Brace Yourself For Another Wild Month In Stock Markets

For the year, the Dow is down -6%, the S&P 500 is down just over -9%, and the Nasdaq has lost -14.7%. The previous record-holder is January 2009, an ugly moment for the economy, when the stock market fell -8.6%. In addition, the VIX – aka the CBOE Volatility Index – has actually dropped back to around 31 after topping 37 earlier this week, its highest point since November 2020.

Keep in mind, the index isn’t registering anywhere close to levels reached during other periods of “extreme” volatility. For example, the index, which is measured between zero and 100, hit its highest point of almost 83 during the financial crisis in 2008. Its most extreme point during the pandemic was around 66 in March 2020. So, by comparison, this week’s volatility has been rather mild.

Federal Reserve

Some insiders equate the wild swings in stock prices to investors, particularly “big money,” trying to establish a new baseline for stock valuations minus the Fed’s easy money policies that have driven a massive amount of cash into markets since the pandemic began in 2020.

At its height, the Fed was pumping as much as +$120 billion per month into the system via its asset purchase program, ballooning its balance sheet to now nearly $9 trillion.

At the same time, the Fed has held its benchmark rate at near-zero and, before that, hadn’t even attempted to raise rates since 2018, and then only briefly. The last full-cycle of rate hikes was 2015. What’s more, investors haven’t really had to factor for inflation since the early 90s and it hasn’t been this high since the 80s.

Bottom line, whatever the new “normal” ends up looking like, it will be dramatically different from the pre-pandemic investing landscape. I’ve heard several large stock traders saying it seems to be the return of Alpha instead of the race to levered Beta. I hear others on Wall Street referencing it to a bit of league recreational youth baseball team where everybody now gets an award simply for participation, but then kids run into a rude awakening when performance really starts to matter.

It feels like we are there in the stock market; every business that was coming into the market was simply being rewarded with participation points, now people are starting to keep a real scorebook and counting the strikeouts and runs scored.

Economy still roars

The good news is that the U.S. economy continues to roar. Historically, a combination of moderate inflation and moderate interest rates has led to some of the biggest boom times for U.S. Last week, the Commerce Department said Q4 Gross Domestic Product (GDP) grew at an annualized rate of +6.9%, stronger than Q3’s +2.3% and well above Wall Street expectations of around +5.7% growth.

Consumer spending climbed at a +3.3% annual pace led by a +4.7% increase in services spending. But the real stand out was private investment which rocketed +32% higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, contributed nearly +5% to Q4 GDP growth.

On the one hand, the inventory build is positive because it indicates an easing of supply chain dislocations that should in turn help with inflation pressures. On the other hand, many economists note that the big boost from retailer and wholesaler restocking is not likely to be repeated.

Companies will also likely start to unwind at least some of that inventory in the quarters ahead, which could drag overall 2022 GDP, especially if consumer spending also drops off. And investors are more closely tracking consumer behavior as inflation continues to rise.

With consumer spending accounting for about 70% of the U.S. economy, any signs that belts are tightening or moods are getting overly pessimistic will likely set off some alarm bells.

Data to watch

Turning to next week, it will be another busy one for both key economic data as well as earnings. The main economic data highlight will be the January Employment Situation on Friday. Other key data includes ISM Manufacturing, Construction Spending, and the JOLTS report on Tuesday; ADP’s private payrolls report on Wednesday; Productivity & Costs, Factory Orders, and the ISM Non-Manufacturing Index on Thursday.

Earnings wise, results are due from NXP Semiconductor and Trane on Monday; Advanced Micro Devices, Alphabet, Amgen, Chubb, Electronic Arts, Exxon, General Motors, Gilead Sciences, Match Group, PayPal, Sirius XM, Starbucks, and UPS on Tuesday; AbbVie, Aflac, Allstate, Boston Scientific, CNH, Corteva, D.R. Horton, Ferrari, Humana, Johnson Controls, Meta (Facebook), MetLife, Novartis, Novo Nordisk, Qualcomm, Siemens, Thermo Fisher, TMobile, and Waste Management on Wednesday; Activision Blizzard, Amazon, Biogen, Carlyle Group, Check Point, Cigna, Clorox, ConocoPhillips, Deckers Outdoors, Eli Lilly, Estee Lauder, Ford, Hanesbrands, Hershey, Honeywell, Ingredion, Merck, Pinterest, Quest Diagnostics, Royal Dutch Shell, Snap, SnapOn, Wynn Resorts, and Xylem on Thursday; and BristolMyersSquibb, CBOE, Phillips 66, Regeneron, and Sanofi on Friday.

Bottom line, brace for another huge week of extreme volatility.

European Shares End Flat as Fed Fears, Virus Concerns Weigh

The pan-European STOXX 600 index closed largely unchanged at 471.79 points, following a selloff last week that knocked it off record levels.

Commodity-linked sectors continued to outpace the general market, as oil and metal prices rose on expectations of a recovery in major importer China.

Basic resources stocks were the best performers for the day, rising 2.0%.

Travel stocks also surged nearly 2% after U.S. health regulators granted full approval to the COVID-19 vaccine developed by Pfizer Inc and BioNTech SE in a move that could accelerate U.S. inoculations.

Global stocks wobbled last week after data from U.S. and Asian economies signalled a slowing global economic recovery, as a spike in the Delta variant of the coronavirus prompted fresh restrictions in several parts of the world.

Investors are awaiting U.S. Federal Reserve chief Jerome Powell’s speech at the annual Jackson Hole symposium on Friday for hints on the central bank’s asset purchases tapering plans.

“Since the release of the Fed minutes last week, the consensus for the start of tapering has moved slightly forward, from the beginning of 2022 to December 2021,” Unicredit analysts said.

“A hawkish surprise from Jackson Hole appears less likely and the next topic of major relevance is probably the U.S. labour market report on Sept. 3.”

Meanwhile, German stocks rose 0.3% as data showed Germany’s gross domestic product grew by 1.6% on the quarter from April to June, slightly up from its previous estimate of 1.5%, helped by private consumption and state spending.

Marks and Spencer Group rose 4.1% after Berenberg and Credit Suisse raised their price targets on the UK retailer’s stock.

“Despite it being a moderate environment for UK consumption…, M&S is enjoying favourable positioning, market share gains from peers disappearing,” Credit Suisse analysts said in a note.

Norwegian salmon farmer Bakkafrost gained 1.9% following its second-quarter results.

Novartis slipped 1.7% after the Swiss drugmaker said its Kymriah CAR-T therapy did not meet the primary endpoint in a late-stage study.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak Dasgupta and Mark Heinrich)

Novartis Posts Q2 Profit Beat, Keeps 2021 Guidance

It generated net profit of $3.72 billion and increased core operating income 18% to $4.35 billion while sales in the three months through June rose 14% to $12.96 billion, a gain of 9% when stripping out currency fluctuations.

Analysts polled by Refinitiv had on average expected net profit of $3.46 billion on revenue of $12.52 billion.

Novartis said its key drug brands were performing well and its product development pipeline continued to progress.

“While demand is starting to return to pre-COVID-19 levels in most geographies and therapeutic areas, we still see a slight impact on parts of our business for example in oncology, generics and certain geographies,” it said.

“We are assuming further easing of COVID-19 restrictions

in the second half of the year with a positive impact on business dynamics.”

It reiterated it expected 2021 sales to grow at a low- to mid-single-digit percentage rate, with core operating income seen growing at a mid-single-digit percentage rate ahead of sales.

(Reporting by Michael Shields, editing by John Revill)

Novartis Q1 Sales, Profit Miss Analyst Expectations Amid COVID-19 Impact

Core net income slipped to $3.4 billion, compared to the $3.5 billion average estimate of nine analysts in a poll by Refinitiv. Sales were 1% higher at $12.4 billion, compared to $12.5 billion forecast in the poll. Net income fell 5% to $2.06 billion.

Novartis confirmed its 2021 outlook, which foresees net sales growing at a low- to mid-single-digit percentage rate, with core operating income expected to grow at a mid-single-digit percentage rate, ahead of sales.

Novartis, like many other drugmakers including cross-town rival Roche, has taken a sales hit for drugs in dermatology, eye diseases and breast cancer treatment areas as people shy away from doctor visits during the prolonged pandemic. That is impacting key Novartis medicines including Cosentyx for psoriasis, Lucentis for macular degeneration, and Kisqali for breast cancer.

“There continues to be COVID-19 related lockdowns and disruptions in several geographies,” Novartis said, adding that the COVID-19 pandemic has also led to a historically weak cough and cold season for drugs made by its Sandoz generics unit.

The Sandoz unit, where sales fell 9% to $2.3 billion in the period, now expects revenue for the full year to decline in the low- to mid-single-digit percentages.

(Reporting by John Miller; Editing by Riham Alkousaa and Michael Shields)