Major Companies Report As Supply Chains and Delta Weigh On Results!
‘On Halloween, You Get To Become Anything You Want to Be.’
In families with multiple kids, the older siblings are admired by the younger ones. Often, worn out parents put big brother and sister in charge of their smaller, more energetic members. Unless you are not familiar with the calendar, tomorrow is October 31. It is well known as Halloween. For kids, it is a great day. In many cases, older kids take their younger family members out and they go trick or treating together. At the end of the evening, the kids come home and compare the collection of candies they accumulated. It makes sense for one to swap a candy they like for one they are not as enamored with. Still, the younger kids are very much dependent on their older brothers and sisters to lead the journey. In a similar fashion, a majority of companies in public markets trade in concert with how the largest entities perform.
Over the last week, the biggest companies in the world reported their financial results from the last three months. The ones which get the most attention are Apple, Amazon, Facebook (becoming Meta), Google, and Microsoft. Other large enterprises which reported include Coca Cola, Visa, Shell, Exxon, McDonald’s, and Chevron. The largest companies constitute a bigger overall market value and so their results significantly impact what takes place in the overall market indexes. Each index has a specific kind of calculation and different composition which determines the overall performance. The Dow is equal weighted whereas the S&P 500 and Nasdaq are market cap weighted. A holding like Microsoft or Apple, sporting trillion-dollar market values, are more impactful than an entity which is worth a mere billion or one hundred million dollars.
So, it makes complete sense the broader market indexes are tremendously affected by the results of the largest companies. If we flip this on it’s head, the smaller the entity, the less dependent the price should be on what takes place with the biggest companies. Unfortunately, this premise does not always hold. One of the important factors to consider is what entities have the largest percentage of ownership in a company. Large fund families like Vanguard, Fidelity, State Street, and Blackrock own major pieces of many of the largest companies across the globe. Moving further down the spectrum, they often own smaller companies. However, smaller entities like hedge funds, mutual funds, or investment advisory firms can have big ownership stakes in microcap, small, and mid cap entities. Many are worried about the possibility of a market correction. If you consider the fact that 25% of the market value of the indexes is tied to the largest four or five entities, you realize how important those companies are to overall market performance. The same dynamic of the older kids (largest companies) dictating what takes priority in families (markets) holds true in the investment world.
As far as specific earnings are concerned, Apple and Amazon missed estimates as both companies told of supply chain problems. Just as important, their guidance indicates these supply issues may persist into next year. In the energy area, the majors (Exxon, Chevron, and Royal Dutch Shell) reported with the first two showing huge cash generation. Shell missed because of poor hedging but paid down an enormous amount of debt. If oil and gas prices stay where they are, or continue rising, energy probably heads higher, maybe dramatically so. Naturally, inventory builds showed up and prices headed lower last week. A warmer winter would cause gas prices to head lower, and the converse is also true.
Politically, all eyes are on the Virginia Governor contest on Tuesday. Democrats continue to struggle with a divided party as Progressives are stopping the big infrastructure bill in the House. Moderates won’t yield to the enormous spending requests Progressives are set on. Jumbled Joe left for Italy to join the world for discussions on the climate. Naturally, the largest carbon emitter didn’t show up, that being China. If the big kids aren’t in the discussion, whatever the parents want to get accomplished probably won’t get done. On that note, I hope you and your family enjoy the Halloween weekend. Trick or Treat.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.