It looked like the market was going to have a nice holiday and then COVID fears reared their ugly head again. A new variant in South Africa is causing a spike in cases and sparking caution among world nations. The spike in cases threatens to impede if not shut down an already precarious supply chain and sent the S&P 500 (NYSEARCA: SPY) reeling in Friday trading. Ultimately, the concern is for earnings, and with countries tamping down on travel the global recovery is in serious jeopardy. If this sentiment carries through into next week we could be in for the correction that we’ve seen brewing over the past few months. The big story of the week, aside from the new COVID-variant, is inflation. Not only did the PCE price index come in hotter than expected but the FOMC’s meeting minutes set a new tone for the market as well. The PCE price index increased 0.4% at the core level to not only set a new high but also accelerate significantly from the previous month. If this keeps up, the FOMC will have no choice but to raise rates and that’s what the minutes indicated. The FOMC says inflation is running hotter than expected and for a longer period of time and they are ready to raise rates if it doesn’t cool off soon. The CME’s FedWatch Tool continues to strengthen in regards to the outlook for interest rate hikes. There is very little chance there will not be at least one hike by June and many in the market think there could be at least two or more hikes by June if not before. The outlook for December has priced in a near 100% of a single hike and there is a high expectation for rates to be 100-125 basis points higher in one year than they are now. We think this outlook is still cautious, there is no sign of slowing inflation yet, and every sign that consumer-level inflation, what the FOMC is mandated to control, is still accelerating. The VIX (INDEXCBOE: VIX) should be on everyone’s radar if it isn’t already. The VIX, a measure of option volatility in the S&P 500 and a proxy for market sentiment, has been giving signs of increased volatility not only in regard to options valuation but price action as well. The action on Friday put the VIX up about 40% at the open and has the index set up for a reversal that could be sustained. A reversal in the VIX is not a good sign for the S&P 500 and would likely coincide with a reversal in the index as well. The caveat in all of this is that last week was a holiday and holiday trading conditions were in effect. That means light volume and little engagement from the big players which almost always results in knee-jerk reactions and extreme movements. The outlook for economic growth is still positive, as are earnings, albeit a little cloudy. The market may correct, it will eventually, but we will most likely view it as a buying opportunity when it comes. What To Expect In The Week To Come A Very Busy Week Of Economic Data After last week, this week’s round of economic data is going to be more important than ever. Last week, the data came in positive but with plenty of evidence of rising inflation and the impacts of supply chain disruptions and labor shortages. The Chicago Fed’s National Activity Index is perhaps the most positive of the reports making a large swing within its range to acceleration and reversing last month’s small deceleration. Existing home sales were also good, as were the flash PMI readings and Personal Income and Spending. Negative reports included the 1st revision to 3rd quarter GDP which shaved 0.1% off the previous figure, as well as the Durable Goods Orders and New Home Sales figures. Both Durable Goods and New Homes Sales came in below expectations, Durable Goods in negative territory, to offset gains in other parts of the economy. This week we’ll get another full slate of reports to include Pending Homes Sales, PMI and ISM figures, Consumer Confidence, Construction Spending, Factory Orders, and the Fed’s Beige Book on top of the monthly employment bundle. The employment bundle includes the ADP and NFP reports which should both show solid gains in employment if not the high figures we have been expecting. There is still no sign of what happened to the 11+ million US workers who fell off the unemployment roles in September. The Beige Book may be the report of the week, however, as it gives an in-depth look into all 12 Fed districts and could reveal rising inflation, labor shortages, and supply chain hiccups are persisting. The Earnings Doldrums, They’re Here The peak of the 3rd quarter earnings season is well behind us and the doldrums are upon us. There are still quite a few reports to come out but, with more than 95% of the S&P 500 having already reported, there isn’t much new we’re going to learn. Looking ahead, Oracle (NYSE: ORCL) reports on the 10th of December marking the midway point between earnings cycles while JPMorgan (NYSE: JPM), marking the onset of peak Q4 reporting, doesn’t issue its release until well into January. Between now and then it’ll be all about small and mid-cap stocks and the data. As far as the Q3 season went, it was largely better than the consensus forecasts but well below what the market was actually expecting. The S&P 500 earnings growth rate is only up about 12% from the consensus expectation at the start of the reporting season which is less than half what we were expecting. Both the Q1 and Q2 reporting periods exceeded consensus by about 3000 basis points. Looking forward, the analysts have grown cautions. While the consensus estimate for Q4, Q1 2022, and Q2 2022 ticked higher over the last week or so all three are trending sideways from levels set way back in late summer/early fall of this year. The question now is if the economy can overcome hurdles and outperform the tepid outlook or if supply chain disruption and inflation will take another bite out of earnings? Our Focus List For The Week This week’s earnings calendar is filled with small and mid-cap names including several retailers/mall stocks and several interesting tech stocks too. Our focus list starts off with a report from Li Auto, Inc (NASDAQ: LI). The company is one of China’s leading EV manufacturers and is expected to post acceleration on both a sequential and YOY basis. Several competitors have reported recently and all beat their consensus estimates on rising demand in China and globally. While we are also expecting strength, with the bar set as high as it is the company can do very, very well and still disappoint the market. The analysts are expecting sequential growth near 45%. Chico’s Fashion (NYSE: CHS) will have our attention on Tuesday morning when it reports. The omnichannel retailer is expected to post a sequential decline in revenue that goes against everything we’re seeing in the retail sector to date. We expect to see this company outperform both the consensus and the previous quarter and possibly return to growth versus the 2019 period. Shares of CHS took a big dive on Friday and opened up a significant value relative to forward earnings. Tuesday evening is going to be the busiest time of the week for us with reports from Salesforce (NYSE: CRM), Ambarella (NASDAQ: AMBA), and Zscaler (NASDAQ: ZS). Individually they are leaders in their respective fields and seeing tremendous growth in the wake of the pandemic. Together they represent some of the strongest trends in tech and economy at large and should all report strong results. Ambarella, the maker of advanced optical and computer-vision semiconductors, is expected to post the strongest gain at up 14% YOY but all three are in a position to outperform their consensus estimates. The real takeaways from these reports, however, will be the outlook for growth and the picture they paint of systemic demand within the tech sector. Likewise on Wednesday with reports from Crowdstrike (NASDAQ: CRWD) and Okta (NASDAQ: OKTA). These two cloud-based security companies should both do well and may be foreshadowed by results from Zscaler on Tuesday. Thursday our attention will turn to the retail world and Dollar General (NYSE: DG). The Dollar Tree (NASDAQ: DLTR) reported last week and beat the Marketbeat.com consensus as well as providing an upbeat outlook. Shares of Dollar Tree are up more than 25% in the last two weeks, driven even higher by the earnings news, and Dollar General could be right behind them.
 Big Lots (NYSE: BIG) rounds out our list Friday morning. The company’s stock has pulled back significantly since hitting a high earlier this year and it is set up for another run. Trading at 7X earnings and paying more than 2.5% in yield it won’t take much good news to get the market going. The analysts are expecting a sequential decline in revenue that we do not agree with. We’re expecting flat to slightly higher revenue sequentially and for stock prices to respond favorably.
Until then, remember the trend! Thomas Hughes
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