It happened on Friday night. The result of drawn-out negotiations, and a driver, not the driver, but a driver of a stock market that has been as hot as hot gets. The House of Representatives finally got around to voting on and passing the roughly $1.2 trillion bipartisan infrastructure rebuild bill. About half the planned spending on public works laid out in that bill is comprised of new money, with the other half drawn from repurposed funds previously meant to be spent elsewhere.
The vote was rather close, 228-206, with 13 Republican representatives crossing the aisle and six extremist Democratic leftists voting against the bill. The latter half-dozen had intended to hold this more broadly accepted bill hostage unless they could be assured that a larger spending package ($1.75 trillion to $2 trillion?), the "Build Back Better" bill that focuses on education, social issues and climate change, would also be voted on and passed. Those negotiations, however, are proving far more difficult.
This infrastructure bill will now head to President Biden's desk to be signed into law and represents as a much-needed win for this administration. Speaker Pelosi had finally felt compelled to move forward with the one bill that had more broad support and had already been passed in the U.S. Senate after finally accepting that the two bills could not pass in parallel.
To get a majority of far-left representatives on board with the infrastructure bill, a group of politically moderate Democratic representatives had to issue a statement that they would vote in support of the larger bill no later than the week of Nov. 15. That date, which is a week from today, supposedly allows the CBO (Congressional Budget Office) to at least get a look at the bill, and is also the day that the House returns from a week-long recess. There is no doubt that even if the "Build Back Better" bill gets through the House, it will either fail or will need to change in order to pass in the evenly divided U.S. Senate, which means the bill would then need to go back to the House. In short, "Build Back Better" remains a long way off (for now) from heading to the president's desk.
The Week Past
Record highs almost every day. Seven consecutive winning sessions for the S&P 500 that would seem incredible if not for the 10-day winning streak that the Nasdaq Composite brings into the current week, matched by its more tech-focused sibling the Nasdaq 100. Are equity markets overbought? The knee-jerk response would be to say "yes." After all, the Nasdaq Composite closed Friday 4% above its own 21-day exponential moving average and an incredible 6.1% above its own 50-day simple moving average. On a daily chart, the S&P 500 currently runs with an RSI (Relative Strength Index) reading of 76, topped by the Nasdaq Composite and the 78 RSI reading for that index. For the new kids, an RSI of 70 or so is usually where an individual security or an index is technically considered to be in an overbought condition.
Let's think about this. A number of market inputs have evolved to the point where these factors all needed to be priced in at levels well above what we on Wall Street had expected. For one, recent economic data points have improved. Sure, supply chain bottlenecks persist, as do shortages on the supply side of labor markets, at least at these price points. However, just last week, data for factory orders as well as ISM surveys for both the manufacturing and services sides of the economy surprised to the upside, and then there was the 531,000 Non-Farm Payroll estimate for October that brought with it a huge upward revision to September job creation. We have been talking about "stagflation" for quite some time. Fact is that what we have is just inflation. The recent numbers are, if we are to be honest as economists, already taking the "stag" out of stagflation after just one weak quarter.
Beyond the suddenly supportive macro, markets have had to adjust for an earnings season that has decisively bested consensus view coming in, and for a Federal Open Market Committee that somehow managed to expertly announce a tapering of asset purchases, and leave financial markets with the perception that this first step toward the eventual removal of accommodation is "dovish." Bond traders even jumped on that fastball as the long end of the Treasury yield curve collapsed on itself late last week.
Then there was the antiviral pill developed by Pfizer (PFE) that apparently showed an efficacy rate of 89% or 90% for those high-risk patients already infected with the SARS-CoV-2 coronavirus if caught early in terms of preventing hospitalization and death.
If that's not good news, nothing is, as cyclical and growth sectors in general took the lead away from more defensive sectors on the weekly and monthly performance tables.
Earnings Update
With retailers for the most part set to report next week and the week after that, and a federal holiday set for this week, the earnings calendar, while not light, certainly will have time to catch its breath after the past two monster weeks. About 89% of the S&P 500 companies have now reported their third-quarter financial results. According to FactSet, 81% of these firms have surprised to the upside on earnings while 75% have posted pleasant surprises for revenue generation. Normal upside surprise rates for both the top and bottom lines would generally be considered to be between 65% and 70%.
The S&P 500 comes into the new week trading at 21.4x forward (12-month) projected earnings. At this late point of the season, still according to FactSet, S&P 500 companies are reporting a blended (reported and expected) year-over-year earnings growth rate of 39.1% on revenue growth of 17.3%. I will remind readers that as of Oct. 1 consensus view for third-quarter S&P 500 earnings was for growth of 27.4% on revenue growth of 14.9%. The regularity and magnitude of these beats show that fears that rising consumer inflation would result in demand destruction and that rising producer inflation would produce margin compression were either overblown or in some way pushed out into the fourth quarter.
On that point, expectations (can we trust them?) for S&P 500 earnings growth for the fourth quarter are currently running at 21.1% (which is a revision lower) on revenue growth of 12.1% (which is a revision higher). For calendar year 2021 in its entirety, the street is still looking for earnings growth of 44.6% on revenue growth of 15.5%. By the way, the music is expected to slow significantly for both first-quarter and calendar year 2022.
Takeaways From COP26
Have we learned much? We may have learned that two of the planet's most consistent pollution offenders, China and Russia, have absolutely no interest in joining the planet in prioritizing an attempt to counter climate change through shifting away from what works cheapest for now in terms of producing energy. On that note, we may have also learned that shifting towards a more ESG (environmental, social and governance) friendly corporate, national or global environment is going to be expensive and may be what semi-permanently reverses the disinflationary force that technological progress has traditionally and broadly placed on consumer prices across developed economies.
Then again, what did we really learn? Pretty sure we already knew all this before the whole dog and pony show in Glasgow even kicked off.
The Week Ahead
From an economic perspective, the front end of the week is top-loaded with Fed speakers. I am tracking at least seven speakers for Monday alone, including Fed Chairman Jerome Powell, who will speak on Tuesday. The macroeconomic calendar is rather light with the exception of inflationary data for October that will be released on Tuesday (Producer Price Index) and Wednesday (Consumer Price Index).
From a corporate perspective, Advanced Micro Devices (AMD) will host its Accelerated Data Center Premiere event here on Monday in order to showcase coming innovation centered around its latest processors. In addition, Nvidia (NVDA) will hold its annual GTC conference from Monday through Thursday this week. Expect Nvidia to build on what started at Microsoft's MSFT "Ignite '' conference last week and focus on the serious side of what seems to be inevitably referred to as the "metaverse" moving forward.
Meta Platforms (FB) has been making headlines with name changes and public relations type news. Microsoft and Nvidia are, along with several others, fast becoming the way to invest in what comes next for that place where artificial intelligence and augmented reality become intertwined for the purposes of getting business done. The death of business travel? If the pandemic did not finish off business travel for good, this next technology will certainly do away with anything deemed less than directly necessary in order to make a sale.
Don't forget, the Walt Disney Company (DIS) reports on Wednesday evening and then proceeds with its Disney+ Day on Friday. If the numbers don't get you fired up, the intention will be that Star Wars, Marvel, Pixar and Nat Geo will give it a go.
Oh, Elon!!
It is interesting that electric vehicle maker Rivian (RIVN) will go to market later this week with its initial public offering. Currently, it looks as if Rivian is set to raise almost $10 billion with its IPO, selling 135 million shares in a range currently spanning from $72 to $74. All told, the implied market, and this will change, is valuing Rivian in total at more than $62 billion. If only there was a way to take the spotlight off of a burgeoning competitor? Hmm.
What a better way for the CEO of the undisputed world leader in the electric vehicle space to steal some thunder by holding a public poll on Twitter (TWTR) and allowing the results of that poll to dictate whether that CEO decides to sell 10% of his holdings in that firm, which is Tesla (TSLA) . In case one sat down to watch football this weekend and did little else, then one is probably familiar with the popular vote that Elon Musk posted to social media. Musk's Twitter faithful overwhelmingly voted for his sale of 10% of his holdings, currently valued (based on Friday's close) at a rough $210 billion, so we are talking about a sale of $21 billion of Tesla.
My guess is that many voters are hoping for a discounted price so that they can enter or add to their long positions in the stock. While the stock is trading significantly lower through the wee hours on Monday morning, my guess is that should Musk stand by his pledge he will take his time and allow the sale to be made in some methodical way, where he has little contact with the trades. In other words, he is not going to plop $21 billion of Tesla shares down on the offer side of the market and ask for a bid. The trades will likely be handled over a lengthy time period by one or more of Tesla's investment bankers. Based on past history, one might gather that Goldman Sachs (GS) will land more than its fair share of this business.
Economics (All Times Eastern)
No significant domestic macroeconomic data points scheduled for release.
The Fed (All Times Eastern)
09:00 - Speaker: Federal Reserve Vice Chair Richard Clarida.
10:00 - Speaker: Interim Boston Fed Pres. Kenneth Montgomery.
10:30 - Speaker: Federal Reserve Chair Jerome Powell.
10:55 - Speaker: New York Fed Pres. John Williams.
12:00 - Speaker: Reserve Board Gov. Michele Bowman.
12:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
13:50 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (COTY) (0.02)
After the Close: (AMC) (-0.54), (IFF) (1.39), (PYPL) (1.08), (RBLX) (-0.08)
