Wall Street Breakfast: What Moved Markets

- Stocks rebounded Friday after a rough September, as investors took heart from a study showing Merck's experimental Covid-19 pill cut in half the risk of hospitalization or death from the virus. Sectors that would expect to benefit most from a pickup in economic activity -- including energy, finance and industrials -- outperformed. The dollar fell and U.S. Treasuries rose, with the yield on the 10-year note slipping back below 1.5% even after government data for August showed the highest rate of core inflation since 1991. Friday's stock market bounce came after the major indexes suffered their worst month of the year in September amid rising fears of inflation, slowing growth and rising rates. The Dow Jones was down 4.3%, the S&P 500 fell 4.8%, and the Nasdaq Composite was off 5.3%

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Top News Shutterstock Stocks rebounded Friday after a rough September, as investors took heart from a study showing Merck's experimental Covid-19 pill cut in half the risk of hospitalization or death from the virus. Sectors that would expect to benefit most from a pickup in economic activity -- including energy, finance and industrials -- outperformed. The dollar fell and U.S. Treasuries rose, with the yield on the 10-year note slipping back below 1.5% even after government data for August showed the highest rate of core inflation since 1991. Friday's stock market bounce came after the major indexes suffered their worst month of the year in September amid rising fears of inflation, slowing growth and rising rates. The Dow Jones was down 4.3%, the S&P 500 fell 4.8%, and the Nasdaq Composite was off 5.3%       Central Banking Fed musical chairs Two regional Federal Reserve bank presidents, Dallas' Robert Kaplan and Boston's Eric Rosengren, announced they would leave their positions early in the wake of a controversy over their portfolio holdings. Kaplan traded millions of dollars in securities last year, including individual high-valuation megacap stocks that benefit from lower interest rates, while Rosengren came under scrutiny for securities tied to real estate and securities bought by the central bank. Meanwhile, Fed Chair Jay Powell opened an ethics panel over the issue and said at a recent press conference changes to current rules must happen. What it means: While a rare occurrence, the loss of two regional presidents underscores the dangers of a market trading as though the Fed is a static entity represented by its Summary of Economic Projections rather than a fluid group where minds can change quickly. Along with the plan for asset tapering, the focus of the last FOMC was on the dot plot of rate forecasts that moved market expectations forward to an initial hike in 2022. Now two of those dots are going away. Rosengren and Kaplan are both in the hawkish camp, with Kaplan considered one of most hawkish voices for the Fed in calling for removal of accommodation. Two dovish replacements could quickly shift the dots back to liftoff in 2023. Go deeper: When it comes to FOMC voting on rates, the rotation was set to bring in three hawkish regional presidents next year: Rosengren, St. Louis' James Bullard, Kansas City's Esther George, as well as hawkish-leaning Cleveland Fed President Loretta Mester. There could be further shifts in the Fed makeup and Powell's renomination is also not secured. While it looks like the continuity would please the markets, President Biden could ensure more dovish leadership with Lael Brainard. (29 comments)       Sponsored By VantagePoint Get Started on Faster, Smarter Trading Today Are you tired of guessing when the "perfect" moment is to enter or exit your trades? Especially in a sideways market. There's a much simpler way to find out what's coming next and how to play it. A way to read the technical indicators that are doing all the hard research for you… See how it works right here. (You should set aside about an hour for this free demonstration, an investment that will save you weeks of time in the long run on your trading decisions.) If over 35,000 independent traders, just like you, have already used this method, then it can work for you too. Simply click the link above to learn more. IPOs Nice frames Warby Parker (WRBY) popped 36% in its public debut on Wednesday, but lost some ground the rest of the week, after hitting the New York Stock Exchange via a direct listing (a cheaper, but less common way of going public). The company is known for its affordable eyeglasses, which start at $95 a pair, and are sold online and through its network of 145 stores. The NYSE initially assigned a reference price of $40 to Warby's 111.5M outstanding shares, giving it a valuation of around $4.6B (during its last fundraising round in August 2020 it was valued at $3B). Backdrop: Warby Parker was founded in 2010 by four friends at the University of Pennsylvania's Wharton School: Neil Blumenthal, David Gilboa, Andrew Hunt and Jeffrey Raider. The group desired to create high-quality, affordable glasses by adopting a direct-to-consumer process, while providing the flexibility of free home try-ons and returns. Warby also runs a philanthropic program through which it distributes glasses to someone in need for each pair of eyewear purchased by a customer. Blumenthal and Gilboa are now co-CEOs of the business, while Hunt and Raider remain as directors of the company. Warby Parker's growth has been financed by a total of $535.5M in venture capital raised in funding rounds from backers including D1 Capital Partners and T. Rowe Price (NASDAQ:TROW). While the company notched $393.7M in revenue during 2020 - up from $370.5M in 2019 - it posted a net loss of $55.9M, following a breakeven 2019 and a loss of $22.9M in 2018. Warby also had 2.08M active customers as of June 30, up from 1.81M in 2020 (the metric is defined as those who have purchased a pair of glasses in the last 12 months). Some of its publicly traded rivals include National Vision Holdings (NASDAQ:EYE) and France-based EssilorLuxottica (OTCPK:ESLOF), which have both seen share gains of around 50% over the past year. Outlook: Statistics from the Vision Council of America suggest that Warby Parker is operating in a growth market valued at $35B in the U.S. 75% of American adults use some type of vision correction, and of that number, 64% wear glasses. The eyewear industry is also pretty resilient to economic cycles due to its medical and nondiscretionary nature. However, some still say the company is overvalued despite its well-known brand and visibility, like SA author David Trainer. In an article entitled, See Through This Optical Illusion, he argues that Warby Parker operates in a highly fragmented market with many small private companies, as well as consumers that still favor in-store purchases. (7 comments)       Economy Supply crunch Things appear to be getting worse, not better, along the global supply chain, which was upended by the coronavirus pandemic over a year ago. That means entire companies and industries are going to have to deal with more extremes for the foreseeable future, making business investment a shaky decision that compounds the original problem. The volatility and uncertainty also destroy demand as prices become too high for consumers. The phenomenon, called the "bullwhip effect," could end up damaging the economy in the short-term, with violent swings in a range of goods. Warning bells: In an open letter to the United Nations General Assembly, business leaders from the International Chamber of Shipping, IATA and other transport groups (that account for more than $20T of annual global trade) sounded the alarm on the risks of a supply chain meltdown. "We are witnessing unprecedented disruptions and global delays and shortages on essential goods including electronics, food, fuel and medical supplies. Consumer demand is rising and the delays look set to worsen ahead of Christmas and continue into 2022. Our calls have been consistent and clear: freedom of movement for transport workers, for governments to use protocols that have been endorsed by international bodies for each sector and to prioritize transport workers for vaccinations... before global transport systems collapse." Some of the effects were on display this week as three more U.K. energy companies were pushed out of business by sky-high natural gas prices. China is also considering raising power prices for factories as an energy shortage there has unleashed turmoil in commodities markets and prompted silicon makers to dramatically slash production. Over in the U.S., the Commerce Department delayed a decision on solar tariffs with the price of panels set to rise, while Dollar Tree (NASDAQ:DLTR) said it would sell more items above $1 to offset cost increases on a range of goods.

Do something! This time around, higher prices have put central banks between a rock and a hard place. Inflation is traditionally fought off by raising interest rates, but that might not be effective at the present given the supply chain issues taking place across the globe and the stage in the economic recovery. On the other hand, if easy monetary policy is left in place, price pressures could be compounded and result in a reduction in purchasing power or lead the economy to overheat. (295 comments)

     

Tech

Facebook grilling

During a three-hour Senate hearing on Thursday, Facebook (FB) came under fire from lawmakers who were upset about the revelations brought to light by The Wall Street Journal's "Facebook Files." Internal documents showed that Instagram makes body image issues worse for a substantial minority of teen girls and was blamed for increases in anxiety and depression. With the company on the defensive (and minimizing its own research), it looks to be signaling new enthusiasm among Senators for regulatory proposals that had stagnated a bit.

Criticism from both sides of the aisle: "We now have deep insight into Facebook's relentless campaign to recruit and exploit young users. And we now know it is indefensibly delinquent in acting to protect them," said Sen. Richard Blumenthal (D-CT). "Facebook is incapable of holding itself accountable." Senator Marsha Blackburn (R-TN) was also quick to admonish the tech giant. "We do not trust you with influencing our children."

Some, like Sen. Ed Markey (D-MA), even compared the social network to Big Tobacco, which "pushes a product that they know is harmful to the health of young people." He also announced plans to reintroduce legislation that would regulate a number of features, including follower counts, autoplay videos, and marketer and influencer promotions on apps aimed at young children.

Go deeper: Facebook on Monday said it would pause work on a controversial effort to build an Instagram for those under 13 (currently prohibited from joining the service). During the hearing, however, Antigone Davis, Facebook director of global safety, was noncommittal about whether the company would shelve Instagram Kids for good. "Sen. Markey, those are the kinds of features that we will be talking about with our experts trying to understand in fact what is most age appropriate and what isn't age appropriate, and we will discuss those features with them of course." (56 comments)

     

Explainer

Funding, infrastructure and debt

Keeping track of the latest happenings on Capitol Hill can get confusing, especially when deadlines are as close together as they are in the fall of 2021. While it's still too early to tell how things will play out, investors have been monitoring the events as lawmakers play politics with the nation's pocketbook. Here are the three big items that are on the radar and how they could impact your portfolio:

Government funding - Late on Thursday night, Congress passed stopgap spending legislation to avert a U.S. government shutdown, which was later signed by President Biden. The bill will keep the lights on at federal agencies through Dec. 3, giving Congress nine more weeks to pass a full budget plan. Buzz surrounding government shutdowns can trigger some market volatility, but this is the least likely event to affect investor holdings.

Infrastructure - House Speaker Nancy Pelosi promised to move ahead with a vote on a $1.2T bipartisan infrastructure bill before Democrat progressives said they have the numbers to stall it. They want the Senate to agree to a separate $3.5T social spending and climate policy package (or what the White House terms "human infrastructure") before pressing ahead on this front. Negotiations are still ongoing, but the developments have the potential to dent some sentiment in the market, especially infrastructure-related names, since the bill was a key part of Biden's economic agenda. At the very end of the week, Biden went to the Capitol for a half-hour meeting with Democrats which ended with no clear agreement, although he promised that they're going to get it done.

Debt ceiling - Treasury Secretary Janet Yellen has said the U.S. will run out of funds to pay its bills by mid-October and even called on Congress yesterday to eliminate the mechanism entirely. A default would "likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency," according to Yellen. It could also "trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost." On Friday, Fitch Ratings warned that the debt ceiling fight could force the firm to downgrade the AAA credit rating of the U.S. (47 comments)

     

U.S. Indices
Dow -1.4% to 34,326. S&P 500 -2.2% to 4,357. Nasdaq -3.2% to 14,567. Russell 2000 -0.3% to 2,242. CBOE Volatility Index +19.2% to 21.15.

S&P 500 Sectors
Consumer Staples -2.6%. Utilities -2.%. Financials -0.3%. Telecom -1.8%. Healthcare -3.5%. Industrials -1.7%. Information Technology -3.3%. Materials -0.9%. Energy +5.8%. Consumer Discretionary -2.4%.

World Indices
London -0.4% to 7,027. France -1.8% to 6,518. Germany -2.4% to 15,156. Japan -4.9% to 28,771. China -1.2% to 3,568. Hong Kong +1.6% to 24,576. India -2.1% to 58,766.

Commodities and Bonds
Crude Oil WTI +2.4% to $75.72/bbl. Gold +0.5% to $1,761.2/oz. Natural Gas +7.9% to 5.547. Ten-Year Treasury Yield +0.1% to 132.2.

Forex and Cryptos
EUR/USD -1.03%. USD/JPY +0.32%. GBP/USD -0.99%. Bitcoin +11.8%. Litecoin +10.5%. Ethereum +12.7%. Ripple +8.8%.

Top Stock Gainers
Paltalk Inc (NASDAQ:PALT) +151%. Grom Social Enterprises Inc (NASDAQ:GROM) +69%. Camber Energy Inc (NYSE:CEI) +59%. Pedevco Corp (NYSE:PED) +52%. Gogo Inc (NASDAQ:GOGO) +51%.

Top Stock Losers
Elite Education Group International Ltd (NASDAQ:EEIQ) -56%. Spire Global Inc (NYSE:SPIR) -49%. Omeros Corp (NASDAQ:OMER) -46%. Ensysce Biosciences Inc (NASDAQ:ENSC) -36%. Adagio Therapeutics Inc (NASDAQ:ADGI) -36%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

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