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Earnings Season Again

October 12, 2020
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Right now, the stock market is ping-ponging up and down on the news of whether or not the White House and Congress can agree on the next stimulus package.  While the future of the economy being dependent upon more “stimulus” from the government is disconcerting, the performance of the U.S. stock market is nothing short of impressive as well as it has held together.  Some of the U.S. stock market performance is undoubtedly resulting from foreign money-managers feeling safer in the American markets – as we mentioned last week.  But for the market to be holding near all-time highs with the election pending is interesting to say the least. Some market observers are more confident of stimulus from Washington if Biden wins therefore, they say stock market is predicting Biden. Some are saying the market would fear regulation if Biden wins therefore, the stock market is predicting Trump. We won’t even venture a guess which side will win, but our comment has to do with the confidence of the market. As we mentioned last week, historical empirical evidence implies that the stock market doesn’t care between Republican and Democrat president administrations in the Whitehouse. However, the one thing the stock market DOESN’T like is uncertainty. That is the shocking part. The market is so strong with so much drama in the news about how people wont even trust the results of the election.  Of course, the stock market could be wrong, BUT IT SEEMS TO BE PREDICTING A DECISIVE WIN – WHETHER BY TRUMP OR BIDEN. The market also seems to be saying that the results of the election will be generally accepted!  Whew! Let’s hope the market is right and whoever is in the Whitehouse we can get back to work!

One thing that could derail the strong stock market in the near term is a weak U.S. earnings season that kicks off this week with a number of financials reporting. We will hear from Johnson & Johnson, JPMorgan Chase, Citigroup and BlackRock tomorrow. Then on Wednesday, we have UnitedHealth Group, Bank of America, ASML, Wells Fargo, Goldman Sachs and United Airlines. Thursday sees releases from Morgan Stanley and Walgreens Boots Alliance. And on Friday we’ll get earnings from Honeywell International and BNY Mellon

The coming week is fairly quiet with regard to financial data and world central bank reporting/commenting. On the data side, we will start to see some hard data from the U.S. for September, with the release of the CPI, retail sales and industrial production figures. China will also be releasing their trade balance for September, and we’ll also get the Euro Area’s industrial production for August.

One last thing to mention is long term interest rates. Looking for near term surprises that could derail the stock and bond markets other than the election, one has to address the yield curve. We recently mentioned in this post that it appears long term rates have bottomed. However, this week we want to mention that just because long rates have bottomed doesn’t mean they are imminently going higher. Strangely enough, the speculative trading community does not agree with us. Take a look at the “Commitment of Traders” report showing how negative trading funds have gotten on the price of treasury bonds (meaning they think long term interest rates are going higher.)

This is a new all-time record BY QUITE A WIDE MARGIN. So, the most overcrowded trade in the marketplace right now is traders that are wagering long term interest rates go higher. In our experience in the financial world, when everyone is betting one way, look to the other.

We have repeatedly complained in this post that the Federal Reserve should not be the arbiter of short-term interest rates – a free marketplace should be. At least the longer end of the curve is still more influenced by a free market than the short end is. Traders are loading the boat thinking these long rates will go higher – we think they will be disappointed, and the good news is that stock and bond rallies won’t get hampered by higher rates. 

Regards and good investing!

Greyson Geiler