Stock index futures were a little flat before the open as investors were looking to build on Wednesday’s rally. The Fed sparked rallies in the major indices after outlining its tapering plans for November and December. Today, earnings announcements are drawing attention once again.
Many investors will be watching Uber's (NYSE:UBER) earnings announcement today because of the tone set by Lyft (NASDAQ:LYFT) yesterday. Lyft rallied more than 8% on better-than-expected earnings. Uber has reported that it’s seeing an increase in drivers coming back as COVID-19 concerns decrease. This could be a good sign for the company as far as earnings potential and is another good sign that the economy is returning to normal.
After today’s close, Square (NYSE:SQ) announces earnings. Despite being a payment company, Square also provides music subscription services in 56 countries under TIDAL. TIDAL recently struck a deal with Tesla (NASDAQ:TSLA) to provide music in Tesla vehicles.
With the Fed news and excitement, investors may have missed that the VIX has slowly dropped to 15. Many investors see this as a bullish signal for stocks. However, investors need to make sure they aren’t lulled to sleep. Markets don’t move in a straight line and there are many issues that the market is still dealing with.
Fed Summary
The major indices were mixed on Wednesday before the Fed’s announcement. However, the Russell 2000 wasn’t waiting around for the Fed and broke out of its nine-month rut by breaking resistance and creating a new all-time high. Many investors may see this as a sign that the sentiment is increasingly bullish. After the announcement, the S&P 500, Dow Jones Industrial Average and NASDAQ Composite rallied and created new all-time highs.
For the most part, the Fed announcement came in as expected, with plans to taper by reducing its bond purchases by $15 billion per month for November and December. At that rate, the Fed’s stimulus efforts would stop about June of 2022. However, the Fed did say it would be flexible in that it could speed up or slow down the purchases as needed.
The announcement did not address any interest rate hikes, and Fed Chairman Jerome Powell decided to focus on tapering and not address the interest rate issue in his post-announcement press conference. Despite his evasiveness, the Fed funds futures are currently pricing in about a 50% chance of a rate hike by June of 2022 and a more than 90% chance for a rate hike by December of 2022.
Small-Cap Cautions: While looking at the top 20 stocks in the Russell 2000 after the Wednesday’s close, it’s important to point out that there are a few stocks here that may be skewing the results. For example, iRhythm Technologies (NASDAQ:IRTC) rallied 59% with the release of the Medicare Physician Fee Schedule calendar for 2022.
But this is kind of the MO for many investors in small-cap stocks. Smaller companies tend to be more susceptible to single news item because they tend to be reliant upon one or two major products. This means that they can climb fast and quick on positive news like earnings or mergers, but they can also fall quickly on disappointing news. For these reasons, many investors choose to avoid small-caps during economically questionable times.
Small-Cap Observations: Another observation from this group, is that Wednesday was a good day for small-cap health-care stocks. A quick survey of these stocks revealed that many of them benefitted from positive earnings announcements or news around the medicare calendar. The fact that these stocks did rally suggests that the market sees these developments as good fundamental changes for the underlying companies.
Small-Cap Performance: Small-caps have tended to outperform large- and mid-cap stocks over the long term. However, they also tend to be more volatile. This means small-cap stocks tend to have large swings to the upside and the downside. Using the thinkorswim® comparison indicator, going back to the year 2000, the Russell 2000 has returned 462%, the Russell 3000 (RUA) mid-cap index has returned 294%, and the S&P 500 has returned 253%.
The ride over the past 22 years is quite different because of the volatility in the smaller companies. This is why diversifying across asset classes is a good idea; it allows investors to take advantage of potential growth in smaller stocks with less risk. Of course, past performance of a security or index does not guarantee future results or success and asset allocation and diversification do not eliminate the risk of experiencing investment losses. It’s also not possible to invest directly in an index.
Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.