Stocks advanced firmly on Friday, with market participants continuing to balance better-than-expected corporate earnings amid rising inflation. The S&P 500 (SPY) closed the day 0.75% higher, the tech-heavy Nasdaq (QQQ) rose 1.05%, and the Dow Jones (DIA) broke a three day losing streak to finish 0.51% higher.
As of Friday’s close, the SPY closed the week 0.4% lower following volatility after the release of the October Consumer Price Index. However, after five consecutive weeks of gains, the market remains marginally below previous all-time highs. The QQQ closed the week 0.91% lower, while the DIA closed the week 0.97% lower.
the Labor Department released the monthly Consumer Price Index, which showed prices soared 6.2% in a year-on-year period, accelerating from September’s 5.4% YoY rate, and higher than the 5.9% expected. This represents that fastest pace of inflationary expansion since 1990, though one has to take into account easy comparisons to last year.
The staying power and magnitude of inflationary pressures has, perhaps, become the central question for market participants, with companies across the board reporting rising input costs and price hikes passed on to the consumers to preserve margins. While Q3 earning results have robustly demonstrated that companies in the SPY were largely able to navigate these cost pressures, the possibility remains that if inflation runs hotter than expected for longer than expected, it could begin to hamper consumer demand.
While a rise in inflation was expected, the pace of the increase surprised to the upside. If the pace of increase is not moderated soon, it carries meaningful implications for corporations, consumers, and the Federal Reserve. As input costs rise, companies will pass the increase in cost to consumers to preserve their bottom line, who will be forced to pay the higher prices. The Fed would then be forced to step in and raise interest rates, which will makes the cost to borrow money more expensive, which means people and companies will likely spend less, leading to a fall in demand for goods and services. A rise in interest rates would particularly hurt high P/E tech stocks that have been flying in the last two years, as these companies rely on borrowing to fund their aggressive expansion.
Still, the Federal Reserve and many economists have reaffirmed that the inflationary pressures are transitory, caused by pandemic-era disruptions in global trade and will eventually ease, albeit while likely settling at a higher level than had been present before the pandemic.
Gabriela Santos, Global Market Strategist at JP Morgan, said “Inflation should moderate. We’re talking about settling at 2%, 2.5% over the course of the next 12 months. So we're still talking about real wage gains, and that's extremely supportive, certainly of people's livelihoods, but also of consumption and hence the economy overall. We do expect a big re-acceleration in growth starting this quarter and throughout next year, [and] 5% average growth just over the next three quarters. So we would characterize this not as stagflation, but as reflation. And that difference is, reflation is actually quite good for earnings growth and quite good for the stock market, especially cyclical sectors." So far, expectations are that the Fed will step in sometime mid-2022 to raise interest rates.
Highlights
Shares of Rivian (RIVN), which is backed by Ford and Amazon, continue to be on absolute fire. The company, which is expected to lose $1.28 billion on no more than $1 million in revenue this quarter, now has a market cap of more than $100 billion. For perspective, they are now the fourth largest automaker in the world by market cap. I’m not a stickler for valuation, but this is absolute insanity and unsustainable. The company has not started production and is already priced to perfection, which they are bound to hit a snag with. I don’t think this price is sustainable.
The University of Michigan’s closely monitored Consumer Sentiment survey showed the consumer sentiment index decreased to 66.8 from 71.7 in October, missing estimates of 72.5. Waning confidence reflects “ an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,” Richard Curtin, director of the survey, said in a statement.
A Snap (SNAP) investor sued the social media company alleging it downplayed how Apple’s (AAPL) change in privacy would affect revenue. Remember, the stock plummeted 25% after an earnings miss, citing Apple’s changes as hampering ad revenue.
After more than a decade of explosive growth, China's Singles' Day, the world's biggest online shopping fest, is losing its gloss and bracing for more modest growth in coming years, hurt by a slower economy and tighter regulatory scrutiny. Alibaba (BABA) said on Friday its sales - or gross merchandise value (GMV) - during the 11 day event grew 8.5%, the slowest rate ever and the first time it came under double-digits growth.
The U.S. Securities and Exchange Commission on Friday said it rejected an exchange-traded fund from VanEck that would have tracked Bitc… spot prices directly. This would have stood in contrast to the ProShares ETF (BITO), which was approved and which only tracks futures rather than prices directly.
**Please note that current stock price was written during the session and may not reflect closing prices**
Affirm (AFRM) target raised by Morgan Stanley from $140 to $185 at Overweight. Stock currently around $149
Equifax (EFX) target raised by Needham & Co from $295 to $335 at Buy. Stock currently around $280
Nice (NICE) with two target raises. Stock currently around $312
Citigroup from $328 to $364 at Outperform
Royal Bank of Canada from $325 to $368 at Outperform
NXP Semiconductors (NXPI) target raised by KeyCorp from $250 to $255 at Overweight. Stock currently around $218
Social Finance Technologies (SOFI) target raised by Jefferies Financial from $4 to $26 at Buy. Stock currently around $23
Tapestry (TPR) with a host of target raises. Average price target $55 at Overweight. Stock currently around $45
Weibo (WB) target raised by Citigroup from $63 to $66 at Buy. Stock currently around $46
“In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks?” - Li Luv