Medicare Agent News: Good Enough For a Risk Rally

Tuesday, January 3, 2023

Good Enough For a Risk Rally

By Nicholas Jasinski | Wednesday, July 20

Risk-On. Netflix's second-quarter results last night were better than feared—enough to set off a solid rally today that was concentrated in the riskier corners of the market. The S&P 500 rose 0.6% and the Dow Jones Industrial Average ticked up 0.2%. The tech-heavy Nasdaq Composite, meanwhile, jumped 1.6%.

The key stat from Netflix's second quarter was a decline of 970,000 subscribers, to 220.7 million. Hardly a strong showing, but far better than the 2 million management expected to lose. Eric Savitz covered the results.

Netflix stock closed the day up 7.4%. Other streaming stocks did well too: Roku added 6.9%, Walt Disney rose 3.8%, and Paramount Global gained 3.8%.

Communication services was the best-performing sector in the S&P 500 followed by technology. Meanwhile, defensive utilities, consumer staples, and health care were the laggards, all losing ground on the day.

The ARK Innovation exchange-traded fund (ARKK), an easy proxy for risk-on appetite among investors, surged 5.1%. Shopify shares added 12%, Block rose 8%, Snowflake jumped 7.1%, and Coinbase Global soared 14.3%. None of those stocks have been winners this year, as the macro forces of rising interest rates, a looming recession, and a post-pandemic hangover have gone against them.

It's not like the world has changed overnight. But, as covered in Review & Preview yesterday, investor sentiment and positioning in stocks had gotten so negative recently that at least a short-term bounce was in store. That appears to have been particularly true for those beaten-up, ARKK-type stocks today.

For J.P. Morgan chief global markets strategist Marko Kolanovic, this whole second-quarter earnings season could unfold similarly across sectors. Lousy expectations going in make it easier for companies to beat a low bar, and he sees a silver lining even in management teams potentially taking down guidance for the second half of the year.

For investors, uncertainty is often worse than bad news. Kolanovic explains his thinking:

The hurdle rate for Q2 earnings is low, though H2 numbers could come under pressure. With consensus FY22 earnings revised higher [year-to-date] despite significant headwinds, a reset of earnings expectations could be taken as a positive as investors stop seeing estimates/guidance as being behind the curve.

Stocks tended to peak ahead of the earnings peak and trough ahead of the earnings trough, and weaker guidance could open the doors for the Fed to pivot and tempt investors to step in the market, looking for the inflection point.

In short, investors are always looking ahead to the next thing. Right now, that's widely expected to be a decline in earnings estimates for the second half of 2022—a recipe for falling stock prices. Once the scale of that decline is more certain, investors can start thinking farther down the road.

Time and economic reality will tell whether recent days' rally is just a flash in the pan or the start of a prolonged recovery in the market.