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From employment to manufacturing and spending, the economy continues to improve as the crucial holiday shopping season approaches.
Today’s non-farm payrolls report featured bullish news on almost every metric. The overall number beat estimates by 25 percent, as key industries like manufacturing, hospitality and construction surged. Government hiring missed, but it’s less sensitive to the economic cycle. The Bureau of Labor Statistics also revised the September and October totals sharply higher.
It came one day after initial jobless claims fell to a new pandemic low of 269,000. A day before that, the Institute for Supply Management’s service-sector index jumped to a record high of 66.7.
“Demand shows no signs of slowing,” Anthony Nieves, chair of ISM’s services, the said in the report. All 18 subindustries expanded and unfilled orders surged to a record. ISM’s manufacturing report on Monday also beat estimates as hiring improved.
The strong numbers have allowed the Federal Reserve to start tightening monetary policy without panicking the market. Coupled with a drop in coronavirus infections and deaths, the result could be a return to normal in the economy and society at large. The change could take effect just as the holiday shopping and traveling season begins.
As often happens in the world of investing, Wall Street anticipated the turnaround before Main Street. Investor surveys showed that pessimism bottom in late September as the S&P 500 held key support from mid-July. Consumer polls reflected anxiety about coronavirus and inflation, but the actual spending numbers defied negative expectations. Moods turned in mid-October as purchasing intentions pushed consumer confidence above forecasts. And what were people planning to buy? Big-ticket items like houses, cars and appliances — another potentially positive sign.
A few days later, the University of Michigan unexpectedly revised its consumer sentiment upward to its highest reading since July. Ford Motor (F) also stunned investors by retracting a negative outlook for the second half and sharply hiking its profit outlook. Changes like this, in just the last few weeks, suggest a significant acceleration could be happening right now.
Two other stories appeared this week. First, Qualcomm’s (QCOM) strong earnings report dispelled worries about the global chip shortage. That helped launch the Philadelphia Semiconductor Index by almost 10 percent, its biggest weekly gain in a year.
Second you have this headline from Reuters: “Something in the air: Jet fuel demand ready for takeoff.” The article, along with another report from Singapore, detailed a price spike in airplane fuel as travel increases across Asia. Will that trend accelerate into Thanksgiving three weeks from now?
Peter Kern, CEO Expedia (EXPE) thinks so. “With early positive signs in Q4 and many countries announcing new openings to international travelers, we are feeling increasingly confident about a continued recovery.” The travel giant cited “improvements across virtually all lines of business” as it jumped 15 percent on strong earnings and revenue.
Airbnb (ABNB) surged to its highest level since March on similarly positive news.
Another interesting development this week has been the collapse of pandemic favorites. Vaccine maker Moderna (MRNA) was the biggest example, missing estimates by a wide margin and slashing guidance. The resulting selloff has knocked MRNA from its position as the S&P 500’s top performer on the year. As an additional blow, Pfizer (PFE) announced today that its Paxlovid antiviral drug was 89 percent effective as a coronavirus treatment. Fellow vaccine maker BioNTech (BNTX) also plunged.
Peloton (PTON), which flew to record highs last year on demand for home exercise, crashed on weak results and a poor outlook.
As a side note, Zoom Video Communications (ZM) dropped more than 6 percent and remains near its low for the year. These stock charts, contrasted with new all-time highs for hotel operators like Hilton Worldwide (HLT) and Marriott (MAR), also suggest the pre-Covid normalcy could be returning.
The improving situation coincides with another potentially important catalyst: retailer earnings. Most brick-and-mortar companies announce results later in the season because they use fiscal years ending in January. (Historically, this let them account for the holidays and changes in merchandise.)
Members of the industry report at an accelerating pace over the next three weeks. This may create opportunities for investors looking to rotate into more traditional companies that will benefit from things returning to normal. Here are some noteworthy names to consider watching:
Next, the most recent numbers from Under Armour (UAA) and Capri (CPRI) surprised to the upside as companies. Management teams have worked past supply-chain issues, while strong pricing has fueled positive earnings surprises. That could be a good omen for other companies in the space.
In conclusion, the market has gradually anticipated the end of the coronavirus pandemic. Recent data seems to confirm the process is underway and potentially accelerating. The result could be a strong end of year, with investors potentially gaining more interest in traditional consumer and travel stocks as Americans return to shopping malls and airports.
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