8 Speed Bumps For Stocks Going Into Earnings

Jobs report coming out on Friday

The August jobs report was clearly disappointing as it showed only 235,000 jobs were added vs. the 962,000 and 1.053 million in June and July, respectively. For September Trading Economics has the consensus forecast at 500,000 vs. its own at 410,000. The U.S. Department of Labor will release the jobs report this Friday, October 1.

Debt Ceiling and government shutdown

Congress is playing its latest round of chicken with raising the debt ceiling and preventing a government shutdown. There are a number of votes being scheduled this week but as usual these may slip. Hopefully, a continuing resolution will be passed to at least avoid a shutdown on October 1.

It also appears that the debt ceiling will be reached in mid-October so there will probably be a lot of headlines about this until it is raised. Overall, stocks may move on these headlines but the impact should be limited, as these will need to be solved.

Delta variant has caused another wave of hospitalizations and deaths

The coronavirus’ Delta variant has led to an increase in hospitalizations and deaths per the CDC or Center for Disease Control. The current 7-day daily average for new hospital admissions for September 15 to 21 was 9,636. This is a 14.4% decrease from the prior 7-day average (11,255) from September 8 to 14.

The current 7-day moving average of new deaths (1,557) has increased 0.7% compared with the previous 7-day moving average (1,545). As of September 22 a total of 680,688 COVID-19 deaths have been reported in the United States.

While these trends seem to be falling or stabilized (deaths should start to fall as they lag new cases and hospitalizations), if consumers pull back on spending or supply chains are further disrupted, there will be an economic hit.

GDP growth is falling

The National Association for Business Economics lowered its forecast for GDP growth on Monday. NABE President-elect David Altig, executive vice president and director of research, Federal Reserve Bank of Atlanta, said, “NABE Outlook survey panelists have moderated their expectations about the prospects for economic growth in 2021 since May. The median forecast calls for a 4.0% annualized growth rate in the third quarter of 2021 for inflation adjusted gross domestic product, or real GDP. The panel’s view has become more tempered about 2021 as a whole, as its median real GDP growth estimate for 2021 is 5.6%, compared to the 6.7% forecasted in the May 2021 survey.”

However, the group’s projections for the fourth quarter and first quarter of 2022 have increased. The median forecast for the December quarter’s growth rate is higher compared to that in the May survey at 5.1% (up from 4.8% in the previous survey), while the median forecast for the March quarter is 4.2% (up from 3.8%).

The September quarter weakness mirrors the Atlanta Fed’s lowering its GDPNow forecast from 3.7% to 3.2%. The chart below also shows how the Blue Chip consensus forecasts decreased in August and is probably set up to further decline with its September estimates.

Fed adding trillions to the system has increased valuations

The Federal Reserve adding over $4 trillion to its balance sheet has driven the sharp increase in the Index after stocks plunged in early 2020 due to Covid-19. The subsequent decrease in interest rates has forced investors to look for returns in the equity markets. This leads to equities being more highly valued, which increases their risk.

The biggest question surrounding the Fed is when will tapering of its buying $120 billion in assets per month start and by how much. It appears the announcement is teed up for November but this could always slip farther out.

But valuations have been pulling back

The S&P 500’s P/E multiple peaked around September last year due to a combination of stock prices moving higher and earnings forecasts being too low. Since then earnings projections have increased at a faster pace than stock prices, which has led to historically high valuations (except for the tech bubble and recession timeframes when earnings take huge hits). Unless earnings projections can resume their upward projections it will be challenging for stocks to register outsized gains.

Technicals are being tested

There are a group of investors who trade stocks based solely on chart patterns. One of the indicators they use are daily moving averages or MA in the chart below.

There was a lot of angst a week ago when the S&P 500 closed at 4,432.99, which was just below its 50-day moving average (the blue line). The Index had been above it for most of the past ten months and had bounced higher when it came down to it.

On Monday last week it broke this support but did close above its 100-day moving average. It took the rest of the week, but it did climb back above the 50-day and close above it on Friday. This Monday was another test as it spent part of the day below it but did close slightly above at 4,443.11 vs. 4,441.75.