Trick or Treating with GM: Big Earnings Beat Could Help Rev Up Market

Stronger markets in Europe and Asia overnight could lend some strength to the U.S. market, along with earnings from General Motors (GM). GM’s strong domestic sales seem to indicate that many U.S. consumers continue to do well.

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Key Takeaways

  • Strong GM earnings help put a positive tone on the market early on
  • Markets rose overnight in Europe and Asia following yesterday’s U.S. rally

  • End-of-month position squaring could be a possible factor today providing strength

(Wednesday Market Open) For investors, a month that’s delivered more tricks than treats finally draws to a close today with the tone looking positive after firm earnings from General Motors (GM). The end of the month, however, doesn’t necessarily mean an end to the volatility that’s held a vice grip over the last few weeks.

Yesterday might have seemed like a little light at the end of the tunnel for some investors as stocks staged a vigorous and broad-based rally that included every sector and put the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) back into the black for the year. However, even if the positive energy continues—and that’s far from guaranteed—there’s little expectation of a decline in volatility anytime soon. 

It’s quite possible this sort of choppy action could continue in weeks to come, considering all the geopolitical events on the calendar. We’re less than a week from U.S. midterm elections, and overseas developments seem to bring their own cast of ghosts and goblins to haunt the markets nearly every day. The latest came early Wednesday when manufacturing data out of China failed to meet analysts’ expectations. 

General Motors Could Help Provide Lift With Firm Earnings

There didn’t seem to be much haunting GM in Q3, though, as the auto company reported better than expected results Wednesday. Shares rose nearly 9% in pre-market trading. Earnings per share of $1.87 and revenue of $35.79 billion, compared with third-party consensus estimates of $1.25 and $34.85 billion.

Average transaction prices for GM rose to more than $36,000, which is $4,000 above the industry average, thanks in part to sales of the company’s new and pricey full-size pickup trucks. Also, despite the trade war underway between the U.S. and China, GM seemed to perform well in that Asian country, citing “record Cadillac sales and strong Chevrolet deliveries” there, according to the company’s earnings release. 

Though the Q3 ended before the market got shaky in October, GM’s results do seem to reinforce impressions that U.S. consumers are mostly doing fine. When a car company highlights sales of a pickup truck where pricing begins at $54,700 (like the GMC Sierra Denali that debuted in August), that could be one sign that at least some consumers are opening their wallets for big items (literally “big” in this case). Also, the GM sales follow strong sales from some other retailers reporting recently, and a report yesterday from Johnson Redbook showing U.S. retail sales at comparable stores rose 5.9% for the week ended Oct. 27.

Before GM reported, Facebook (FB) shared a bit of a mixed quarterly picture late Tuesday (see more below), but shares popped more than 5% in pre-market trading. Though FB’s earnings per share of $1.76 was well ahead of analysts’ average $1.47 estimate, revenue of $13.73 billion fell short of the $13.78 billion estimate. Daily active users of 1.49 billion were up 9% year-over-year, but came in a touch below the average estimate, as well.

The FB earnings followed disappointing results from fellow FAANG stocks Amazon (AMZN) and Alphabet (GOOG, GOOGL) last week. Tomorrow brings the finale for FAANGs with Apple’s (AAPL) earnings after the close. 

Consumers Don’t Seem Affected As of Yet

Yesterday’s consumer confidence data might have provided more evidence that whatever’s going on in the stock market, it doesn’t necessarily reflect the wider economy. The October reading from the Conference Board of 137.9 was the highest for any month since September 2000, back when Bill Clinton was president and the S&P 500 (SPX) was under 1,500.

The report came after a strong University of Michigan sentiment reading last week and firm 3.5% GDP growth in Q3. There hasn’t been any data yet indicating the U.S. consumer isn’t doing well. That might also explain why any company in retail that misses on revenue is likely to get punished once we hit the heart of retail earnings season in the weeks ahead. However, remember that there is such a thing as the “wealth effect,” a theory that argues consumers tend to buy more when they feel like they’re doing well in the stock market. That’s why the November consumer confidence data could be worth monitoring.

From a technical standpoint, the major indices made some progress on the charts yesterday, with the SPX climbing out of correction territory under 2650. It’s still way under the 200-day moving average of 2765, which remains a possible resistance point. The Dow Jones Industrial Average ($DJI) remains down more than 7% from its all-time high close even after Tuesday’s rally, while the Nasdaq (COMP) is still down 11% from its highs, which keeps it in correction mode for now, anyway.

Asian and European markets mostly drifted higher overnight, and that might lend some strength to the U.S. market this morning as well.

FIGURE 1:  Soda Outpaces Phones This Month: This one-month chart shows how information technology stocks (candlestick) are being easily outpaced by consumer staples (purple line). Data Source: S&P Dow Jones Indices. Chart Source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Squaring Up? One thing investors might want to ponder as this turbulent month winds down is the possibility of some “position squaring” today in the last session of October. This can sometimes happen at the end of the month as some traders offset short or long positions. At the end of a month like this, with major indices down so sharply, if traders decide to take profit on short positions, such position squaring could give the market a bit of a boost. Some of that might have played into Tuesday’s revival, but that doesn’t mean it’s necessarily all over.

Tug of War in Facebook Shares: This month has had its ups and downs, to say the least. So did Facebook (FB) shares in the hours after the close yesterday following the company’s earnings report. FB missed third-party consensus expectations on revenue and users, but beat earnings per share estimates. The stock rose immediately after the earnings report, then fell, then rose again. It almost seemed like a tug of war between bulls and bears. The bulls might argue that FB’s misses on revenue and users were pretty light, and it beat EPS quite substantially. The bears could say, however, that it’s relatively easy for a company to find a way to make earnings look good, but revenue is revenue. There’s no way around it if revenue doesn’t keep up. So far, the FAANGs haven’t had a really smooth earnings season, with FB the latest to report imperfect results following Amazon (AMZN) and Alphabet (GOOG, GOOGL) last week. Next up: Apple (AAPL) tomorrow.

Get Your Pencils and Scorecards Ready: For anyone keeping score at home, the last day of the month starts with the S&P 500 (SPX) down 7.9% for October, the Dow Jones Industrial Average ($DJI) down 6%, and the Nasdaq Composite (COMP) down 11%. The SPX is on track for its worst month since May 2010, while you have to go back to October 2007 to find a worse month for the COMP. However, the DJIA had a worse month than this as recently as August 2015. 

Good Trading, 

JJ

@TDAJJKinahan 

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