Higher Bond Yields Keep the Pressure on Stocks

Bulls want to believe that the worst of the recent downturn is over with some pointing to the fact that stocks didn’t sell off yesterday in spite of yields on 10-year Treasuries surging back above +3%.

Bond yields

At the same time, Wall Street insiders warn that it may be hard for stocks to mount any meaningful rallies if bond yields much over +3% are sustained. Theoretically, the guaranteed, risk-free returns of bonds could start to more seriously compete with stocks for investor money, keeping a lid on any big upswings.

Higher bond yields are also likely to keep the pressure on stocks of high-growth companies that dominate the tech sector. With many of these fast growing, profitless companies, their valuations are largely based on the future profits that today’s debt-fueled growth is supposed to be paving the way for.

Higher bond yields and interest rates make those profits less valuable in the long run, meaning those companies aren’t as valuable anymore. This is a key reason why bears believe there is more stock market “excess” left to shake out, especially with the Federal Reserve expected to aggressively tighten policy in the months ahead.

Fed officials have signaled rate hikes of 50-basis points for both the June and July policy meetings. There have also been hints that a 75-basis point hike could be justified in the second half of the year – perhaps September – if inflation shows no signs of easing. It’s hard to see where that relief might come from in the near-term especially with oil and other energy prices flying.

Saudi Arabia hiked prices on its crude oil for Asia, Europe, and the Mediterranean yesterday. What’s more, the hike for Asia was substantially higher than expected at +$2.10 versus +$1.50. Higher oil prices for Asia means higher manufacturing and transportation costs, which will likely end up being passed on to consumers in importing countries like the U.S.

Data to watch

The next read on U.S. inflation comes on Friday with the Consumer Price Index, which is also the final report before the Fed’s policy meeting next Tuesday and Wednesday (June 14-15). It’s hard to imagine a big bull rally between now and then considering the extreme degree of uncertainty surrounding energy prices and the impact on inflation. It’s also hard to imagine the central bankers have much insight to offer as far as when inflation might start to ease.

Part of the Fed’s job now is not only trying to keep a lid on prices but it also needs to manage consumer and investor expectations for inflation. If business and consumers anticipate substantially higher prices ahead, they could in theory pull back on investing/spending enough that it ends up creating a self-induced economic downturn. A slowdown would be welcomed by the Fed but it can be a fine line between slower growth and an outright recession. This is a “thread the needle” part of the equation that investors are not entirely confident that the Fed can successfully navigate.

Today, economic data is light with just the Trade Balance and Consumer Credit on the calendar. Earnings highlights include Advantest, Casey’s General Stores, and J.M. Smucker.

What Do Traders Have to Know About Today’s Stock Market Rise?

Bullish factors

Experts warn, however, that the data pool is relatively small as Omicron was only detected a few weeks ago. While a larger data set could come to a different conclusion, the early findings are encouraging and investors seem content for the moment rotating back into some of the so-called “reopening” stocks like airlines, hotels, and live entertainment that have gotten beaten up recently.

Vaccine makers are expected to begin releasing data regarding effectiveness against the new variant over the next week or two.

Bulls are also encouraged by news that China’s central bank is making moves to boost its sluggish economy which has suffered from an energy crunch and fallout in the property sector, as well as extreme Covid measures that have weighed on both industrial output and consumer consum ption. Inflation, particularly across the manufacturing sector, is also blamed for keeping a lid on China’s growth with the country’s producer price index in October climbing at the fastest pace in at least 25 years.

Data to watch

November data, which will be released overnight Wednesday, is expected to show a pullback in factory-gate prices. Many economists believe that climbing manufacturing prices in China have contributed to overall global inflation pressures as the country exports so much of its industrial output. China’s global trade surplus hit record levels in October.

Bears are now worried that we could see increased trade tensions between the worlds top two economies now that the U.S. formally announced a diplomatic boycott of the 2022 Winter Olympics that are scheduled to start in Beijing in less than 60-days. Though American athletes will still be able to compete US officials will not be contributing to the fanfare of the games. Such a snub by prominent Western leaders and other governments following this lead could really get China fired up so pay close attention.

Today, here at home, U.S. data includes International Trade in Goods, with analysts expecting a slowdown in U.S. imports. That in turn could be viewed as good news for inflation as slowing consumer demand could go a long way in easing supply chain pressures.

At the same time, if imports drop too dramatically it could fan worries about the health of U.S. consumers which have so far not shown signs of reining in spending amid the current inflationary trends and widespread shortages of goods. Productivity and Costs and Consumer Credit are also due today. On the earnings front, highlights today include Autozone, Casey’s General Stores, ChargePoint, and Stitch Fix.

New York Becomes First U.S. City to Mandate Covid-19 Vaccination for Private-Sector Workers. The new measure will go into effect Dec. 27 and will cover about 184,000 businesses. New York will also require children ages 5-11 to show proof of vaccination for indoor dining, entertainment, and fitness.

 

Earnings Week Ahead: AutoZone, Campbell Soup, Lululemon and Broadcom in Focus

Earnings Calendar For The Week Of December 6

Monday (December 6)

Ticker Company EPS Forecast
SAIC Science Applications International $1.49
MDB MongoDB Inc -$0.38

 

Tuesday (December 7)

IN THE SPOTLIGHT: AUTOZONE

The Memphis, Tennessee-based auto parts retailer AutoZone is expected to report earnings per share of $20.78 in the fiscal first quarter, which represents year-over-year growth of about 12% from $18.61 per share seen in the same period a year ago.

The company, which is a major retailer and distributor of automotive replacement parts and accessories, is on track to beat earnings per share estimates again after having beaten it for 12 consecutive quarters. The company is expected to post revenue growth of about 6% to $3.33 billion.

The company is expected to earn $97.73 per share and generate $14.81 billion in revenue for the entire fiscal year, according to Zacks Research. These results demonstrate increases of 2.67 % and 1.22 % over last year, respectively.

“We see AutoZone (AZO) as a high-quality retailer with the ability to compound earnings/FCF growth over time. While not immune to a tougher macro backdrop (fewer miles driven), we believe AZO is best positioned through any recession given its leading exposure to the more defensive DIY segment (~80% of sales),” noted Simeon Gutman, equity analyst at Morgan Stanley.

“In addition, its DIFM growth was accelerating pre-COVID-19 and we think it can gain more share in that segment going forward. In our view, ongoing share gains coupled with solid expense management should allow AZO to overcome headwinds from less driving in the near- to medium-term. These advantages seem priced in currently.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE DECEMBER 7

Ticker Company EPS Forecast
AZO AutoZone $20.71
AHT Ashtead Group £0.62
S Sprint -$0.18
TOL Toll Brothers $2.48
CASY Casey’s General Stores $2.79
HRB H&R Block -$0.94

 

Wednesday (December 8)

Ticker Company EPS Forecast
UNFI United Natural Foods $0.58
KFY Korn Ferry International $1.37
THO Thor Industries $2.70
RH Restoration Hardware $6.62
GEF Greif $1.47
GME GameStop -$0.52
CPB Campbell Soup $0.81

 

Thursday (December 9)

IN THE SPOTLIGHT: LULULEMON ATHLETICA, BROADCOM

LULULEMON: The Vancouver-based healthy lifestyle-inspired athletic retailer is expected to report its fiscal third-quarter earnings of $1.40 per share, which represents year-over-year growth of over 20% from $1.16 per share seen in the same period a year ago.

The apparel retailer would post year-over-year sales growth of about 28% to $1.43 billion. In the last two years, the company has beaten earnings per share (EPS) estimates most of the time.

Sales are expected to be $1.4-$1.43 billion in the third quarter of fiscal 2021, representing a two-year CAGR of 24-25%. The gross margin is expected to increase 50-100bps compared to the second quarter of fiscal 2019. The company expects adjusted earnings to be between $1.33 and $1.38 per share, compared with $1.16 in the prior-year quarter and 96 cents in the third quarter of fiscal 2019, according to ZACKS Research.

Net revenues are expected to reach $6.19-$6.26 billion for fiscal 2021 compared with $5.83-$5.91 billion earlier. Earnings per share will be $7.38-$7.48 versus $6.73-$6.86 previously mentioned.

Lululemon Athletica (LULU) is a long-term topline grower, supported by compelling secular tailwinds (e.g., performance/athleisure focus), a market share gain opportunity, & credible future revenue driver (e.g., international expansion, digital growth, & product innovation/expansion into new categories). The company’s recent MIRROR acquisition offers both revenue & profitability upside, as reflected in our bull case,” noted Kimberly Greenberger, equity analyst at Morgan Stanley.

LULU dominates the NA athletic yoga apparel category due to its unique brand positioning & fashionable products. Covid accelerated consumers health & wellness focus & fashion casualization, both of which should benefit LULU.”

BROADCOM: The chipmaker and software infrastructure supplier is expected to report its fiscal fourth-quarter earnings of $7.74 per share, which represents year-over-year growth of over 21% from $6.35 per share seen in the same period a year ago. The semiconductor manufacturer would post revenue growth of nearly 14% to $7.35 billion.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE DECEMBER 9

Ticker Company EPS Forecast
SMDS Ds Smith £16.10
FIZZ National Beverage $0.50
HRL Hormel Foods $0.50
CIEN Ciena $0.86
ORCL Oracle $1.11
LULU Lululemon Athletica $1.40
AVGO Broadcom Inc $7.74
MTN Vail Resorts -$3.66
COST Costco Wholesale $2.57

 

Friday (December 10)

No major earnings are scheduled for release.

The Biggest Risk To Economic Growth. Should You Still Buy The Dip?

In fact, the all-time record for new highs in one year is 77, set in 1995. Trend watchers note that 2021 is only the 11th time since 1928 that the S&P 500 has rallied +20% or more during the first 8 months of the year. In all but the two big market crash years of 1929 and 1987, the S&P 500 managed to hold a solid double-digit gain into year-end, according to Bank of America research.

Bears vs bulls

Bears, however, are quick to point out that the S&P 500 hasn’t had a pullback of at least -5% or more during the entire climb higher this year, something that generally happens about three times a year. Typically, corrections of -5% to -10% are considered healthy. Bears of course believe stocks are wildly overvalued due in large part to the Federal Reserve’s monetary supports and “easy money”. Once the Fed starts reducing its asset purchases and lifting interest rates, bears believe investors will take a more “risk off” attitude and the bull rally in stock markets will correct to some degree.

Overall, bulls seem comfortable with the Fed beginning its asset purchase “taper” later this year and that is partially due to Fed Chair Jerome Powell’s insistence that the economy “still has much ground to cover” before rate hikes are on the table. Bulls are also anticipating a second shot at a “reopening boom” after the current wave of coronavirus has passed. Remember, this wave cut short the Covid-free summer spending surge that everyone had been anticipating so bulls believe this pent-up demand is going to be spent in the quarters ahead.

What to watch?

The biggest risk to economic growth right now is not on the demand side but rather on the supply side as shortages for everything across the board are limiting the amount of goods and services available. Demand amid the summer Covid surge has cooled a bit, which may be a good thing in the long run as it’s given some manufacturers a minute to catch up. And again, bulls believe this is creating just another layer of pent up demand that consumers will satisfy down the road.

Turning to next week, remember that U.S. stock, bond, and commodity markets are closed on Monday, September 6 for the Labor Day holiday. The short week will also be light on data with just the Fed’s Beige Book and July Consumer Credit on Wednesday, and the Producer Price Index on Friday. Next week’s earnings will include Casey’s General Store, Lululemon, GameStop, Oracle, Z-Scaler, Academy Sports, and Kroger to name a few.

SP500 analysis

Sp500 rallied despite weak NFP. There is only one reason for such reaction – the Federal Reserve still cannot move to tighten monetary policy. However, the Cycles forecast the best buying dip opportunity in October if other conditions will be there. We certainly can’t judge now if it is going to be conformed by other tools.

sp500 cycles september 2021

We have bearish ADL divergence on a daily chart and potentially it will play well and create a buying opportunity in October. However, I have to say there is still good accumulation in this market. So, I believe if this market gives a sell signal in September, traders should cash out their positions quite quickly. We are in a strong bull trend and so far all fundamentals still support the stock market.

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