The final week of October is really spooking investors. Investors are booing solid earnings reports. One might say more tricks than treats. Weak Halloween puns aside, yesterday brought a solid rebound as the major averages attempted to solidify the low end of their recent trading ranges. An approximately 12% band between 3,200 and 3,600 on the S&P 500 has lasted for three months now. There is a wider range in the Nasdaq of approximately 15%, but neither of them are ready to break out in either direction until we get resolution on the major themes we are well aware of, namely, Covid, the election and future stimulus.
Healthcare and housing stocks sat out the solid rally in most sectors. Fears of a blue wave may be sending some pharma investors to the sidelines as potential healthcare legislation with a Government option leads to uncertainty for future growth plans. However, as we have seen in the past, the best companies adjust. Industry visionaries adapt to changes and come out stronger. Government plans can alter the short-term trajectory of some stocks, but baby boomers aren’t getting any younger. Long-term demand for health care is only going to grow. Doing some extra work here could prove fruitful. Organizations with great leadership teams and a track record of innovation are becoming cheaper relative to historic norms.
Housing related stocks are massive winners this year. Yesterday’s pending monthly home sales report surprisingly stalled after posting a record high last month which hurt these stocks relative to the market. It is certainly worth watching, but sales were still up 20% from last September. Again, the long-term trajectory points to solid demand and low inventories. The millennial generation is starting to have families and will need to move out of small apartments in the city. Rapidly rising mortgage rates could slow purchases, but we are far away from any spike that could deter a need to move.
In the “past is no guarantee of future results” category, Q3 GDP came out yesterday as well, posting a 33.1% annualized pace. It was the fastest growth ever recorded, which is easier to do when the previous quarter is down 31.4%. The sequential math here doesn’t mean we are back to even, but the V-shaped bounce back surprised business leaders and investors alike. This market drop and rebound are unprecedented to say the least. That’s what happens after you lock down trillions of dollars in normal activity across the globe. Pent-up demand is a powerful thing.
Home sales, vehicle production, air cargo, trucking surveys, railcar loadings and retail sales are all ABOVE pre-Covid levels. When you give consumers $1,200 checks and extended unemployment benefits, they find ways to spend it. Consumer spending led the rebound with a 41% expansion during the quarter. Every subset was up except Government spending, which was down 4.5%, stemming from shutdowns.
Although it is great to see such a bounce, the rebound in spending is hardly expected to continue if Covid case counts keep spiking. Approximately 14 million Americans are scheduled to have their unemployment benefits run out by year-end as well. Something needs to give, and soon.
Turning to today’s trading, it will be led by a few heavyweights. Overnight we heard from four of the biggest companies in the world with respect to their 3rd quarter earnings. Together they represent 17% of the S&P 500 weighting and 10% of the index earnings. A brief on each company’s results:
Apple# (Market cap of $1.9T): Total sales came in at nearly $65B. Bottom line earnings were slightly better than expected. iPhone sales were weaker than analysts predicted, leading to a ~4% drop in the stock after hours. Their revenue is up 1% over the past year but the stock is up 90%. A continuation of the wide trading range is expected, leading up to a massive 5G upgrade cycle. Why buy a phone in the summer when a 5G upgrade is coming in the winter? Next year will show solid growth. Nothing wrong with this stalwart.
Amazon# (Market cap of $1.6T): Total sales came in at over $96B, handily above estimates of $92B and up 37%. An amazing continuation of growth which has now posted 76 straight quarters of double-digit year over year expansion. They only had $89B in revenues six years ago and now exceed that in just one quarter. They also crushed EPS estimates. On the positive front, Bezos noted, “We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season.” Let’s hope this continues for all retailers. Guidance was a tad lighter than expected, which is causing a slight drop in the stock this morning.
Google# (Market cap of $1.1T): Total sales came in at $46B versus expectations for less than $43B and were up 14%. Advertisers rush to where the consumer is. For Google, that’s search and YouTube. Big name brands are fleeing traditional cable ads and shifting buckets of money over to the online leaders, of which there are only a few. Google’s 17% stock return in 2020 has trailed the rest of FANGMAN, who have posted a 62% return. It looks like catchup time is in order as the stock bounced 7% after the report.
Facebook# (Market cap of “only” $800B): Total sales came in at $21B versus expectations for under $20B. Amazingly, this 22% jump in revenues was the company’s 2nd slowest growth rate in history. Again, advertisers are being forced out of the old world and into the new. Facebook continues to grab eyeballs and consumers’ valuable time. Even with China banning the app, they noted 2.7 billion accounts used their platform on a monthly basis. Wouldn’t you want to advertise there? Future growth rates are hard to estimate if/when we reopen and consumers spend less time on their couches. Expenses will continue to rise as well. Good news has been priced in and the stock is down slightly after hours. The stock is not expensive relative to their revenue trends.
In total, these four behemoths crushed it last quarter. Updates showed a tremendous amount of growth, outside of Apple, as Covid-induced trends pushed consumers away from traditional spending patterns and into the future digital economy. Make no mistake, these companies are quite sound. The question becomes, how much good news is priced in? In a world of low interest rates, those that are taking share with predictable growth can carry elevated P/E ratios. Investors will be anxious to see how management can handle a post-pandemic world with more competition for spending.
For now, they are selling most of them which is pressuring futures. Where they close today will be more important. So we stay in these trading ranges until the aforementioned Covid, election and stimulus uncertainties become finalized. Hopefully, we can check at least one of these off the list by the next Friday update.
Today, Ivanka Trump turns 39. The Fonz, Henry Winkler is now 75.
James Vogt, 610-260-2214