Investors Have Lots To Digest Between Earnings, Data, Fed This Week

We hope you’ve had a restful weekend because this week is looking pretty busy on a trio of fronts—earnings, economic data and monetary policy. And that’s not even counting the potential for policy headlines from Washington, which played a big role in trading last week.

This morning, trading seems pretty subdued ahead of the big week. That’s probably to be expected as Wall Street tends to look to earnings for a snapshot of the recent past and guidance for future performance. About a third of S&P 500 Index companies are set to open their books this week.

Investors probably want to hear more about U.S. President Joe Biden’s potential capital gains tax hike on high earners, news of which contributed to last week’s price volatility.

There’s good news on the vaccine front as the Johnson & Johnson (NYSE:JNJ) jab is back in distribution in many U.S. states after health officials lifted an 11-day pause on use of the vaccine amid worries about blood clotting as a rare side effect.

With so much to consider this week, you might want to keep an eye on Wall Street’s main measure of investor jitters, the Cboe Volatility Index (VIX). The index is up this morning, but it’s hanging out at just under 18. A number below 20 in this market appears to mean alarm bells aren’t really much of an issue. But there could be plenty of room for surprises this week amid so many earnings reports, a Fed meeting, and lots of economic reports.

Week Ahead In Economic Data/h2

This morning, we saw durable goods orders for March come in softer than expected—up 0.5% against a Briefing.com consensus forecast of a 2.0% gain. The numbers come after durable goods orders in February unexpectedly fell after a string of gains. A month ago, some economy-watchers suggested the soft February number could have been an anomaly—a non-linear data point within an uptrend. This month’s tepid number might call into question the pace of the current recovery. Still, it was a positive number, and considering how atypical this pandemic period has been, the recovery is likely to be atypical as well.

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Tomorrow, the market is scheduled to get two February price indices for the housing market and a consumer confidence number for April from the Conference Board. Last time around, the index for March showed consumer confidence at its highest point in a year amid recovery expectations. With the vaccine rollout progressing well, in the United States at least, it could be interesting to see whether the numbers show another jump. (See more on consumer confidence below.)

One of the top-shelf economic reports is due out on Thursday with the government’s release of its advance report on first quarter gross domestic product. A Briefing.com consensus is calling for a rise of 6.5%. That wouldn’t be too shabby after the prior quarter’s 4.3% gain. Good news on the GDP front would be welcome given that Thursday is also the day we see new weekly unemployment figures. Those have been improving, and a Briefing.com consensus expects they will continue to do so this week, but they’re still very high compared with what they were prior to the pandemic.

Lest you think Friday might bring a respite from important economic numbers that tend to have a high trading impact, the last day of the week brings the latest number for the Fed’s preferred inflation gauge—the core personal consumption expenditure (PCE) price index. (More on that later.)

Monthly Meeting On Monetary Matters/h2

At the moment, the Fed doesn’t seem too worried about inflation, and almost all of the expectations in the futures market point to the central bank standing pat on its key policy rate on Wednesday after concluding its monthly rate-setting meeting.

The central bank has been telegraphing that it’s going to keep monetary policy easy for the foreseeable future and that it’s even willing to let inflation run a little hot for a while.

At the moment we’re not seeing the problematic price rises that many seem to be worrying about, but we’re also not completely out of the woods when it comes to the pandemic’s effects on the economy. After all, last week’s initial jobless claims showed nearly 550,000 people filing for unemployment benefits.

Tesla Helps Shift Earnings Season Into High Gear/h2

This week, more than 100 S&P 500 Index companies report, inducing Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Tesla (NASDAQ:TSLA), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). These companies are heavily involved in technology, even if AMZN, GOOGL and TSLA aren’t officially in the SPX’s Information Technology sector.

Take TSLA for instance . In addition to being on the forefront of creating its own cutting-edge electric vehicle technology, it’s also a big user of computer chips, which are in short supply globally. So it could be interesting to see whether company executives elaborate on how the electric vehicle maker is navigating a shortage that is proving to be an Achilles heel for the auto industry.

AAPL has also had problems securing chips for its MacBooks. But AAPL has a much larger range of products to sell than TSLA, so postponing some MacBook production probably isn’t as big of a headwind as, say, halting production at a vehicle plant, like TSLA did in February.

The bigger picture for tech-related growth stocks appears to be whether investors feel they’ve found the sweet spot for valuations. It’s arguable that if we see another big uptick in long-term interest rates because of fears of inflation that we could also see more selling in tech-related companies.

CHART OF THE DAY: Major tech-related stocks report earnings this week against a backdrop of a falling yield on the 10-year Treasury, as represented here by the 10-Year Treasury Note Yield Index (TNX—candlestick). If rates pick up again, there could be more pressure on tech-related equities, but for now at least investors might be able to focus more on company fundamentals. Data source: Cboe Global Markets (NYSE:CBOE). Chart source: The thinkorswim® platform . For illustrative purposes only. Past performance does not guarantee future results.

Importance of Consumers: Data that take the pulse of the American consumer are often watched by investors because consumer spending makes up such a huge chunk of the U.S. economy. These numbers are of particular interest now that the vaccine push is really gaining steam in the United States. As virus cases come down, governments should be able to allow more commerce, providing an outlet for pent up demand at a time when people have been saving up. The more U.S. consumers shop, the better the domestic economy does, and the better goes the economy of much of the rest of the world that supplies the U.S. with raw materials, parts and finished goods.

Inflation Expectations: One interesting thing from the preliminary consumer sentiment index for April from the University of Michigan was that inflation expectations for the year ahead were 3.7%, the highest in a decade. If that scenario were to take place, it would represent a significant uptick from where we are now. The February core PCE price index showed an annualized number of 1.4%, below expectations. That’s well under the Fed’s target of 2%, especially when you consider the central bank has decided to average inflation over time, meaning that it will let prices rise more than its target percentage as long as they even out to the 2% target over time.

Tax Implications for Investors: If you have years of investing ahead, the potential capital gains tax hike on the wealthy may look more impactful now than it does, say, 10 years from now looking back. Think back to what this column said last week about being in a “wait and see” market. The same applies to any legislation. Wait and see. It appears to be the opening round of what could include lots of negotiation horse-trading, and thus not cause for panic.

The market already was grappling with the idea of higher taxes since earlier this month, when Biden proposed raising corporate taxes to help pay for his infrastructure plan. Some business groups said the idea could cost jobs. Other analysts said better infrastructure helps corporate America by making it better able to compete with growing economies like China. Take your pick, because both sides’ arguments have strong points.

Written By: TD Ameritrade