Small Reversal As Market Gets Ready For Rate Cut
The stock market fell slightly on Tuesday which was a reversal from its early morning action. S&P 500 fell 8 basis points. From its morning peak, it fell 0.33% to the close. It was hurt by Alphabet all day which closed down 2.12% after missing EPS estimates massively. Facebook and Apple both report on Wednesday after the close. They are the last major internet firms to report results. After this week, most S&P 500 firms will have reported. In early November, earnings season will start to die down.
Beyond Meat fell after hours even though it beat EPS and revenue estimates. It ended up closing down 22.22% on Tuesday. It’s down 65.1% from its record close and up 24.7% from its first close. It’s certainly getting closer to fair value, but might have more room to fall. Beyond Meat will always be known as one of the money losing bubble stocks to IPO in 2019. But it might be on its way to becoming a successful company even as its stock craters.
Another one of these bubble IPOs, Peloton, actually had its stock rise 8.01% on Tuesday, but it’s still down 10.02% from its first close. Fitbit stock has risen 40.37% because Alphabet is planning to acquire it so Android can better compete with Apple Watch.
Review Of Tuesday’s Action
Personally, I don’t think the stock market fell because of the Fed meeting on Wednesday. Everyone knows the Fed will cut rates. There is no pressure to guide for a cut in December because there is only a 23.7% chance of a cut. I can’t see any way the Fed messes this up. I think stocks fell because they are overbought. CNN fear and greed index rose 4 points to 71 which is a few points away from extreme greed. That’s not a place you want to buy risk assets at in the short term.
Nasdaq fell 0.59% because of Alphabet’s decline. It will be impacted by Facebook and Apple on Thursday. Russell 2000 rose 0.33%. VIX rose for its 2nd straight day as it increased 0.09 to 13.2. It’s still very low; if the market corrects, it has plenty of room to increase. Worst sectors were technology and communication services which fell 0.92% and 0.95%. Communication services was hurt by Alphabet. Best sectors were healthcare and materials which rose 1.16% and 0.67%.
Mayor Pete Is Helping Healthcare Stocks
Healthcare sector has been exploding lately. This explains why the market is at its record high. XLV healthcare sector ETF is up 7.05% from October 8th. It is 1.61% from its record high. This sector might be being helped by Warren’s decline in the polls. Her odds of winning the nomination have tumbled recently. Currently, she has a 38% chance of winning. Her odds peaked at 52% on October 4th. This timeline is very close to the rise in healthcare stocks.
Also, Mayor Pete’s chances have increased. He went from 5% on September 22nd to 16% today. If you think Mayor Pete will do well at the November 20th debate, buy healthcare stocks. So far, 9 candidates have made that debate.
In the latest New Hampshire primary poll, Sanders took the lead by 3 points over Warren. Compared to the last CNN poll, Sanders gained 2 points, Biden lost 9 points, and Warren lost 1 point. New Hampshire is the first primary state. Sanders and Warren should do well because they are from neighboring states. In the latest national poll, Biden was up by 12 points over Warren and Sanders.
Compared to the last Politico poll, Biden gained 2 points, Warren lost 1 point, and Sanders gained 2 points. Sanders might have some momentum because he was endorsed by Alexandria Ocasio-Cortez, a freshman Representative who seems very popular on social media. She has 5.7 million Twitter followers. Warren only has 3.4 million.
Pending Home Sales Beat Estimates
Housing data took a breather recently, but with the new home sales beat and this pending home sales report, the market is back in action. In September, the pending home sales report had monthly growth of 1.5% which beat estimates for 0.7%. This growth is impressive because it comes on top of 1.6% growth in August.
As you can see from the chart below, this implies existing home sales will improve in September. It will come closer to hitting a cycle high. Pending home sales index rose 3.9% yearly to 108.7. Anything above 100 means sales are above where they were in 2001. South, which is the biggest region, had the biggest improvement and the highest reading as its index rose 5.7% to 127.5. Worst was the Northeast which had growth of 1.3% and reached just 93.9.
Earnings Update
After this week, earnings season will be more than halfway over. With 236 S&P 500 firms reporting earnings, 77% beat EPS estimates and 61% beat sales estimates. Sales growth has been 3.16%. The graphic below breaks down earnings growth. As you can see, GAAP earnings growth is -12.15%. It doesn’t include buybacks and GAAP is usually lower than non-GAAP. That method will usually show the worst growth.
GAAP EPS growth is -5.75%. This is probably the best way to look at earnings. However, you look at earnings, just stay consistent. Don’t pick the result that fits your narrative. Non-GAAP earnings growth is -1.43% and non-GAAP EPS growth is 2.03%. Either way, this has been a good earnings season because Q4 earnings estimates have fallen less than last quarter. Non-GAAP EPS growth in Q4 might end up in the mid-single digits which could be the highest growth of the year.
Conclusion
Stocks are very overbought regardless of the upcoming Fed meeting. Stocks usually fall when Powell speaks, but I can’t see how he can cause a decline this time. Everyone expects a cut and few expect another cut in December.
Unless he calls for a hike in 2020, which won’t happen, I don’t see what he can say to scare investors. Pending home sales report was very good and Q3 earnings season has been positive so far.