October 14, 2020

Market recap

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Top Story

Everything Apple Announced and Why it Matters

A Hotly Anticipated, Live Streamed Event

After months of excitement from both investors and customers, Apple (AAPL) held its “Hi, Speed” product launch event on Tuesday. In a video recorded at Apple’s Cupertino headquarters and streamed at 4 p.m. PT, Tim Cook and other executives announced a new HomePod Mini, new headphones called AirPods Studio, and the highly anticipated iPhone 12 with 5G connectivity.

Thirty minutes into the live stream, more than 2.5 million people had tuned in to the event on YouTube (GOOGL). More followed along on Apple’s website and on several liveblogs during the event. Prior to the unveiling, Morgan Stanley (MS) analyst Katy Huberty said she expected "this fall’s launch to be the most significant iPhone event in years."

5G Comes to iPhone

Analysts predicted the new iPhone would be the most important upgrade to Apple’s smartphone series since 2014 when Apple released the supersized iPhone 6 and 6s. The iPhone 12 series, which will be available for pre-order in a few weeks, will all run on 5G networks. Tim Cook and Verizon (VZ) CEO Hans Vestburg said they would partner on what they called a “nationwide” 5G network. While 5G ambitions are certainly exciting, investors know this next-generation cellular push is going to take time. Analysts noted 5G connectivity might not be available in all regions since 5G is still under construction in some parts of the United States.

Apple’s new iPhone 12 comes in multiple colors with flat edges, similar to the iPad Pro. It should be more scratch resistant than past iPhones and will also feature what Apple is calling MagSafe—a magnet to help the phone connect to wireless chargers. In a break from tradition, the new iPhone will not ship with a charger or headphones. For the first time, Apple also announced a smaller iPhone—the iPhone 12 Mini. The 5.4-inch iPhone will have the same features like MagSafe and 5G, but it will be more lightweight.

Why the Apple News Matters

The pandemic and its subsequent economic impact have made it a tough market for new product releases in certain sectors, but Apple has managed to stay on top by creating a different and highly customizable experience for each user. Between software, hardware, and services like Apple TV+, iCloud storage, and Apple Music, Apple has a lot to offer. A newer, faster iPhone gives the tech giant the ability to provide all of that value in one place: right in the palm of the user’s hand. For consumers, this creates a “Halo Effect,” whereby a positive experience with one product leads to brand favoritism and loyalty so the company can sell other products and services. As Daniel Flax put it on Tuesday morning, Apple is pulling a variety of services together for consumers in a “fun, easy, and secure way.” Investors also like this about Apple’s business model, and the iPhone is often-times at the center of this ecosystem.

Additionally, analysts note that Apple has done a nice job offering devices at different price points while still maintaining a great user experience regardless of the amount of money the consumer spends. This strategy helps get consumers in the door in hopes that one day they may opt in to another purchase like the newest iPhone, an Apple Watch, or a fitness subscription. If Apple can continue to delight users with these new products, it may continue to see growth.

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Big Banks Kick Off Third Quarter Earnings Season

Estimates Appear Better Than Expected

The year 2020 probably won’t be remembered for stability, especially from a market-based perspective. After a coronavirus-induced meltdown in March, stocks staged a historic rebound through the end of August, hit a rough patch in September, and now appear to be climbing somewhat higher in October. Despite the volatility, the start of the third-quarter earnings allowed investors to breathe a short sigh of relief. Analysts appear to have underestimated the economy’s recovery for the second time this year.

Most analysts thought S&P 500 earnings would end the third quarter down 25% compared to this time in 2019, but now projections are calling for a 21% drop. While this steep decline is certainly not ideal, it's a welcomed improvement during what's otherwise been a year filled with unsettling news.

JPMorgan Expresses Cautious Optimism

Highlighting this cautious optimism is JPMorgan Chase & Co. (JPM), America’s largest bank by assets, which reported its latest results on Tuesday. The Wall Street heavyweight had a blockbuster quarter, registering a net income figure that was actually higher than 2019. This was largely driven by the bank’s decision to set aside less money for loan losses. In the first half of 2020, JPMorgan put over $15 billion dollars aside just in case borrowers defaulted on loans. In a surprise move this quarter, JPMorgan announced it had actually shrunk its reserves by $569 million.

The takeaway is that JPMorgan is still setting aside a significant amount of money to cover credit exposure, but it's not adding to those reserves. Analysts took this to mean the bank thinks the economy may be recovering quicker than anticipated. Zooming out, over the past three months, JPMorgan outperformed expectations in earnings, revenue, and trading. Revenue reached $29.94 billion. This was slightly less than the same time last year, but over $1 billion more than Wall Street estimates.

Citigroup Surpasses Expectations Despite Penalty

Citigroup (C) also exceeded expectations in its third quarter earnings report released on Tuesday. CEO Michael Corbat, who is soon to be replaced by Jane Fraser, said deposits are up and credit costs are flattening for the bank.

Analysts anticipated Citigroup’s earnings per share to land around $0.93 in the third quarter, but Citigroup outperformed at $1.40 per share. More strikingly, that number takes into account $400 million Citigroup paid in penalties last week. US regulators said Citigroup needed to address problems in risk management, data governance, and other controls. Without the penalty, Citigroup’s earnings would have hit $1.55 per share.

While awaiting other earnings reports, investors will also have their eye on the fourth quarter, which hangs in the balance of COVID-19 vaccine hopes, an election season, and mid-pandemic remote holiday shopping. Next up today in the financial space are more banks, including Bank of America (BAC), Wells Fargo (WFC), and Goldman Sachs (GS).

Holiday Shoppers May Soon Turn to YouTube

YouTube Takes on the Mall

It’s Prime Day on Amazon (AMZN), the unofficial kickoff to the holiday shopping season. With the ongoing pandemic causing many people to continue shopping from home, retailers are on the lookout for creative ways to highlight their products. A new tool in marketers’ pockets may soon be YouTube (GOOGL).

The vision: imagine YouTube as a directory of items for sale—the boots on one creator’s feet, the mirror in that living room, the tools in a DIY video. Viewers could soon have the option to click on a video and buy products directly from YouTube.

Google Getting in on E-Commerce

YouTube is already an advertising powerhouse for Google, but the pandemic has impacted that power to some extent. With coronavirus-related cuts to ad spending, Google hit an unpleasant milestone in the second quarter when revenue fell for the first time in the company’s history. Now, Google is hoping to get into the e-commerce game.

Bloomberg Intelligence expects the e-commerce market to grow to $2.8 trillion by 2025 as platforms like Instagram and Facebook (FB) allow users to shop while they scroll. “The sheer size of the e-commerce market and its future growth makes it too big to stay out of,” one Bloomberg analyst said.

When Facebook launched Shops a few months into the pandemic back in May, its stock hit an all time high, surging by 6.4%. After the announcement, investment management firm AllianceBernstein (AB) told clients that Facebook just opened up a $1.3 trillion market. That’s the kind of revenue stream that could await Google if this experiment succeeds.

The Future is Shoppable

Last year, YouTube released a Shopify integration below videos. Creators could tag as many as 12 items for sale, and the items would rotate below their videos. Google also introduced a Shopify integration on Google Shopping in July to help retailers manage their own inventory.

During a recent call with investors, Google CEO Sundar Pichai suggested the future of e-commerce on YouTube could have something to do with the videos themselves. He hinted that the “unboxing” videos that are so popular on YouTube should allow viewers to buy the products they see on screen.

YouTube is full of cooking content, product reviews, and makeup tutorials. The tech-giant is betting the latest push can help keep more of the online shopping activity in its own ecosystem.

Not-So-Breaking News

  • It was a rough day on the coronavirus vaccine and treatment front. First, Johnson & Johnson (JNJ) said it will pause its late-stage coronavirus vaccine trial after one of 60,000 participants came down with an unexplained illness. Then Eli Lilly (LLY) also announced it paused its antibody trial due to safety concerns. Remember, AstraZeneca (AZN) placed its vaccine trial on hold in September as well after a patient developed spinal cord inflammation. All companies have stressed the importance of patience in order to secure safe treatment and vaccine development.
  • Disney (DIS) reported it will restructure the company to focus more on direct-to-consumer streaming through Disney+ and Hulu. Executives said that while COVID-19 accelerated the repositioning, this pivot was long in the works. Effective immediately, one central division will be responsible for managing ads, Disney+, and other content distribution. Shares of the entertainment giant advanced over 3% yesterday following the news.
  • BlackRock (BLK) announced it’s now managing $7.8 trillion in assets—a 12% increase from this time last year. Investors have piled into passively managed index funds during the pandemic. BlackRock’s most successful product is its iShares ETF offering, which made up almost 70% of its assets during the third quarter.
  • Delta (DAL) reported a net loss of $5.4 billion over the past quarter. For context, during this time last year the carrier brought in $1.5 billion. Since the pandemic started Delta has lost more than $11 billion as people locked down, quarantined, and stayed close to home. All eyes are on lawmakers in Washington for what those in the airline industry hope is more financial aid.
  • Amazon’s (AMZN) Prime Day delivery boxes will feature a white pumpkin and AR integration. Customers can draw on the pumpkin and then use Amazon’s AR app to watch it take on a 3-D form. Amazon hopes reusing the boxes will remind customers of its environmental aspirations and packaging-reduction initiatives.
  • Besides payment history, what other factors go into a credit score? Learn more about how credit scores are calculated, and what is considered a bad one, at SoFi Learn.

Financial Planner Tip of the Day

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