- Another Large Group of Earnings Announcements as Major Indices Test New Highs
- Insights into the Fed from October’s Beige Book
- Value Stocks Look to Turn the Tables on Growth Stocks
Stock futures are slightly lower as another large group of companies report earnings on Thursday. Starting with a surprise from AT&T (T), the company is trading higher in premarket trading after beating on earnings despite missing on revenue. AT&T saw growth over the last quarter with strength in HBO, wireless subscriptions, and postpaid and prepaid phones.
Unilever (UL) demonstrated pricing power by raising prices on its products by 4.1% in the third quarter and delivered better-than-expected revenues. The ability for a company to pass on its higher costs to consumers can be difficult, but Unilever was able to do it. However, the company warned that it expects to see higher inflation next year. Whether or not the company can continue to pass on these costs is unknown.
Copper miner Freeport-McMoRan
On Wednesday, Bloomberg reported that PayPal
After the close, more earnings announcement will come in for companies like Intel
After Wednesday’s close, automaker and technology company Tesla
Some may say, Big Blue ain’t what she used to be, IBM
Overall, the markets did rise on Wednesday, and the Dow Jones Industrial Average ($DJI) and S&P 500 (SPX) tested their all-time highs as large- and mega-cap companies continue to garner attention from investors. Travelers (TRV), Amgen
Outside earnings news, some important economic data is coming through. Initial jobless claims came in better than expected with fewer people filing claims last week. However, the Philadelphia Fed Manufacturing Index missed analysts’ expectations and is reading about half of its March high. The September existing home sales will report after the open. These reports offer insights into various parts of the economy. A broader economic picture was given in a report on Wednesday.
The Summary of Commentary on Current Economic Conditions, better known as the Beige Book, was released by the U.S. Federal Reserve. This report is published eight times a year and provides anecdotal information on current economic conditions in each of the Fed’s 12 districts.
The Beige Book report doesn’t usually move the markets, but it and the FOMC Meeting Minutes are helpful when it comes to understanding what Fed members are seeing in relation to the economy, inflation, and interest rates.
The October Beige Book reported moderate economic growth. Employment also grew at a modest pace despite high demand for labor. According to the report, labor shortages are being caused by child-care issues and vaccine mandates. However, many workers also left for other jobs or chose to retire.
While most districts remain positive about their respective economic futures, concerns around labor, inflation, and supply chain bottlenecks are reducing optimism. Most districts reported significantly higher prices for goods and raw materials and problems in getting supplies and products through supply chain bottlenecks.
While there isn’t much new in the report for people who consistently follow the financial news, it does show that policymakers are seeing similar issues and are aware of these difficulties. There’s also little in the report that would suggest the Fed would divert from its November tapering plans.
A Look Back: Using the comparison indicator on the thinkorswim platform, the S&P 500 Pure Growth Index ($SP500PG) has outperformed both the S&P 500 Pure Value Index ($SP500PV) and the regular S&P 500 (SPX) Index over the past 10 years with returns of 332% to 226% to 174% respectively. On a five-year comparison, the ranks are the same with returns of 168%, 136%, and 75%. If value is to assume leadership, it may require a fundamental shift in the market.
Interest rates could be that fundamental shift. As I’ve noted before, value stocks tend to perform better when interest rates are rising because of how a stock’s intrinsic value is calculated using discounted future cash flows. The Fed has pushed interest rates lower over the last decade through the overnight right and open market purchases. The lower interest rates have helped growth stocks perform well. The recent turn to an inflationary economy makes it harder for the Fed to keep rates low. This means value stocks could get that fundamental shift that value investors are looking for. However, if inflation is transitory as the Fed hopes, then value’s time out in front could be short lived.
Great Value: Generally speaking, there are three primary ratios used to identify potential value stocks. They include the book value-to-price ratio, the price-to-earnings ratio, and the price-to-sales ratio. Value investors often use these ratios by looking for the lowest ratio compared to the stock’s industry group. In addition to these ratios, value investors tend to calculate a stock’s intrinsic value using the discounted cash flows formula I mentioned earlier. Value investing can take some work, but investors like Warren Buffett and his mentor Benjamin Graham are well known for this investing approach.
Value Views: Investors wanting to get started in value investing may want to check out the Schwab Sector Views. This monthly article breaks down various aspects of the stock market monitoring different market sectors for strength and calls out sectors that are demonstrating value traits.
Additionally, TD Ameritrade’s
TD Ameritrade® commentary for educational purposes only. Member SIPC.
Tag: Stock Market