Earnings March Proudly Into Bastille Day, With Banks In Vanguard, Delta Winging Higher

July 14, 2021 | JJ Kinahan’s Daily Market Update
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Despite a modest sales shortfall from Bank of America, Delta and Citigroup earnings both shine this morning, with Delta’s profit coming as a nice surprise.
Powell, the chairman of the Federal Reserve, is scheduled to testify before Congress today and tomorrow.

(Market opens on Wednesday) Perhaps parades and fireworks come to mind when you think about Bastille Day. Today on Wall Street, we’ll see a slew of new earnings reports, another look at inflation, and a few words from Federal Reserve Chairman Jerome Powell. Are there any fireworks? We’ll have to wait and see.
The second day has a lot to live up to after a solid start to earnings season on Tuesday, when big banks saw their investment banking operations grow. So far, everything appears to be in order. If you will, the banks have more than kept their half of the agreement.
The stock of Bank of America (BAC) got off to a sour start on Wednesday. In pre-market trading, shares dipped as the business slightly missed analysts’ average revenue estimate due to poor rates cutting net-interest income.
Citigroup (C) was a happier story, with the business surpassing profits and revenue projections from Wall Street. Wells Fargo (WFC) reported a strong revenue beat, which surprised investors and gave the stock an early lift. Blackrock (BLK) also performed well, exceeding predictions and displaying a large amount of assets under management.
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When it comes to trading volume falling down from the frenetic levels of the Covid peak, it’s nice to see how C phrased it. According to the corporation, revenue decreased, but this was due to “mainly reflecting normalization in market activity.” Despite the fact that trading performed well, the prior quarter’s level was unattainable. Nobody else put it as succinctly as you did.
Delta (DAL) shares soared before of the bell as the airline surprised much of Wall Street by announcing a profit in the second quarter, despite the average analyst forecasting another loss. Domestic leisure travel has “completely recovered to 2019 levels,” according to DAL’s press release, with “encouraging signs of progress” in corporate and foreign travel.
Apple (AAPL) shares jumped 2% before of the open in non-earnings news after a media report stated the company had advised suppliers to prepare for a 20% rise in iPhone shipments. This could indicate that higher demand is on the way.
The major indices rose slightly higher in pre-market trading Wednesday, with the earnings picture mostly positive and Treasury rates relatively flat. The banks may be to blame for a large portion of the bounce. Questions about Chinese demand and news of a possible OPEC deal sent crude down a notch.
Ahead of Fed Chairman Jerome Powell’s economic speech before Congress, things may be a little slower than usual. When people are waiting for his statements, the market frequently trades more thinly. It’s all about the questions when it comes to congressional testimony. Powell’s prepared remarks indicated that he was not in a hurry to end the easy money policy.
The June producer price index is something he’ll almost certainly be asked about (PPI). In June, both the headline and core PPI rose 1% month over month, far exceeding analysts’ expectations of 0.5 percent. This comes just one day after consumer prices increased to their highest level in over 30 years.
JP Morgan Chase (JPM) and Goldman Sachs (GS) both fell approximately 1% yesterday after reporting good results, continuing a trend that began in Q1. Despite an earnings beat, BLK is down today. This could be a case of “buy the rumor, sell the fact” trade, but it could also be an early warning sign to investors that much of the projected strength in Q2 earnings—across the board, not just in banks—has been priced in to some level in recent months. Keep in mind that the S&P 500 Index (SPX) is already near levels that many analysts predicted for the end of 2021.
With that in mind, it’s possible that investors could witness more of the same in the coming weeks, with large businesses being punished on Wall Street despite strong earnings announcements. In a similar vein, the Tech sector set an all-time high Wednesday, despite the overall market’s weakness. When the major hitters come up to bat in the coming weeks, could we see some earnings-related profit-taking in that sector? We’ll have to wait and see.
Small-caps, on the other hand, were hammered early this week. Yesterday, the Russell 2000 Index (RUT) had its worst day in months. At the same time, the dollar index continues to rise, possibly indicating that investors believe the Fed will become more aggressive. Even while Tech soared and bonds down yesterday, we talked about investors becoming cautious last week, and the evidence is undoubtedly still out there in the sinking RUT and rising greenback.
According to Fed minutes released last week, Fed Chairman Jerome Powell—who is due to testify before Congress today and tomorrow—appeared to be among those advising patience on withdrawing stimulus at the last Fed meeting. In front of senators and representatives, that tune is unlikely to change.
One of the possible concerns for Powell from our elected officials could be how long the Fed intends to let inflation continue to rise before pressing the “taper” button. Some experts dismissed yesterday’s hot June consumer price index (CPI) statistics, claiming that a large portion of the rises were due to one sector, used vehicles.
Despite this, the Fed may be feeling the heat, with inflation at levels not seen in almost 30 years and showing no evidence of being “transitory,” as Powell put it, at least for the time being. People have been concerned about rising prices for around the sixth month in a row.
Other questions for Powell might include whether the economy has enough stimulation without the projected additional infrastructure expenditure of hundreds of billions of dollars, and whether this will overheat things. There’s also the question of whether the Fed needs to continue buying mortgage bonds at a rate of at least $40 billion per month now that the housing market looks to be recovering nicely from Covid. Even some Fed officials recently questioned whether the purchases should be continued.
Anyone expecting Powell to make a significant shift in policy today or tomorrow should remember what he stated last month about not raising rates ahead of time to keep inflation in check. Even while Powell indicated last month that the Fed is “thinking about thinking about” withdrawing stimulus, it’s difficult to picture Powell, who has been fairly consistent in his beliefs, changing his mind just a month later.
Powell and his team are scrutinizing the entire economy, including the job market, and have committed to allow inflation to rise above its target if that is what is required to get people back to work. On Wall Street, the consensus appears to be that Powell will remain dovish today, which puts us back to the old adage that many investors seem to be adopting recently: “Don’t fight the Fed.”
When Wall Street appears to be too expensive, buyers often turn to offshore equities. Unfortunately, concerns over the Delta variety of Covid-19 and the recent Chinese regulatory crackdown on firms may be preventing some of that money from going to foreign markets. This might lead to more money stacking up in fixed income and stocks in the United States.
Stocks in the United States are still around all-time highs. Perhaps the “TINA” (There Is No Alternative) effect is once again boosting the stock market, as investors see little other opportunity to increase their money, so they continue to “buy the dip,” as we’ve seen so many times this year. This could also explain the run on “meme” stocks and cryptocurrencies in 2021.
Despite recent dividend increases by firms, particularly large banks, the average S&P 500 dividend yield of roughly 1.35 percent isn’t particularly attractive, so investors may be more inclined to pursue “growth” equities. After yesterday’s inflation news, all of the FAANG stocks climbed, albeit some eventually slumped when rates rose.

Only for the sake of illustration. Past performance isn’t a guarantee of future success.
FTSE Russell and ICE are the data providers. The thinkorswim(R) platform provided the data for this graph.
Changing Directions is the chart of the day. The dollar index (DXY—purple line) was scraping the bottom of the barrel in early June, while the Russell 2000 Index (RUT—candlestick) was setting new highs. In July, the tables have flipped, and it’s not all good news. Small-cap performance shows investors are betting on U.S. economic growth, but the strong dollar could signal a more hawkish monetary policy ahead, which hurts growth sectors like Tech.
Vigilantism Do you want to take a powder? When so-called “bond vigilantes” believed the Fed wasn’t being tough enough on inflation, they pulled bonds down hard and raised yields. For the most part, it isn’t occurring right now. Consider the following example: With the Fed funds rate at near zero for the past 17 months, annual core consumer inflation grew at its quickest rate in almost 30 years in June, although Treasury rates fell modestly on Tuesday after the data was released before rallying later in the day. Despite a scorching PPI reading, yields dipped again today.
Even after Tuesday’s little rise in yields as the inflation report was digested, the 10-year Treasury yield remains historically low at slightly over 1.4 percent. When you combine that with widely held predictions for roughly 8% Q3 economic growth (as measured by the Atlanta Fed’s GDP Now indicator) and 5% inflation, it’s clear that something isn’t quite right, at least in traditional market terms.
It’s uncertain how long this perplexing scenario will persist, but it might be extremely difficult for persons on fixed incomes (retirees, for example) to make ends meet in the interim. They’re paying for groceries, gas, and other necessities, but savings interest rates are still at record lows. It’s a two-edged sword, because what’s good for stocks isn’t always good for stocks./nRead More