Concerns over Chinese real estate developer Evergrande and the U.S. debt ceiling debate are overshadowing record car deliveries for Tesla. Friday’s rally was driven in part by stronger U.S. manufacturing and Merck’s breakthrough COVID-19 therapeutic. However, consumer and investors appear to be in a wait-and-see mode.
Evergrande and the debt ceiling cause Friday’s rally to fizzle
(Monday Market Open) Friday’s rally appears to have lost its momentum over the weekend because stock futures are trading lower before Monday’s open. China’s troubled real estate developer Evergrande continues to be a drag on stocks. Hong Kong’s Hang Seng Index (HIS:HK) dropped 2% as trading on Evergrande was halted. Chinese markets are closed until Friday due to holidays. This may provide Evergrande more time to find a solution to pacify investors.
Automaker/tech company, Tesla (TSLA) is doing their best to create a spark among investors. On Saturday, the company reported a record quarter by delivering 70% more cars than a year ago. Despite the semiconductor shortage, the company has been able to increase its vehicle deliveries. Shares of Tesla were up 2.8% in pre-market trading.
Washington D.C. isn’t helping matters as they continue to cause investors concern over the debt ceiling debate. President Joe Biden met with his Democrat cohorts and appears to have been influential in finding a middle ground for progressives and moderates among his party. The interparty turmoil has kept the debt ceiling debate in limbo as the party is divided over infrastructure and social spending bills that have blocked the debt ceiling from being addressed.
In additions to the debt ceiling, this Friday’s Employment Situation report will likely draw a lot of attention. Investors continue to watch for the Fed to start tapering. An improving job market will help the Fed feel more confident in moving forwards with its tapering plans.
As last week closed out with investors were feeling pretty positive. The major indices had a rocky start but pushed higher on a strong day of trading. The S&P 500 (SPX) and NASDAQ ($COMP) closed back above their respective 100-day moving averages, but the Dow Jones Industrial Average ($DJI) is still below its 100-day moving average. Despite the rally, stocks failed to reach Thursday’s highs, which appears not to have deterred the bears just yet. All sectors traded higher on Friday with the exceptions of Utilities and Health Care.
Part of the positivity was because of a report showing that U.S. manufacturing grew more than expected in September and was able to expand its workforce. The ISM Manufacturing PMI report showed that demand is still strong, but supply chain difficulties are still a problem. These problems include record-long lead times for raw materials, transportation difficulties, worker absenteeism, and trouble filling positions.
Additionally, the Michigan Index of Consumer Sentiment was higher than expected but reported that consumers are postponing purchases because of inflation. Higher prices are stretching paychecks so many potential buyers are staying away from high-priced homes, new vehicles, and durable goods. The report expressed hope among consumers that inflation will be transitory and the time to buy will come later.
Drug maker Merck (MRK) rocked the COVID-19 complex on Friday with data on its new therapeutic for COVID-19 patients. The experimental pill was shown to reduce hospitalizations and deaths by 50% for people infected with COVID-19. The company is expected to ask U.S. and foreign health officials to authorize the drug for use.
Some COVID-19 vaccine drugs fell on the Merck news as analysts debate the appeal of a shot for prevention versus a pill for treatment. Moderna (MRNA), whose COVID-19 vaccine has been touted as the most effective by the Centers of Disease Control and Protection, dropped more than 11%, hurt by its small portfolio of products. Other vaccine companies with larger portfolios didn’t fall as hard. Pfizer (PFE) was down a little more than 1% before trimming some of its losses, but Pfizer has its own COVID-19 therapeutic in the works. Johnson & Johnson (JNJ) fell 0.64%.
Antibody drug makers that help treat COVID-19 patients also fell. Regeneron (REGN) dropped about 5.7%, Vir Biotechnology (VIR) fell more than 21%, and Vir’s partner GlaxoSmithKline (GSK) fell a 0.21%.
Gilead (GILD), which makes the only fully FDA-approved drug Remdesivir (used to treat hospitalized patients), was down 1.85%.
Merck may provide another avenue back to normal, but it’ll take time to get the product to market. While Merck has the ability to manufacture and move to market quickly, there are numerous other COVID-19-related policies that will continue to put up roadblocks that are causing delays.
CHART OF THE DAY: RUSSELL 2000 IN A RUT. The Russell 2000 (RUT—candlesticks, 50-day moving average—blue, 100-day moving average—red, 200-day moving average—lavender) has been range bound for nearly the entire year and its major moving averages have converged into one general area. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Small-Cap Conundrum: Small-cap stocks have a few roadblocks of their own. They tend to be the “risk-on” investment when investors are looking to add more aggressive growth. The fact that the Russell 2000 (RUT) hasn’t gone up suggests that investors are in a “risk-off” mode. However, it hasn’t gone down either. Instead of the risk-on/risk-off dichotomy, maybe it’s time for a “wait-and-see” approach. While small caps have underperformed the major indices, investors have not abandoned them. Perhaps more patience is all that’s needed.
Mortgage Moves: However, consumers are showing more patience. As mentioned above, the Michigan Consumer Sentiment report found people were holding off on purchasing high-priced homes because of the inflation-induced budget squeeze. However, rising mortgage rates could continue to put pressure on housing. Barron’s reported that weekly mortgage rates posted their biggest increase since February. The average 30-year fixed-rate mortgage climbed 13 basis points from 2.88% to 3.01%. Higher rates and higher prices could cool down the hot housing market.
Mortgage rates commonly correlate with the 10-year Treasury yield (TNX). Potential homebuyers may want to watch the index to keep up with the direction of interest rates.
Bitcoin Continues to Bewilder: Finding a correlation for cryptocurrencies has been difficult. Bitcoin rallied more than 9% on Friday, but it’s hard to say why. Cryptocurrencies like bitcoin sometimes appear to be correlated with the most aggressive market assets and show tremendous volatility. Many crypto advocates promote these currencies as a hedge to the stock market. However, they often rise and fall, albeit at very different multiples, with stocks.
Cryptos are also touted as a hedge to the dollar but don’t appear to have a relationship to the dollar. Most dollar hedges like precious metals tend to fall when the dollar is rising.
Chart readers may have success in trading bitcoins gyrations, but for an investor looking for a fundamental factor to cryptocurrencies, there’s very little data. For many investors, it’s difficult to build an investing strategy outside just reading the tape.
Currently, there are thousands of cryptocurrencies and new ones are still coming to market. But, it’s difficult to determine what makes one crypto better than another. In the end, there’s no doubting the popularity of the asset class, but with the lack of information, many investors are bewildered.
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