A sea of calmness and optimism best characterized the US stock market for the week. Retail solid earnings and the superior performance of technology stocks engineered the markets to a new high.
While inflation looms in the background, it has not dented the spirit of risk-on sentiments, and investors are happy to continue seeding and harvesting the rewards. The index performances were mixed.
The Dow had fallen by 1.4% as Boeing crashed after delaying 787 deliveries. The S&P 500 rose 0.3%, modest but looking at the bigger picture; it was a spectacular year to date performance. Nasdaq is the biggest winner, adding 1.2% for the week, with Nvidia at the forefront of the leap, jumping 7.9% with a set of robust earnings results.
Economic data calms the nerve
As discussed, with a less aggressive Fed, economic data is likely to drive the US markets’ trajectory. Accordingly, Pika World’s economic outlook remains on the cautious optimism stance. Our approach in the mid-cycle transition has done us well, with occasional pitfalls but added grains to our basket of returns as we navigate decisively in each portfolio adjustment.
Initially, we were concerned that inflation might dampen investors appetite for risky assets. However, our worries will not be substantiated. Retail sales were healthy, growing by 1.7% in October. More assurance came from retail giants earnings results such as Home Depot (HD) and Lowe’s (LOW), which hint that consumers are still investing in improving the amenities of their homes. Then came the sparkle from Macy’s (M), which is exploring segregating its digital business from the conventional physical stores, sending its shares to rocket more than 21% on Thursday. Walmart, too, joined the party with a remarkable performance. Clearly, all is well, at least for now.
With the confluence of healthy economic data and earnings, investors fret less on the headwinds of supply chain issues that could drag down corporate profit margins. This gave S&P 500 the booster as it tops up 8% gain in the current earning season, which some articles called the best result in 7 years on the support that profit margin for companies showed no sign of weakness.
Fiscal stimulus in the Pipeline
A giant step forward indeed for Biden’s administration. The Build Back Better bill passed primarily along party lines and cleared the House with 220-213 votes. It ushers a season of hope and assistance to the realm of the social fabric as funding for Universal Pre-K leave and expanded Medicaid benefits are on the card. Good news for electric car makers, too, as electric vehicle tax credits were part of the bill.
Markets appeared to be delighted with the news. After all, the consistent bull market narrative was supported by firm and timely monetary and fiscal policies. Moreover, it was thought that inflation would erode the political will of the magnitude of this bill. Still, it seems that a watered-down $2 trillion package is palatable for the majority of the members.
Senate now has the more significant role in having it passed. There are signs of challenges. As always, Pika World expects some factions of the moderate Democrats to hold out support for the bill possibly, which would be detrimental
to the movement given the thin majority held by the Democrats in the Senate. After all, the Republicans aren’t interested in investing in the fortune of the Democrats and pitched on inflation scare to derail efforts of any success towards the finishing line.
Our outlook Ahead
Asset classes such as Oil had a lacklustre week as it fell 5.8%, down by 10% compared to its October highs. We see more supply from US producers ramping up their production, and demands start to dwindle with the wildcard- Covid 19 playing out in Europe, given the flare of lockdown arriving.
Buying the dip has proven to be a rewarding strategy thus far this year but surrounding this is a more formidable force that could blow away gains should Covid-19 lockdown gain traction.
On the other hand, a heartening outcome will be the pushing of booster jabs by governments globally, and vaccination for children is gaining traction with the hope of taming the damping effects of the virus on the economy while letting the animal spirits work on for the stock market.
Consistent with Pika World’s strategy, we tend to retire some gains in our portfolio and rotate into sectors of companies that present more opportunities for upside ahead as we recycle our capital into the remaining weeks of the year.
We appreciate your time reading this edition. Stay tuned as we share more insights on our readings and thoughts on the market.
More Stories
Fed put helps power stock market rally
Major Economic Events Ahead
A flip-flop markets into earnings season