Pair of Earnings Disappointments Seem to Weigh on Wall Street

Investors appear to keep readjusting their expectations for stock market valuations after two market-leading stocks came up short of expectations.

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Key Takeaways

  • Quarterly results from two tech giants disappointed some analysts; stocks under pressure 

  • Government’s first GDP estimate beats expectations

  • Gold performing well this month despite rise in the dollar

(Friday Market Open) Investors appear to keep readjusting their expectations for stock market valuations after two market-leading stocks came up short of expectations.

Like last quarter, investors may shrug at positive earnings reports, but any disappointments can mean that shares might get hammered. It’s that latter scenario that seems to be happening this morning as shares of Amazon (AMZN) and Alphabet (GOOG, GOOGL) are under pressure and appear to be leading broader sentiment lower.

Although both companies reported better earnings per share than Wall Street analysts had expected, they also both missed quarterly revenue projections. AMZN’s holiday quarter guidance also appeared to disappoint investors.

Both companies’ shares were down sharply in pre-market trading. Shares of other members of the so-called FAANG stocks—Facebook (FB), Netflix (NFLX) and Apple (AAPL)—were also down.

It could be worth keeping in mind that the FAANG stocks had all rallied Thursday amid an upbeat day for U.S. equities as October volatility continued. Over the last two turbulent weeks, this group of stocks seems to have been a leader to the upside as well as the downside.

One bright spot this morning came on the economic data front. The government’s first estimate of gross domestic product came in at a seasonally adjusted annual rate of 3.5%, slightly ahead of the Briefing.com consensus estimate forecasting 3.3% growth. 

Volatility and Discipline 

If there was ever a time to consider staying disciplined with your investing or trading strategy, times like these may be it. 

If you’re an active trader, you might have been loving the volatility we’ve been seeing this month. After all, some strategies can help you protect your assets, or even make money, during a down market. For longer term investors, the volatility can be scary, but a disciplined focus can help. Also, even beyond this extra-volatile October, ups and downs in the stock market are normal. Over time, buy-and-hold investors tend to see the ups and downs smooth out. (See more on volatility below).

That said, now appears to be a special time for the market. Market participants seem to be trying to figure out where they want to be positioned to close out 2018 and begin the new year.

That factor alone could cause some volatility, but the reallocation is also coming as investors re-think  the valuation of tech stocks, consider what rising interest rates may mean for the market, weigh geopolitical developments and continue to watch closely for news on trade negotiations between the United States and China. And this year, we’ve got midterm U.S. elections thrown into the mix.

 Perhaps it’s no wonder the market is choppy.  

Considering Your Own Outlook

One thing that may help calm some nerves for those who might be a bit jittery is to sit back and consider what your long-term belief is about where the individual companies or sectors you may be invested in are going. Coupling that with what CEOs are saying about their views for the coming three to six months could offer a broader picture than just focusing on the day-to-day headlines and market ups and downs. 

While rising interest rates on government debt, which appeared to be the match that started this volatility fire a couple weeks ago, can mean that there is more competition now for stocks such as utilities, the rising rates don’t mean that the market as a whole has to sink. That’s especially true now as a strong economy appears to be a key reason that interest rates are rising.

Bullion and the Buck

Amid all this volatility, now might be a good time to check in on the performance of a couple of investments besides U.S. Treasuries that are often considered to be safe havens. First, the U.S. dollar has been performing well along with the U.S. economy and as some foreign jurisdictions don’t look as enticing as the United States. 

Meanwhile, gold has seen a pop despite the rising dollar. The two assets tend to move inversely with one another, so the fact that gold has been on the rise argues that investors could be using the precious metal to hedge some uncertainty. Still, gold is well off its highs this year, so the increase in market volatility may be acting as an excuse for some bargain hunting. 

FIGURE 1 VOLATILITY NOT UNPRECEDENTED. Though this month's volatility might feel particularly intense, it's worth noting that such periods aren't too uncommon. Looking back 20 years in the Cboe Volatility Index (VIX), we see several extended periods in the mid-20s.The red line is drawn at a VIX reading of 25. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

A Market Reboot? Beyond the normal October trading choppiness, it appears that there is some normalization going on in the market. As traders and investors look to the latter part of this year and into next, it seems that some are re-evaluating stock valuations. Perhaps that shouldn’t be surprising as we've seen interest rates moving up toward more historically normal levels after a prolonged stint at artificially low levels. Also, consider the Cboe Volatility Index (VIX). The market’s main fear gauge has surged this month amid worries about higher interest rates, trade and geopolitics. But glancing at a chart back to the 1990s shows that the VIX’s level around 24 as of Thursday afternoon isn’t out of line with many historical moves (see figure 1 above).

Bull Market Seen Slowing, Not Stopping: Just because investors are apparently reassessing their stock-market exposure, doesn’t mean the bull market is over. “We think the S&P 500 will be higher a year from now, though its angle of ascent is being adjusted to a more sustainable trajectory, since GDP and EPS growth should face tougher comparisons in the quarters ahead,” said investment research firm CFRA, referring to earnings per share and gross domestic product growth. That doesn’t mean investors aren’t questioning the strength of the bull market, the note said. First, stocks have dropped substantially over the past two weeks, leading to questions about company earnings growth fundamentals and to the search for bottoming technical patterns. It still probably is worth bearing in mind that October is a notoriously volatile month.

Weekly Unemployment Snapshot: While economic reports like this morning’s GDP report or next week’s non-farm payrolls data are often closely followed by investors and analysts, other economic reports don’t seem to get as much glory. Take claims for unemployment benefits. This weekly report is often right up there with natural gas inventories in the 2nd-tier department. But over time, the jobless numbers help form an important view of the labor market in between the government’s monthly report on the employment situation. The latest four-week moving average for continuing claims showed the lowest level since August 1973. The data show that the labor market tightness has continued as the economy chugs along. We’ll have to wait until next week to get the Labor Department’s latest take on the nonfarm payrolls picture, the unemployment rate, and hourly wages. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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