Medicare Agent News: Investors' Dilemma

Wednesday, October 26, 2022

Investors' Dilemma

By Alex Eule | Thursday, October 20

Earnings v. Economy. Stocks gave up morning gains for a second consecutive day, as bond yields continued to head higher and investors debated another round of earnings reports.

There was also good news from the job market, which might be bad news for the Federal Reserve and stocks. Jobless claims unexpectedly dropped to 214,000 from 226,000 a week ago. Economists were expecting 235,000.

Continued strength in the labor market could quell worries that the Federal Reserve is overreaching with its monetary policy, which could, in turn, keep the rate increases coming.

The Dow Jones Industrial Average, which was up 1.3% at 10:20 a.m., ended the day down 90 points, or 0.3%.

"In our view, another 75 [basis points] increase in the federal funds rate is all but locked in when the FOMC meets in November," Daniel Berkowitz, senior investment officer for investment manager Prudent Management Associates wrote today. "The market largely agrees, with the 2-year Treasury yield touching 4.6% and the 10-year yield approaching levels last seen during the summer of 2008."

Berkowitz notes that the market is now pricing in a terminal funds rate of 5% by the first half of next year. A month ago, the federal funds rate was seen peaking at 4.5% next year.

Corporate earnings, meanwhile, are generally holding up, with some notable exceptions (more on that below). Shares of AT&T jumped 7% after the telecom reported better-than-expected third quarter results amid strong sign-ups for mobile and wireline plans. For AT&T shares, it was the best reaction to a quarterly report in at least five years. Three months ago, the stock had fallen 7.6% on disappointing results.

The key for the company is that it reported strong free cash flow of $3.8 billion in the quarter, which is enough to cover the stock's 6.6% dividend yield. The dividend is the holy grail for AT&T investors and there's been some question about its sustainability. At least for now, investors seem comforted.

As of this morning, 88 companies in the S&P 500 have now reported earnings, with 75% of them coming in higher than expected. Keep in mind, that earnings typically beat expectations. Since 1994, the historical beat rate is 66%, according to Refinitiv. So this quarter is sounding pretty good. But investors have grown used to better, actually. Over the last four quarters, Refinitiv notes that on average 78% of companies have beat estimates.

For now, earnings are better than feared. But that's only half the story. For Fed watchers, the problem continues to be the economy, which is better than hoped.