THE WEEK ON WALL STREET A strong opening to the third-quarter earnings season sparked a late week, broad-based rally that helped stocks finish the week with solid gains. The Dow Jones Industrial Average rose 1.58%, while the Standard & Poor’s 500 added 1.82%. The Nasdaq Composite index led, gaining 2.18% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, was up 1.37%. INVESTOR OPTIMISM RETURNS After beginning the week on a lackluster note, stocks turned higher on Wednesday as companies kicked off a new earnings season and details about the Fed’s taper plans emerged. Investor enthusiasm shifted into high gear the following day on positive economic data and earnings reports that exceeded investor expectations. Buying continued through Friday on fresh earnings surprises and a better-than-expected retail sales report. The economic data allayed some concerns about inflationary pressures and economic deceleration, while early earnings results provided hope that companies had weathered the surge in summer Covid infections. Nevertheless, worries about how supply-chain disruption and higher prices may impact corporate earnings guidance haven’t gone away. LET THE TAPERING BEGIN Minutes from September’s Federal Open Market Committee released last week provided detail around the Fed’s plans to taper its $120 billion monthly bond purchase program. The Fed expects to reduce its purchases by $15 billion each month, beginning in mid-November/December and ending in June 2022. This tapering schedule is somewhat faster than what investors were anticipating, reflecting the Fed’s concern that inflation has been somewhat higher and more persistent than it had anticipated, with continuing supply-chain bottlenecks raising that risk level. Fed Chair Powell’s commitment to transparency and advanced signaling of policy changes appeared to have worked, as markets greeted the news calmly. In fact, stocks rallied strongly the following day as yields moved lower. THE WEEK AHEAD: KEY ECONOMIC DATA Monday: Industrial Production. Tuesday: Housing Starts. Thursday: Jobless Claims. Existing Home Sales. Index of Leading Economic Indicators. Friday: PMI (Purchasing Managers’ Index) Composite Flash. THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS Tuesday: Netflix, Inc. (NFLX), Johnson & Johnson (JNJ), Procter & Gamble (PG), Kansas City Southern (KSU). Wednesday: Tesla, Inc. (TSLA), International Business Machines (IBM), Verizon Communications (VZ), Abbott Laboratories (ABT), United Airlines (UAL), CSX Corporation (CSX). Thursday: AT&T, Inc. (T), Intel Corporation (INTC), Snap, Inc. (SNAP), PPG Industries, Inc. (PPG), Southwest Airlines (LUV), American Airlines Group, Inc. (AAL), Union Pacific Corporation (UNP), Chipotle Mexican Grill, Inc. (CMG), Danaher Corporation (DHR), Dow, Inc. (DOW). Friday: American Express Company (AXP), HCA Healthcare, Inc. (HCA), Schlumberger Limited (SLB). FINAL THOUGHTS Early earnings reports have been good and, so far, the market likes it. We are entering a seasonally strong period for market returns. That means usually, but not always, the market has good returns through year end. If earnings continue to come out strong one would expect to see the famed Santa Claus rally. There are many variables ahead including the much anticipated "Fed taper" and a number of the talking heads continue to badmouth this market. The expression "climbing a wall of worry" has never been more apropos. Additionally, in early December, Congress must act on the debt ceiling issue and there's also the infrastructure legislation. We can always count on them to let us down, so we remain cautiously optimistic into year end.
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THIS WEEK'S UPDATE
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October 18, 2021
