October Volatility in Full Force as Stocks Bounce Off Wednesday Rout

After Wednesday’s late collapse, the markets charged back Thursday, apparently led by the FAANG stocks once again. After the close, however, Amazon and Alphabet came up short on quarterly revenue.

Print
https://tickertapecdn.tdameritrade.com/assets/images/pages/md/
5 min read

Key Takeaways

  • Market bounces back with hefty gains Thursday after Wednesday’s washout

  • Strong earnings from Tesla, Microsoft and others appear to give markets a lift

  • Amazon and Alphabet both miss analysts’ revenue estimates in their earnings reports


(Thursday Market Close)  It’s been a crazy couple of days, and the FAANGs are right in the thick of it.

The previous time stocks launched a big daily rally a little over a week ago, the FAANG stocks helped drive the market higher. Thursday appeared to be the same story as most of Wednesday’s dramatic losses got wiped away amid huge gains for all the major indices. After the close, however, some worries appeared to creep back in after Amazon (AMZN) and Alphabet (GOOG, GOOGL) both missed Wall Street analysts’ quarterly revenue projections and AMZN came up short in holiday quarter guidance (see more below).

The FAANGS all galloped higher Thursday, including beaten down names like Netflix (NFLX) and Facebook (FB). AMZN shares were up nearly 8% by late in the session ahead of earnings results from the company, and GOOG rallied 5% as investors waited for its quarterly tally.

Even though Thursday was in some ways the polar opposite of Wednesday, one element stayed the same. Over the last two turbulent weeks, FAANG stocks seemingly have been the primary leader to the upside and the downside, so even investors who don’t own these names might want to keep a close eye on them.

Some of the FAANG strength seemed to spill over into tech names like Cisco (CSCO) and Intel (INTC) as well. Strong earnings from Microsoft (MSFT) late Wednesday and Tesla (TSLA) early Thursday also appeared to help spark the turn-around. 

Tech Sector Sentiment Under Scrutiny

If there’s one thing to consider taking away from the wild week we’re having, it’s that sentiment appears to be changing in the tech sector. Tech has been a great hero over the past year, and earnings so far from some tech companies this season, like MSFT, have looked strong even as others like Advanced Micro Devices (AMD) and IBM (IBM) appeared to disappoint.

A lot of tech earnings lie ahead, so it’s way too early to judge what sector earnings will ultimately look like when all is said and done. Still, long-term investors might want to examine their portfolios and check their exposure to tech to make sure they’re still comfortable with their allocations, because at least for the moment, judging from market action, the support hasn’t been there recently for some of the high valuations we’ve been seeing.

We’re in the thick of earnings, so long-term investors who either own techs or are thinking of owning techs might want to consider this opportunity to hear from CEOs about what they think the atmosphere might look like over the next three to six months.

Ground Still Seems to Be Moving Under Market

From a broader perspective, beyond just tech, the market seems to have entered a new environment. The geopolitical scene remains cluttered with coming events that could have big impacts, including the U.S. midterm elections, the possibility of more tariffs on China, and something a lot of people seem to have forgotten about: Brexit. Dozens of companies have mentioned tariffs as a factor in their earnings calls so far this quarter.

All of this helps explain why volatility has perked up and the VIX is back above 20. The economy is still red hot, but the low volatility, low interest rates, and high valuations that many investors enjoyed a year ago aren’t necessarily the case heading forward. In a way, this isn’t too surprising. The VIX doesn’t normally hang around in the 10-11 area where we saw it last year. The long-term average is in the mid-teens. Interest rates don’t normally stay below 2% year after year. Stock valuations reached near-record levels earlier this year. 

As these things move back into a more normal mode, long-term investors might want to stay disciplined and keep their eye on what things might look like in a few months or years, and not overly focus on the day-to-day, minute-to-minute noise. 

However, looking back for a moment at the day-to-day: Thursday saw Treasury yields edge up just slightly, staying under 3.13% for the 10-year note. That’s well under the monthly high above 3.25%. The dollar also gained against foreign currencies, with the dollar index finishing the day near its 2018 highs at above 96.60. 

Amazon, Alphabet Lead Host of Afternoon Earnings

After the close, shares of Amazon (AMZN) and Alphabet (GOOG, GOOGL) both retreated despite the companies reporting better earnings per share than Wall Street analysts had expected.

Alphabet (GOOG, GOOGL) reported a major earnings beat, with earnings per share of $13.06 coming in more than $2 above the third-party consensus view of $10.42. However, revenue of $33.7 billion failed to meet expectations of $34.04 billion. Perhaps chief among analyst concerns is a potential slowdown in the company’s core business at a time when privacy concerns have triggered greater regulatory scrutiny of Alphabet and its FAANG contemporaries.  

Amazon’s revenue of $56.6 billion came up short of the $57.1 billion that analysts had expected, but earnings per share of $5.75 easily beat third-party consensus views of $3.12.

AMZN’s Q4 guidance also fell short of third-party consensus expectations at $66.5 billion to $72.5 billion. Expectations were for $73.79 billion, media reports said. The miss might cast a shadow not just on AMZN’s fortunes, but perhaps might raise questions about what this could mean for the holiday shopping season in general. Revenue from Amazon Web Services (AWS), the company’s cloud services division, came in at $6.7 billion for the quarter, roughly in line with estimates. AMZN shares, which rallied 7% during the session, gave back most of the gain in after-hours trading.    

Intel (INTC) also reported better than expected earnings per share, coming in at $1.40 per share. INTC beat on revenue as well, at $19.16 billion, versus analyst consensus of $18.11 billion, and up 19% year-over-year. The release pushed shares up 4% and into positive territory for the year, but still some 18% off the high set in June.

Figure 1:  Higher Yields, Higher Volatility: As this six-month chart shows, a higher 10-year yield (candlestick) has often correlated with a higher VIX (purple line). The last month saw this dramatically illustrated. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

GDP Soon, and GDPNow: Among the last releases of the week before the markets open Friday is the first set of GDP data for Q3 2018. Consensus estimates compiled by Briefing.com point to expected annualized GDP growth of 3.3%, down from its previous release in late September—a Q2 reading of 4.2%. Though still robust compared to the sub-2% readings we've seen over most of the last decade, the reading might be pulled downward by events that transpired since late summer, such as cooler readings on durable goods and housing, as well as heightened uncertainty over trade and other macroeconomic issues. 

But if you want an unsmoothed preview before the GDP release, consider GDPNow, the Atlanta Fed’s forecasting model, which keeps a running full-year forecast, based solely on the math from a selection of data releases, with no smoothing or other subjective adjustments. If you think the stock market has been volatile in 2018, take a look at this metric. It started the year at a whopping 5.4% annual 2018 growth forecast for GDP, but after a gut-wrenching February, its projection fell to as low as 1.9%. Recent updates have varied from 5% to 3.6%, with its most recent reading at the low end of that range. Its next update will occur Monday, October 29.   

A Dovish Note? Fed Vice Chair Richard Clarida said Thursday he believes “some further gradual adjustment in the federal funds rate will be appropriate,” (or in non-”Fed-speak,” more rate increases). He said at current rates, monetary policy “remains accommodative.” 

However, in discussing possible Fed policy as 2019 unfolds, he seemed to indicate that even strong growth and employment might not automatically require additional rate hikes, as long as inflation and inflation expectations remain stable.  “If strong growth and employment gains were to continue and be accompanied by stable inflation, inflation expectations, and expectations for Fed policy, that situation, to me, would argue against raising short-term interest rates by more than I currently expect,” Clarida said.

Most of the language coming out of the Fed lately has been hawkish, but some analysts saw a note of dovishness, at least in that part of Clarida’s speech. Of course, 2019 is still a long time away, and expectations in the futures market point toward one more hike this year and about a 50% chance of another one early next year. The question some analysts are pondering now is whether the Fed stops at two or adds a third, which would take rates above 3%.


Good Trading, 

JJ

@TDAJJKinahan 

Helpful Educational Content and Programming
  • Check out all of our upcoming Webcasts or watch one of the many archived ones, covering a wide range of topics from market commentary to portfolio planning basics to trading strategies for active investors. No matter your experience level, there’s something for everybody.
  • Looking to stay on top of the markets? Check out the TD Ameritrade Network, which is live programming that brings you market news and helps you hone your trading knowledge 

The TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation.                                                                       

Economic Calendar for this week. Source: Briefing.com
Call Us
800-454-9272

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.  

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.

Scroll to Top