The S&P 500 and the NASDAQ posted solid gains for the second week in a row, and the Dow notched its fourth consecutive positive result, surging nearly 6% to outperform its peers by wide margins. Mixed earnings results from some major technology companies weighed on the NASDAQ’s result. Halloween is tomorrow so I have broken down this week’s update using slogans from some of the most popular Halloween candy.
You’re not you when you’re hungry — Snickers
Investors have been starving for economic growth and like a Snickers bar, this week’s GDP report satisfied them. U.S. economic growth returned to positive territory in the third quarter after recording slightly negative results in the first two quarters of 2022. GDP grew at an annual rate of 2.6% in the latest period, beating most economists’ expectations and easing concerns about the prospects of a protracted recession. Don’t be fooled by the positive quarter, the economy still is likely to enter a mild recession next year and expect earnings growth to slow or even contract. Just as I told you in the previous quarters that the numbers were not as bad as they seem. This quarter’s number is not as good as it seems. The rebound was mostly due to a boost from net trade, as imports fell and exports surged, reducing our trade imbalance. Consumption is the primary driver of the U.S. economy. It accounts for nearly 70 percent of GDP and it slowed to 1.4% from 2% in the previous quarter. Residential investment (housing) declined sharply because mortgage rates have more than doubled since the start of the year. The positive is that the decline in housing should help reduce inflation. Remember, if we get the much-forecasted economic slowdown that doesn’t mean the stock market will have to stay lower because it has already priced in a recession next year. The stock market is a forward indicator meaning it is pricing in a future outcome.
Gimme a break — Kit Kat
The yield of the 10-year U.S. Treasury bond gave us a break and finally fell after a 12-week streak of gains. The string of gains boosted the yield to the highest level since 2008. It settled to around 4.02% on Friday after briefly climbing as high as 4.33%. In August, the yield was around 2.60% before the twelve-week run began. Although the yield of the 10-year U.S. Treasury bond fell for the week, the yield of the 3-month Treasury climbed causing a deeper inversion of the yield curve. The 3-month yield rose higher than the 10-year yield on Tuesday and stayed there the rest of the week. That’s a rare occurrence, and indicates investors are extremely pessimistic about the immediate future. Logically, if investors want to be compensated more for putting money away for 3 months than for ten years that means they are more concerned about the short term than they are the long term.
How many licks does it take to get to the Tootsie Roll center of a Tootsie Pop? — Tootsie Pop
Profit margins continue to shrink like a lollipop after a lick. Margins for companies in the S&P 500 are forecast to average around 12% for the third quarter. If that figure is maintained by the time all quarterly reports are released, it would mark the fifth quarter in a row of declining profit margins. This week was the most important week of the earnings season, as 164 of the S&P 500 companies, or almost 50% of the index market cap, reported results. We had several high-profile misses. Alphabet, Microsoft, Meta, Apple and Amazon together account for 20% of the index, and, on average, their stocks declined 9% on the day of their earnings release. A deeper dive into the reports to date indicates Americans are still spending, businesses not so much. Meta, Alphabet and some of the other tech companies are seeing online advertising spending continues to slow. That’s what you would expect as companies adjust their marketing budgets in response to the economic uncertainty. Tech companies are also the most impacted by the strong dollar as many of the large tech companies derive more than half of their revenue overseas. There has been a good number of positives so far. The post Covid reopening trend is still in play. The U.S. consumer is still spending, but now more on services less on goods, sorry Amazon. Strong earnings reports from Visa and American Express highlight the fact that despite all the uncertainty in the world Americans are still spending confidently. Just like the GDP number, take the earnings results with a grain of salt. On the surface earnings are holding up better when compared with the recent bear markets. That’s because revenues and profits are expressed in nominal terms (dollars unadjusted), meaning that the earnings are buoyed by inflation as companies pass through the price increases to the consumer.
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