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Winning October continues, as corporate earnings and retail sales surprise

Some doom remains on the horizon, but it was mostly happy thoughts this week on Wall Street as corporate earnings outpaced analyst expectations and retail sales point to an improving economy.

MANHATTAN (CN) — Starting the week off slow, markets hit their stride after a raft of positive corporate earnings and retail sales data caused investors to rally.

By the end of the week, the Dow Jones Industrial Average gained 549 points, while the S&P 500 increased by 80 points. The Nasdaq, looking to return to 15,000 points and to put the Big Tech rout from last week behind it, gained 318 points.

Early in the week markets looked relatively stagnant, but investors rallied Thursday on surprisingly good corporate earnings. By Thursday's closing bell, the Dow gained 550 points, the S&P added about 100 points and the Nasdaq gained about 250 points.

Some experts had predicted earnings would again be a pleasant surprise to Wall Street, which has consistently low-balled how well Corporate America has done during the pandemic.

“Our view is that the Street continues to underestimate U.S. corporate earnings,” Nicholas Colas and Jessica Rabe of DataTrek Research wrote in an investor’s note early in the week, adding that earnings are the best path for higher stock prices since interest rates are increasing, the Fed will be tapering and economic growth is slowing.

“These are all headwinds, and we think they will remain so,” Colas and Rabe wrote. “Investors need to believe in a higher sustainable level of corporate earnings to offset these issues.” They noted that analysts missed earnings during the first quarter of this year by 23% and then by 17% during the second quarter. They predict analysts will continue to underestimate corporate earnings and that third-quarter earnings will beat analyst expectations by at least 10%.

Bank earnings, which came in much higher than expected, helped drive market gains for the week. In its earnings release, Morgan Stanley reported a $3 billion year-over-year gain in net revenues and about a $1 billion increase over that period in net income. Bank of America showed that its net income gained 58% year over year to hit $7.7 billion last quarter, also noting that average deposits were up 15% or $247 billion since September 2020.

Other companies also showed a big jump in revenue. UnitedHealthcare reported an 11% increase in its revenues year over year, while pharmaceutical giant Walgreens Boots Alliance posted a 72% increase in its earnings since the end of August 2020.

On Friday, Goldman Sachs reported a 26% increase in its net revenues and a 60% gain in earnings since September 2020. The investment bank predicts the United States will see 4% growth in gross domestic product next year.

Retail sales also helped cap off the winning market this week, with the U.S. Census Bureau reporting a 0.7% increase in monthly sales in September. That number is well above the slight decline in retail sales that analysts had predicted.

“Despite reports of increasingly widespread shortages, spending on goods apparently held up relatively well,” wrote Andrew Hunter, senior U.S. economist at Capital Economics, in a note to investors. He predicted that services spending would likely see a resurgence in the next few months, but that the retail numbers weren’t wholly positive.

“Nevertheless, real consumption still looks to have risen by no more than 0.5% last month, which means growth dropped below 1% annualized in the third quarter, down from 12% in the second,” Hunter wrote. “With goods shortages likely to persist, and the resulting surge in price seating into real incomes, we expect consumption growth to remain subdued.”

The main concern lately has been the supply bottleneck — an issue that drove the U.S. Chamber of Commerce earlier in the week to meet with members of the Biden administration to discuss how to open up ports.

But some say a break in the clouds could come soon. During the Institute of International Finance’s annual conference, JPMorgan Chase CEO reportedly said that supply-chain bottlenecks would soon be gone. “I should never do this, but I’ll make a forecast,” Dimon said, according to news outlets. “This will not be an issue next year at all. This is the worst part of it. I think great market systems will adjust for it like companies have.”

Along with supply shortages, inflation continues apace. On Wednesday, the Bureau of Labor Statistics reported that headline inflation rose again in September, this time by 0.4%, while core inflation gained 0.2%. Overall, headline inflation is 5.4% higher than the same time last year.

“If one doesn’t eat, drink drive, buy a car, buy a home, rent a home, furnish a home, buy clothes, send kids to school, send a package in the mail, own a pet, to name a few, you might not have much inflation in your cost of living,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Energy prices led the way for price increases: gasoline prices gained 1.3% last month, fuel oil increased almost 4%, and piped gas services increased by 2.7%. Supermarket prices also gained 1.2%, while food away from home increased by only half a percentage point.

Only a few segments saw a drop in prices. Used cars, which had started the spike in prices months ago, fell for the second month in a row but are still up by 24% year-over-year. Fortunately, apparel prices also dropped 1.1%, while airline fares continued their sharp downturn, falling 6.4% last month after a 9.1% drop in August.

Anu Gaggar, global investment strategist for Commonwealth Financial Network, noted that the price increase rate has slowed down from the spring and summer. “Some of the transitory components are already moderating, such as airlines, apparels, and used autos,” she wrote. “Disruptions due to supply chains not being able to keep up with the spike in demand may take longer but will eventually be fixed.”

Gaggar noted the 2.34% five-year inflation expectation is only a bit above the Fed’s 2% goal, but warned rising rent and wages could prove “stickier” and soon start to eat into corporate margins.

Another positive trend is that initial unemployment claims dipped below 300,000 claims for the first time since pandemic-related lockdowns took hold. The Labor Department reported it received only 293,000 new claims for the week ending October 9, well below what analysts had predicted. Nearly 330,000 claims were filed the prior week, which was itself a drop from the week before that following a brief uptick in claims during September.

The flip side of the employment coin, though, is that Americans are quitting their jobs at a faster rate than before. According to the Bureau of Labor Statistics’ Job Openings and Labor Turnover summary report, 4.3 million workers quit their jobs in August, a new series high of 2.9% of the American workforce.

Quits increased in food services and wholesale trade and were focused primarily in the South and Midwest of the country, where 3.2% of the workforce has left their jobs. The industry most affected by disaffected workers is leisure and hospitality, where 6.4% Americans have left for greener pastures. That industry also has the largest amount of job openings, at more than 10%.

“The drop in openings for the leisure and hospitality sector was notable,” wrote Nick Bunker of Indeed’s Hiring Lab. “The decline here suggests that the rising case counts in August tempered employer demand for new hires.”

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Categories / Business, Economy, Financial

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