Wall Street Seems To Be In Risk-Off Mode Amid Worries About Rising Virus Cases

Key Takeaways:

  • Microsoft beats on top, bottom lines, but guidance disappoints
  • Oil prices falter as risk appetite wanes, inventories grow more than expected
  • Facebook, Alphabet, Twitter CEOs to address lawmakers today

If you’ve ever driven the early-morning rush hour, you know the drill: Traffic is tight but manageable, but then you start seeing brake lights ahead. It seems a similarly divergent set of views is emerging with investors. The view in the rearview mirror is OK—relative to the worst-case scenario anyway. The other view, that of the road ahead, seems less certain.

On the economic front, durable goods data out yesterday looked pretty good, but that data point is backward looking, and a separate report showed consumer expectations are dropping amid rising Covid-19 cases and continued high unemployment. (See more on both below.)

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Analysts are expecting third quarter GDP, scheduled for release Thursday, to show a pretty solid recovery from the depths of the virus, but looking ahead, case counts and hospitalizations are seeming ominous, both here and in Europe.

Stricter restrictions are looking likely in France and Germany, while here at home the governor of Illinois ordered tighter restrictions for Chicago. European markets were down across the board overnight and domestic stock futures weren’t looking so great on this side of the pond this morning amid worries about the pandemic.

Earnings Season Rolls On

On the earnings front, many companies have been reporting better than expected results. After yesterday’s close Microsoft (MSFT) continued the drumbeat of companies that have beaten expectations this earnings season. But the tech giant’s shares were down more than 2% as its quarterly revenue guidance was less than analysts had been expecting.

That dynamic from MSFT seems to punctuate the rearview mirror-vs.-road-ahead argument—an important lesson as earnings season rolls on. Remember: Four FAANG members—Apple (AAPL), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL) are set to report tomorrow.   

In other earnings news, General Electric (GE) shares jumped 5% in the pre-market after reporting profit and revenue numbers that surprised to the upside. But Mastercard (MA) missed on both top and bottom lines.

Investors know that the past isn’t always precedent. What they don’t know is what the future will hold. With unease about the unknown mounting as we enter the cold months of the year, Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) is on the rise—touching 38 in the early going Tuesday—and demand for the relative safety of U.S. government debt has been climbing, pushing yields lower.

With risk tolerance on the back foot, oil prices are lower amid worries about demand if the global economic recovery falters. It’s also looking like a larger-than-expected rise in U.S. crude inventories is helping push black gold lower.

And as if executives of top social media titans don’t have enough to worry about this week (with earnings scheduled for tomorrow), later today the CEOs of Facebook (FB), Alphabet (GOOGL) and Twitter (TWTR) are scheduled to address lawmakers on Capitol Hill. Tough questions could form a headwind for their shares today. But again, the following day we’ll get an earnings snapshot from them.

Virus Worries Persist as Stimulus Hopes Fade

Wall Street had a better day Tuesday than it did Monday, as tech-related companies helped things a bit, but the overall mood still seemed somber after the Senate adjourned without passing a Covid-19 relief bill and as coronavirus cases rise in many states.

In addition to the Senate’s adjournment, White House communications director Alyssa Farah told Fox News that the administration is hoping for a coronavirus stimulus agreement “within weeks.” That timeline further dampens hopes of a deal before the presidential election next week.

Another round of stimulus has been on Wall Street’s wish list for some time as the economic recovery seems to be far from complete. Financial aid from the government, the thinking goes, could help boost spending among U.S. consumers, which undergird a huge portion of the domestic and international economies.

That aid seems especially important as coronavirus cases continue to rise. A return to stricter stay-at-home orders could dent the economic recovery. On Tuesday, in a familiar theme when there is bad news on the coronavirus front, so-called stay-at-home names like Zoom Video Communications (ZM) and Peloton Interactive (PTON) did relatively well while companies that would benefit from a broader recovery, such as United Airlines (UAL) and Delta Air Lines (DAL), lost altitude.

Tech Forms A Bright Spot

In another familiar theme, tech-related companies tended to do better than the market as a whole—helping the Nasdaq Composite (COMP) to the only gain among the main three U.S. equity indices.

As many tech-related companies help provide products or services that aid in the new normal of working, playing, and learning at home, it seems that investors gravitate toward them in hopes that they’ll provide relative safety.

And some of the mega-cap names also offer the potential stability that comes from having lots of cash on hand, a cushion that some other companies don’t have in these trying times.

Some of the big tech-related names may have been getting a boost ahead of earnings. Microsoft gained before reporting after the closing bell, and Facebook, Alphabet, Apple (AAPL), and Amazon (AMZN) also were up Tuesday ahead of opening their books on Thursday.

Business Spending Rebounds: In the tug of war between economic data showing recovery and data that disappoints, durable goods orders on Tuesday scored one for the former. The headline number came in much better than expected, rising 1.9% month over month in September and beating the 0.7% expected in a Briefing.com consensus. “The key takeaway from the report is that business spending continued to rebound, evidenced by the fifth consecutive increase in nondefense capital goods orders, excluding aircraft, which jumped 1.0% after increasing 2.1% in August,” Briefing.com said.

Consumer Expectations Decline: When it comes to consumer confidence, things weren’t so rosy. The Conference Board’s Consumer Confidence Index for October came in at 100.9, a decline from the previous month’s downwardly revised 101.3 and below a Briefing.com consensus estimate of 101.9. The decline in consumer confidence came after sharp improvement in September. “Consumers’ assessment of current conditions improved while expectations declined, driven primarily by a softening in the short-term outlook for jobs,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement accompanying the new numbers. “There is little to suggest that consumers foresee the economy gaining momentum in the final months of 2020, especially with Covid-19 cases on the rise and unemployment still high.”

How Will The Rest of the FAANGs Do? This week, investors are scheduled to see quarterly results for the rest of the FAANG stocks. FB, AAPL, AMZN, and GOOGL report on Thursday, following Netflix’s (NFLX) report earlier this month. Although MSFT isn’t part of this group, its share price activity after it reported earnings yesterday brings to mind what happened with NFLX. Although Microsoft beat on top and bottom lines, its shares still fell because of disappointing guidance. NFLX’s shares also came off after its release. True, NFLX did report worse-than-expected earnings, but its revenue came in ahead of forecasts. A key reason NFLX shares came down appeared to be disappointing subscriber numbers. While we’ll have to wait until Thursday for the rest of the FAANG’s to report, it remains a question as to whether investors might focus on something other than earnings or revenue.

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

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