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Talk, Talk: Stimulus Wrangling Continues, with Markets (and Volatility) in Flux

The market's attention has turned back to the ongoing stimulus talks, with both sides suggesting progress, but also acknowledging differences remain. Meanwhile, Netflix disappoints on earnings, and Tesla reports this afternoon.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Senate podium: stimulus talks drag on
5 min read
Photo by Getty Images

Key Takeaways

  • Netflix disappoints, but Snapchat surprises to the upside

  • VIX ticks north of 30 in the overnight hours

  • 10-year Treasury yield rises above 0.80 for the first time since June 

(Wednesday Market Open) Ongoing stimulus talks seem to continue to be the main focus for investors this morning as discussions between the Trump administration and House Democrats drag on.

The White House’s chief of staff told CNBC that Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi had made good progress but still had a ways to go and plan to talk again today. Meanwhile, Pelosi wrote in a letter to House Democrats that she remained hopeful of a deal before the election.

With the stimulus discussions set to continue, it seems that investors will keep monitoring any headlines that might come their way. Wall Street has been hoping for a stimulus package that could help boost consumer spending and give a shot in the arm to corporate performance. 

 While both sides seem to be being more concessionary, each day that passes without a deal makes it less likely something gets done before the election.

Volatility Edging Higher amid Talks

Amid the inconclusive stimulus talks as the election approaches, it seems that investors’ jitters are increasing slightly, with the Cboe Volatility Index (VIX) up a bit this morning. But in a bit of an odd relationship, investors were also selling safe-haven U.S. government debt, and the yield on the 10-year Treasury is above 0.8% for the first time since June. 

It’s been said that bonds lead the market, and right now government debt is giving us more of a confidence vote while the VIX is more cautionary. And if you’re looking for a risk-on/risk-off vote from the dollar, the greenback seems to be leaning toward the calmer side. The buck is often considered a safe haven, and it’s hit its lowest point in a month. 

From an investor perspective, it’s important to remember that stimulus is in many ways a stopgap measure—a bridge to the other side of COVID-19. It’s why many eyes have been on Moderna (MRNA), BioNTech (BNTX), Pfizer (PFE) and other biopharma firms in the race for a vaccine. Such a development would likely help spur business and leisure travel, leaving airlines and other travel companies less responsive to the day-to-day stimulus wrangling in part because there’s no guarantee that they’ll get special treatment from a package. Americans seem to be getting stir-crazy and ready to travel (see more below) but many remain inhibited by the risks.  

In corporate news today, electric vehicle maker Tesla (TSLA) is scheduled to pop the hood to give investors a look at its performance during the third quarter. One question is whether TSLA can report a profit for the fifth quarter in a row. Investors also likely will be looking for additional clues as to whether the electric vehicle maker is on track to deliver 500,000 vehicles this year. 

Last time around, the company handily beat expectations, posting positive earnings per share when analysts had expected a loss. For Wednesday’s report, a consensus of analysts is expecting earnings of $0.56 per share on revenue of $8.26 billion.

Netflix Panned After Earnings Disappoint

Netflix (NFLX) shares are off about 5% in the premarket this morning after the entertainment streaming giant reported earnings that came in well below analyst estimates. Still, the FAANG member beat forecasts on its top line.

In addition to top- and bottom-line numbers with Netflix, investors also tend to closely scrutinize the company’s global paid net subscriber numbers. This time around, NFLX added 2.2 million subscribers, well below the 3.57 million analysts had been expecting. Despite today’s selloff, it’s worth noting NFLX shares are still up some 60% year-to-date.

The results come after NFLX delivered jaw-dropping new subscriber numbers in the first half of the year but warned investors those rates would be unsustainable and to expect a significant slowdown in the second half. To that end, NFLX had previously issued new subscriber guidance of 2.5 million. So the 2.2 million net adds announced yesterday falls short of its own previous guidance.

But with many consumers—particularly the homebound school-age set—still employing social distance measures, where might they be turning for their content?  Snapchat (SNAP) might rank highly on that list. SNAP shares are soaring to the tune of 24% in the premarket as it announced quarterly revenue and user numbers that flew past analyst estimates. And it’s not just the 11 million new users added last quarter or a quarterly revenue that ran 58% ahead of last year’s—SNAP is also being helped by a surge in new advertisers on its platform.

In other corporate news this morning, PayPal Holdings (PYPL) said it will allow customers to use cryptocurrencies to shop at merchants on its network early next year. While bitcoin hasn’t been top of mind with many investors over the last year or so, compared to previously, cryptocurrencies seem to continue to be taking hold.

Stocks–And VIX–Rise Slightly Yesterday

Tuesday’s market was marked with a bit of an interesting dynamic. Wall Street’s main indicator of worry rose along with the three major U.S. indices. True, the VIX ended only 0.58% higher, and the gains in the equity indices were also pretty muted. So you might say all four indicators were flattish.

But there also might be a dynamic of increased uncertainty even as stocks tiptoed higher in a way reminiscent of someone walking up some stairs when the rest of the family is asleep.

The impetus for the slight move higher in equites appeared to come on optimism about a stimulus deal. But there’s also a sense that we’ve seen this movie before. If you’ll remember, the rally in stocks a couple weeks ago was fueled by similar optimism about a deal, but last week that wind came out of the market’s sails.

Elevated Volatility and Investment Horizons

The VIX ticked higher in the overnight hours Wednesday as well, eclipsing the seemingly-resilient 30 mark. 

The ups and downs in the market based on stimulus headlines are kind of reminiscent of how equities acted on the daily news flow back during the height of the trade war between the U.S. and China, or when there was much more daily uncertainty surrounding the coronavirus outbreak. 

With volatility possibly remaining elevated between now and the election, it might be a worthwhile time to remember that sometimes it’s a trader’s market. That’s a reference to shorter-term traders thriving on volatility. 

But over the longer term, for buy-and-hold investors, these bumps tend to smooth out. While the past isn’t necessarily precedent, look at where the market went after the trade-war volatility eased and after the intense COVID-sparked selling stopped earlier this year. 

CHART OF THE DAY: BELOW THE RADAR. The Dow Jones U.S. Airlines Index($DJUSAR - candlestick) seems to be less affected these days by the on-again/off-again stimulus talks, as evidenced by its lagging the broader S&P 500 (SPX - purple line). That’s perhaps a partial reflection of a traveling public still cautious about taking to the skies. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Easing Back Into Travel: Research released earlier this month shows that most frequent travelers in the United States and Canada are eager to travel again, with some having already made plans and some dreaming of when they can travel again. A survey conducted in September in conjunction with the World Travel & Tourism Council found that 23% of respondents said they plan to travel by the end of this year, while 70% said they will travel next year and 18% said they will start traveling again in 2022. Of those who plan to take a holiday, 47% said they would fly to their next destination while 21% said they would drive and 17% said they would take an ocean cruise. But concerns do linger, with more than half of survey respondents saying they worry about the risk of being infected on a plane or cruise ship, getting stuck away from home, or being quarantined on a ship or at a hotel. 

Green Shoots Keep Growing: While it is true that restaurants, hotels, airlines, small businesses and the American consumer need another round of stimulus, the market seems to be finding some underlying strength even though a stimulus bill hasn’t been passed. Part of that buoyancy may be coming from economic data that seem to be getting better slowly but surely. The latest third quarter gross domestic product estimate using the GDPNow model from the Atlanta Fed stood at 35.3% on Tuesday, well up from the 11.9% initial estimate from the end of July. We’ll have to wait until Oct. 29 for the government’s first official estimate of third quarter GDP.

Earnings Generally Beating Forecasts: Part of the seeming underlying strength in the stock market may also be coming from better-than-expected earnings. As of Friday, with 10% of S&P 500 Index (SPX) companies reporting results for the third quarter, 86% of them had beaten earnings per share estimates, according to FactSet. That was above the five-year average of 73%, the data provider said. Overall, the companies were reporting earnings that were more than 21.7% above estimates, handily above the five year average of 5.6%.

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Netflix disappoints, but Snapchat surprises to the upside

  • VIX ticks north of 30 in the overnight hours

  • 10-year Treasury yield rises above 0.80 for the first time since June 

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