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Morning Commentary

HERE COMES THE FED

By Charles Payne, CEO & Principal Analyst
7/28/2021 7:47 AM

Whoa. Tuesday was a rough session made even more frustrating because great earnings results couldn’t seduce buyers. On the contrary, even names that edged higher initially stumbled quickly and moved lower, as if reacting to someone yelling “fire” in a crowded theater.   

All the major indices finished well off intraday lows, but they were down for the session.

Major Indices

Previous close

Open

Low

Close

S&P 500

4.423

4,416

4,372

4,401

NASDAQ

14,840

14,807

14,503

14,660

Russell 2000

2,216

2,215

2,171

2,191

The S&P 500 Heat Map saw a fair amount of green, but mainly from the smaller, less influential names, in five sectors: Utilities +1.7%, Real Estate +0.80%, Health Care +0.47%, Consumer Staples +0.21%, and Materials +0.13%.

Market Breadth

I’ve actually seen worse market breadth on up days lately. Still, there was nothing to write home about with market breadth – especially on the NASDAQ Composite. Decliners outpaced advancers, just about 3 to 1, and there were 241 new 52-week lows against only 58 new highs.

Market Breadth

NYSE

NASDAQ

Advancing

1,184

1,199

Declining

2,107

3,162

52 Week High

98

58

52 Week Low

65

241

Up Volume

1.58B

1.39B

Down Volume

2.41B

2.79B

Consumer Confidence

While headlines of the spreading Delta variant and increased restrictions, including mandated vaccines and mask-wearing, continue to dominate the news, consumer confidence held up well.

In fact, yesterday saw the sixth consecutive month of improvement, getting back to highs enjoyed at the start of the Covid-19 pandemic. Consumers see jobs plentiful at a 21 year high, and there are big increases in folks expecting to buy cars, homes, and major appliances in the next six months.

If officials stop short of lockdowns, there is a good chance the consumer will continue to carry the economy.

Earnings Saga

Earnings season is living up to the hype, as revenue and earnings gains continue to gallop ahead of higher estimates.

S&P 500 Reports 2Q21

Revenue

Earnings

Beat

86%

89%

Blended Return

+20.2%

+79.2%

Blended Estimate Jul 1st

+18.5%

+65.4%

Blended Estimate Apr 1st

+15.2%

54.0%

Blended Estimate Jan 1st

+12.7%

45.7%

After the close, mega growth names posted amazing results, only to be met with a thud, except for Alphabet (GOOG), which I mentioned on yesterday’s Afternoon Note, acting great after financial releases.

Apple (AAPL)

Actual

Estimate

Revenue

$81.4 billion

$73.3 billion

Earnings

$1.30

$1.01

iPhone

$39.6 billion

$33.5 billion

Services

$17.5 billion

$16.3 billion

Mac

$8.2 billion

$7.7 billion

Other

$8.7 billion

$7.8 billion

China

$14.7 billion

 

 

Alphabet (GOOG)

Actual

Change

Revenue

$61.9 billion

+62%

Earnings

$27.3

+169%

Service

$35.9 billion

+68%

YouTube

$7.0 billion

+83.7%

Google Network

$7.6 billion

+60.4%

Other

$6.6 billion

+29.3%

Cloud

$4.6 billion

+53.9%

Bets

$192 million

+29.7%

 

Microsoft

Actual

Estimate

Revenue

$46.2 billion

+62%

Earnings

$2.17

$1.92

Cloud

$17.4 billion

$16.3 billion

Azure

+51.0%

+42.0%

LinkedIn

$14.7 billion

$13.9 billion

Personal Computing

$14.0 billion

$13.7 billion

Today, it’s all about the Federal Reserve.

Today’s Session

It’s really interesting that the ongoing narrative on the Street is the Fed will hike rates late next year, and to make sure it’s a smooth process, that starts with an advanced warning from Chairman Powell, so let’s see if he will give more hints about tapering.  The last FOMC gathering saw members thinking about thinking about tapering.

Yet there is a wildcard growing in plain sight.   Growth of the Delta variant will play an outsized role in Fed decision-making and will give Jay Powell a lot more time to hold off on removing the punchbowl.  I personally would be shocked if Powell said anything that could be read as the official signal for tapering.

Moreover, considering how close this administration is,  there is no way the Fed will offer a message that counters the implied urgency from the CDC, which is urging Americans in certain parts of the country to return to mask-wearing…even the vaccinated.

Let’s not forget James Bullard suggesting back in April the Fed would need to see 75% of the adult population vaccinated before beginning to taper asset purchases.  Back then, the target was seen as achievable, maybe before the Jackson Hole gathering, but at current pace, it will take another seven months.

Meanwhile, the new variant has rocketed to the top of the list of biggest risks to market stability according to a survey of institutional money managers by Deutsch Bank.

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In addition to Delta variant, and associated policies to curb its growth, the Powell Fed has been adamant about the jobs picture.  Three metrics Powell focuses on are a million miles from being healed.

Participation: 61.6 January 2020 63.4

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Employment-Population: 58.0 January 61.1

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Black Unemployment 9.4 Sept 2019 5.1* / Hispanic Unemployment 7.4 September 2019 4.1*

*All time low

Meanwhile, the earnings parade continues with monster beats from Boeing (BA), its first since 2019, as the company achieved $0.40 when the street was modeling for ($0.83).   McDonalds (MCD) saw 40.5% same store sales growth while the street was looking for 38.7%.

Portfolio Approach

This morning we are adding a new position in Industrials  in our Hotline Model Portfolio.

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