, National Instruments NATI, Nuance Communications NUAN, MKS Instruments MKSI, Brooks Automation (BRKS), and Plexus PLXS. These are examples of the types of companies that may benefit if inflation continues to be a problem and more companies look to automate.
Outsourcers: Another technological advance that has helped with cutting costs in the cloud. The cloud provides access to many things, including outsourcing. According to a recent article by Business Today, Wipro WIT is still among the top outsourcing companies in India. Trinity Industries TRN is another outsourcing company. In October, Trinity announced that it topped analysts’ earnings and revenue expectations. However, companies like IBM IBM, Accenture ACN, and Infosys INFY all help companies with outsourcing solutions.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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