Rally Pause: Wall Street On Edge As Stimulus Talks Drag On, Nike Earnings Awaited

Key Takeaways:

  • Final day of final full week of year begins with stimulus talks in focus
  • Nike NKE earnings expected after the close with digital sales front and center
  • Investors brace for Monday’s addition of Tesla TSLA to S&P 500

It’s the final day of the final full week of the year, and the race is on for Congress to reach a stimulus ahead of Christmas.

Even before that, they have to find a way to keep the lights on in Washington by the end of today. Unless negotiators make a lot of progress very fast or move forward with another “continuing resolution,” there’s a chance the government could shut down tonight. That seems pretty unlikely, and it’s also not necessarily a dagger to Wall Street. The last time was two years ago. That shutdown coincided with a nice January 2019 rebound in stocks after a harrowing Q4 of 2018.

Stocks appear to be pausing in their upward surge this morning, but major indices are still on track for their fourth positive week in the last five. So far this week, the Nasdaq NDAQ (COMP) is outperforming other major indices, which suggests Info Tech has regained its leadership position, at least for the moment. Going into the week, many thought it would be a busy set of days, but that hasn’t panned out. Maybe it’s the snowstorm on the East Coast slowing things down.

While there’s a lot of optimism about a stimulus, it’s important not to count on it. This has been debated for six months now and it’s really coming down to the wire. Yes, there seems to be more bipartisan cooperation, but remember that it’s very hard to get things done in a lame-duck Congress. It’s easy to see things going south and the market taking it pretty hard, with so much stimulus premium already built in. Hope for the best, but prepare for the worst, as the saying goes.

A “buy the rumor, sell the fact” type of scenario may be in store if a stimulus does get done, especially when you consider possible pressure from late year tax-related profit-taking. The other side of the coin is that we’re in kind of a “bad news is good news” mode, as you might have noticed when stocks rallied yesterday to new highs despite the bearish initial jobless claims news. Some investors might have seen the disappointing report putting more pressure on Congress to act.


Short Week Ahead Highlighted by Tesla, Home Sales

There’s no way to know what the government might ultimately do, and that’s the big wild card in the days ahead. Besides stimulus, next week does have some other stuff worth watching. Maybe nothing is bigger than the addition of Tesla (TSLA) to the S&P 500 (SPX) prior to Monday’s trading session. TSLA is the most valuable company ever added to the SPX. It will likely come in with a roughly 1.0% weighting, and index funds are expected to buy around $80 billion of TSLA stock and sell the equivalent in other stocks.

TSLA being added could cause a lot of movement in and out of the market. People get excited about it, but don’t forget there’s something on the other side of this. People will have to be getting out of a lot of other stocks, too, and that could provide pressure. All this can make sudden, quick movements possible one way or the other. In other words, watch out for volatility on Monday, and maybe in the days beyond.

Other things to look out for in the short week ahead include the potential U.S. approval of Moderna’s (MRNA) vaccine, the government’s final estimate for Q3 gross domestic product (GDP), and November existing and new home sales. Speaking of which, mortgage rates again hit record lows recently, and some of the major home building stocks like Lennar LEN (LEN) and KB Home KBH (KBH) had very nice days on Thursday.

They may also have gotten a lift from the Fed’s dovish words on interest rates earlier this week, along with better than expected housing starts and building permits data released Thursday. Building permits are a good barometer of economic health, because housing developers don’t tend to plan new projects if they feel like the demand isn’t there.

Crude’s strength is in the picture, too. It’s on pace for its seventh straight week of gains. Some of this may have to do with the weak dollar (see chart below), but it also could speak to better demand. As we know, crude demand is a great barometer for the health of the economy, so this is kind of an important story and worth watching.

There’s still a couple of housekeeping items before the weekend, including quadruple witching and Nike (NKE) earnings. Witching days (today is one of them) aren’t necessarily as volatile as they once were, but you still should be mindful if you’re trading today. Some of the big houses might still use quadruple witching because the expirations of their positions match up better. At every expiration, you should have a heightened sense that there might be more movement at the open or close as people unwind baskets of stocks or futures.

One other thing maybe worth eyeing today and next week is the dollar index, which fell below 90 on Thursday and now rests at its lowest level since April 2018. The weaker dollar contributed to decent performances in foreign equities, oil prices, and precious metals yesterday, research firm Briefing.com observed, but energy stocks didn’t get much help from the higher oil prices Thursday. The dollar’s softness might have been exacerbated by the Fed’s dovish policy words earlier in the week. 

The risk picture appears mixed this morning. Gold is down, bonds are flat, and the Cboe Volatility Index (VIX) is up just a tad and back above 22. It still hasn’t managed to fall below 20 since February.

Nike Earnings on Friday with an Eye on Guidance, Digital Sales

Amid all the big picture news, there’s actually a little corporate item on the calendar in the form of NKE fiscal Q2 earnings today after the close. NKE’s last quarterly report was pretty much a home run, with online sales rising 82%. Shares rallied double-digits back in September on that news. So NKE has a hard act to follow, especially for its U.S. business, with stimulus measures having dwindled during the reporting period. Digital sales are likely to take center stage once again.

Another thing to watch is guidance. Last time out, NKE was one of the few major firms to offer some, projecting high single digit to low double digit sales growth for fiscal 2021. A hike in that estimate would probably be viewed as positive not just for NKE, but for consumer health in general. Don’t count on it, though. These remain tough times, and holiday shopping predictions are all over the map.

One more thing that might be supportive for NKE is its China sales, seeing that China’s economy appears well ahead of many others in recovering from the pandemic. NKE has heavy exposure there, which could help its quarterly takeaways. Sales in China rose 6% in the previous quarter for NKE, but that covered a period when China’s economy was less robust.

Earnings Beat: It’s a bit worrisome that analysts expect earnings to decline double-digits in Q4 even as the market keeps posting new highs. As noted here yesterday, research firm FactSet says average S&P 500 earnings this quarter are expected to descend 9.9% year-over-year. That would be the third-worst earnings quarter since 2009. It’s even worse over at research firm CFRA, which projects Q4 earnings to drop 11.4%. Despite these expectations, the average S&P 500 valuation is around 22, compared with just 15 historically.

Fed Chairman Jerome Powell was asked about valuations Wednesday at his post-meeting press conference, and responded that asset prices are “a bit high” but added he doesn’t see a lot of “red flags.” Also, it’s kind of reassuring that CFRA projects a big rebound in 2021 calendar year earnings of 21.3%. That could be the key number to track in coming months, because in the very long run, corporate results and share prices tend to converge, one way or another. The question is whether prices ultimately have to go down or earnings go up. Finding that out is arguably the top reason Wall Street opens every day.

Digging Into the Sectors: CFRA expects all but four S&P sectors to post Q4 losses. The lucky ones? Health Care SBRA , Info Tech, Materials, and Utilities. All of these are seen posting single-digit gains. The rest of the picture is a lot more murky, judging from CFRA’s research. It projects double-digit earnings declines for five sectors year-over-year, including a nearly 100% drop for Energy CMS earnings. Think that’s bad? It’s actually an improvement from the 108% year-over-year decline that sector posted in Q3. Yes, it’s been very hard times for the Energy sector, notwithstanding some recent strength here as crude rebounds back to nine-month highs. It honestly wouldn’t be surprising to see more bankruptcies and consolidation in the oil patch.

Real Estate, Industrials, and Consumer Discretionary follow Energy for worst projected Q4 results, according to CFRA’s projections. Year-to-date market performance for some of the sectors taking the biggest earnings left hooks doesn’t really reflect the underlying financial weakness, by the way. Energy is down 34% this year, which seems bad enough until you note that the sector’s companies are expected to post earnings losses of 107% in 2020.

“I Can Make a Hat, or a Brooch…” There’s new hope that when we make the old joke about there being “a sale at Penney’s!” our kids will actually know what we’re talking about. No, they may not appreciate our old movies, but they could be familiar with the store. That’s because JCP JCP enney (JCP) has emerged from Chapter 11 bankruptcy. The chain completed the previously announced sale of its retail operations to Simon Property Group Inc. SPG and Brookfield Asset Management Inc., according to Bloomberg. It’s the first step in a process that splits JCPenney into two parts, an operating company led by its mall landlords and a property company owned by its lenders.

That doesn’t mean it’s necessarily a good idea to take any risk on the shares, which now trade for “pennies,” no pun intended, on the over-the-counter market. Penny stocks are mighty risky, though earlier this year many investors piled into shares of another bankrupt company, Hertz. That’s despite Hertz shares having an ultimate value of zero. As for JCP, the move to split it in two highlights the current conundrum for many brick-and-mortar stores trying to compete with online retail and with mega-chains that have big online sales. Sometimes, they’re more valuable for the land they own than for the stores that sit on that land. JCP had bled money for years as shoppers chose online retail or specialty stores, as Crain’s Chicago Business recently pointed out. Now JCP will likely work on shutting or shrinking stores and accelerating spending on digital, an analyst told Crain’s. The good thing? JCP claims it’s saved “tens of thousands of jobs” and preserved “this iconic institution.” Which means maybe even our grandkids will get the old joke.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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