Investors Ain’t Afraid of No Ghost

October 29th, 2021

Despite its frightening reputation, October served up more treats than tricks for investors as we closed the last trading week of the month. Another strong batch of Q3 earnings results, combined with optimism that Congress was inching closer to finalizing a combined $2.8 trillion spending package, managed to push markets higher for the week and month. With 279 companies in the S&P 500 reporting, 82.10% beat expectations. That’s well above the long-term average of 66.00%. This helped propel the Q3 earnings growth rate to 39.20%. Revenue growth remains impressive, particularly given supply chain and labor constraints, rising 15.10%. Better than expected results and hopes for more spending to fuel growth in 2022 helped to offset weak Q3 GDP and personal income results. For the week, the S&P 500 rose 1.33%. The week’s gains helped lift the index to a 5.70% return in October.

GDP Slowdown Fails to Spook Investors

Supply chain constraints and a surge in Delta variant cases served as formidable headwinds to U.S. economic growth in the third quarter. GDP rose just 2.00% annualized, its weakest quarter of growth since the recovery began in mid-2020. Consumer spending, which comprises 69% of GDP, rose 1.60%. Spending on services remained strong despite the delta variant, rising 7.90%. Spending on goods, however, tumbled -9.20% as supply chain shortages kept cars and appliances off dealership lots and showrooms. Also holding back GDP was a drop in residential fixed investment and a surge in the trade deficit. Markets mostly shrugged off the weak print, simply chalking it up to supply failing to meet strong post-Covid demand.

Personal Income Dies While Consumers’ Spending Rises

Personal income fell -1.00% in September, cut by the end of extended government unemployment benefits in September. That resulted in the savings rate falling to 7.5% – its lowest since December 2019. The savings rate is now back in line with pre-pandemic levels. However, a rise in wages and salaries, which rose 0.8% in September, helped to offset some of the drop in personal income. The slump in personal income didn’t seem to faze consumers who were willing spend 0.60% more for the month. Going forward consumers will need to rely on wages and salaries along with personal debt to fuel their spending given that the excess savings appears largely tapped out. 

It is rare for Octobers to be as favorable as 2021’s was. Earnings have been strong and there is a degree of optimism by investors over what a multi-trillion-dollar package will do for spending and the economy. To the extent Q3’s GDP figure was a disappointment, markets have taken it as a sign that there is ample demand and just limited supply, convinced those issues will work their way out in the end. That is probably correct, particularly now that delta is declining, vaccines are generally available, and treatment is improving. Next week is likely to be the beginning of the end for one of the major catalysts of the bull market however – near zero interest rates. While the Fed has telegraphed that it will keep rates low, the tightening cycle is almost certainly set to begin on Wednesday. Tightening cycles almost always result in some consternation – the introduction of a new variable that makes it more difficult for markets to assess whether changing macro factors are the result of fundamentals or the cost of leverage.  This is not to say a recession is imminent, but it is worth noting that most modern recessions have been blamed on monetary policy. To the degree that the last year has felt like a golden era for markets (low rates, ample demand, massive savings reserves), 2022 is likely to feel more normal – or outright spooky in comparison.

The Week Ahead

A busy week ahead for markets with October nonfarm payrolls, manufacturing, and services reports on tap. Traders will also be tuning in to the Fed’s FOMC meeting for news on when the central bank intends to begin tapering its pandemic era bond-buying program. 


Haunting Words of Wall Street

Sunday is Halloween, and to get into the spirit of the holiday, we’re taking a look at some spooky terms that haunt the world of finance and investing.

1. The Witching Hour: For some, this term might conjure up thoughts of the frightfully trying evening hours before bedtime when little goblins – exhausted from the day’s activities – may become incorrigible. In investor terminology, the witching hour refers to the last hour of the stock market trading session. It is also known in the context of what is called triple witching, which is the third Friday of every March, June, September, and December. Those days are the expiration days of three kinds of securities, including stock index options, stock options, and stock index futures. The triple witching hour is the final trading hour on those days. During the witching hour, many traders move to close and hedge their positions in anticipation of expiration. Because of massive volumes and quick movements in every direction on a variety of investment instruments, the market can become volatile and unpredictable in the short term – just like a toddler.
2. Dead Cat Bounce: The Dead Cat Bounce conjures up a horrible image, unless you are a dog person or allergic. It refers to a brief and significant recovery in the market or in a security after a prolonged, steep decline. During a long downward slide, some investors may think that the market or a particular security has bottomed out. They may begin to buy instead of sell, or some may be closing out their short positions and realizing gains. These factors may create brief buying momentum. The term dead cat bounce is derived from the disturbing idea that even a dead cat will bounce if it falls from a great height. This is also a reminder to keep your pets indoors on Halloween!
3. Graveyard Market: This term refers to bear markets in which investors can’t sell their holdings without suffering large losses, while other investors, wary of the bear market, decide not to invest at all. As Barron’s Dictionary of Finance and Investment Terms explains, “Like a graveyard, those who are in can’t get out, and those who are out have no desire to get in.”
4. Ghosting: Ghosting is an illegal practice whereby two or more market makers collude in order to artificially inflate or deflate the price of a stock, hoping to profit on the uptick or downturn. One market maker will buy or sell large amounts of a certain stock, and the second, conspiring firm follows its lead, causing a stock’s price to artificially rise or fall and causing a buying or selling frenzy. The co-conspirators have an opportunity to profit from the price movement. The term derives from the transparency of market makers who can act without the market being aware of their collusion. 
5. Death play: A rather insensitive term, a Death Play refers to the strategy of buying or short-selling a stock with the expectation that the move will prove lucrative should a company executive die. Investors who believe an ill CEO’s death would be devastating to a company’s performance may decide to short a stock, while investors who think the subsequent change of management would be a good thing might buy.
6. Phantom stock: This term refers to a form of employee or executive compensation that is related to the value or performance of an employer’s stock, but differs from conventional equity compensation. Phantom stock is simply a promise by a firm’s management to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time. That bonus may be paid out in cash or stock at a predetermined date, but an employee receives no stock at the outset, when he or she is initially enrolled in a phantom stock plan.
7. Tombstone: A tombstone is a small graphic that is used to commemorate an engagement or deal that an investment bank has managed. Tombstones get their name from the black border and typically heavy black print that resemble actual tombstones. Tombstones may be used by banks to advertise an offering in a business newspaper or magazine. Banks also use tombstones to show past deals they have successfully managed.
8. Zombie Company: In the world of investing, zombies are firms that continue to operate even though they have run out of money. In most cases, zombie firms eventually go bankrupt, but in rare cases, a zombie company may “come back to life” if they are able to monetize existing investments and bring a valuable new product, drug, or technology to market. A zombie company may also be a shell company that has no assets or viable business operations but continues to operate in name only as a protective measure by the owner of a related business entity. The owner may keep the shell company alive while moving ownership of intellectual property or any other valuable assets to a secondary company. Creditors will find that the initial company has no assets or money when seeking to recover outstanding debts and may have no recourse to make a claim against the new, seemingly unrelated entity. Very scary indeed.
9. Zombie Accounts: Bank accounts that consumers close but that have been reopened are called zombie accounts. These accounts are different than phantom accounts which are created by identity thieves in a consumer’s name without their knowledge. Both can create nightmares. A zombie account is brought back from the dead when the old account receives a notice for an automatic bill payment or a direct deposit and is re-opened. The old bank account can get hit with fees and penalties, including overdraft charges, for not maintaining a minimum balance
10. Viatical Settlement: We saved the scariest term for last. In a viatical settlement, a person with a terminal disease (a viator) sells his or her life insurance policy in exchange for immediate cash. Under this terrifying scenario, the buyer of the policy takes over paying the premiums and hopes the Grim Reaper quickly comes to claim the soul of the viator so they can receive the death benefit. The longer the viator lives, the lower the rate of return on the purchaser’s investment. 



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