Which Way Is The Nasdaq Trending This October?
Signs Are Positive for a Short-Term Nasdaq Bull Run
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The Nasdaq composite index is currently trading at 5,309.30, down 0.17% or 9.25 points. The index has a 1-year return of 19.34% and a year-to-date return of 6.03%. The 52-week trading range is 4,209.76 on the low end, and 5,342.88 on the high end. The Nasdaq features a wide range of cap-weighted stocks across 3 sectors: capital markets, global select and global markets.
The Nasdaq composite index is highly responsive to movements in major technology stocks like Facebook (FB), Apple (AAPL) and Amazon (AMZN). Additionally, the Nasdaq is highly responsive to oil prices. Recently, OPEC countries agreed to an interim deal that would see production being cut for the first time in 8 years. This had a ‘pyrrhic’ positive impact on the price of crude oil, and US equities rallied accordingly.
The S&P 500 index surged by 5% + (the biggest gain since January 2016). While indices have displayed whipsaw behaviour of late, the latest move by OPEC appears to bolster sentiment that production cuts will raise prices. Telecommunications companies were dragged lower by a 1.5% decline in AT&T Inc., while the gains in energy stocks were hit hard by a 3.8% decline in Nike Inc.
Overall, though, the Dow Jones Industrial Average managed respectable gains of 0.6% or 110.94 points on Wednesday, 28 September 2016, buoyed in particular by Chevron Corporation and Exxon Mobil Corporation. These companies contributed 40% towards the Dow’s gains. The Nasdaq for its part, also rose 0.2% on the back of resurgent energy prices. There has been somewhat of an unravelling between oil prices and stocks on the S&P 500 and the Nasdaq composite index. However, the correlation still exists and it is evident on the S&P 500 index energy sector index.
Is an Overheated Economy a Possibility in the US?
OPEC’s production cut will see the group pushing out between 32.5 million barrels per day and 33 million barrels per day. The informal meeting in Algiers was attended by the Iranian Oil Minister, the Saudi Arabians and other key OPEC producers. However, Iran will not be freezing production since it has been subject to punitive sanctions for several years. US indices are also buoyed by the Fed’s decision to push back an interest-rate hike to a later stage.
Instead of opting for a September hike, Janet Yellen has suggested a hike in November/December 2016. She is of the opinion that a rate hike is necessary to prevent the economy from overheating. This scenario could occur if too much economic activity takes place at near zero interest rates, leading to inflationary pressures. If output capacity grows faster than consumption demand, an inefficiency will develop. This is precisely this scenario that the Fed is trying to avoid.
In October, evidence will be available vis-a-vis the strength of the US economy. Demand for durable goods remained stable in August, but capital equipment shipments declined for a fourth successive month. This indicates that there is ongoing weakness in the manufacturing sector. There are other positive signs for the US economy including an 8% decline during the month of September for the VIX. This measures market turbulence, and it is significantly lower. The Fed made clear that growth is steady but slow.
What Policy Objectives Is the Fed Pursuing?
The move towards increased interest rates is expected by market participants and has already been factored into equities markets. The brief crude oil rally has subsequently retreated (as at Thursday 29 September) and is described as flattish by equity traders. Of course, the directional movement of the S&P 500 index and the Nasdaq composite index are largely dependent on the sentiments of major policymakers at the Fed. That the S&P 500 index and the Nasdaq rallied on Wednesday was unexpected; OPEC has struggled to come to consensus about production cuts for quite some time.
The Fed has 2 major policy objectives for the US economy: 2% inflation and maximum employment. Presently, the employment objective is in sight at 4.9% unemployment (considered maximum employment) while the inflation objective remains a way off. Meanwhile, major Fed decision makers are urging Janet Yellen and the FOMC to act to avoid falling behind the proverbial curve. Janet Yellen favours a graduated series of rate hikes, as opposed to a sudden rate increase that would jolt the economy.
Apple and the Nasdaq
One of the big factors driving the Apple Inc., (Nasdaq: AAPL) is demand for the new iPhone. According to reports, demand for the latest iPhone outstrips supply by a long margin. The iPhone 7 and the iPhone 7+ came out for sale on 16 September 2016. Deliveries began a week earlier than expected, and many investors were confident that this would help Apple to maximise its sales. However, Q1 of 2017 (the first fiscal quarter for Apple) appears constrained.
The company remains severely backed up in terms of meeting demand, as evidenced by the shipping times (2 weeks – 1 month) after orders have been placed. The iPhone 7+ with 256 GB will be shipping out in November while the AT&T iPhone 7 with 32 GB of storage will be shipping out in up to 3 weeks. Pre-orders for the latest iPhone 7 and iPhone 7+ are significantly higher than those for the iPhone 6 and iPhone 6+.
The good news for Apple and the Nasdaq composite index is that iPhone sales drive up the company stock in a big way, and this reflects on the index. Ahead of the holiday season, Apple can expect a bumper final three months of the year. So far, Apple has launched the iPhone 7 and the iPhone 7+ in a total of 58 markets as at September 23. Compare that to the iPhone 6s which launched in just 12 markets. Even with all the problems facing Apple in trying to restructure and re-energise its stock, it is clear that the demand side of the industry is alive and well. Apple Inc (Nasdaq: AAPL) is currently trading at $112.86 per share, down 0.98% or $1.12. For the year-to-date, this heavy hitter is already up 8.88%.
Disclosure: None.