Archives for October 2015

Why Do We Care About Earnings? Weekly Update – October 26, 2015

Image courtesy of FreeDigitalPhotos.net/hywards

Image courtesy of
FreeDigitalPhotos.net/hywards

Stocks rallied again last week on a strong Tech sector showing, bringing the S&P 500 positive for the year again. For the week, the S&P 500 gained 2.07%, the Dow grew 2.50%, and the NASDAQ rose 2.97%.

Every quarter, financial pages everywhere become focused on earnings reports as companies begin to dole out information on how they performed in the last quarter. So far, we’ve heard from 172 S&P 500 companies who have reported 2.0% higher profits on 2.1% lower revenues as compared to the same period last year. Now, higher earnings can be counted as good news, but S&P companies have gotten a boost from the Tech sector and some individual success stories. Once all reports have come in, analysts are projecting earnings to be 3.4% lower (than Q3 2014) on 5.1% lower revenues. Overall, it’s clear that the same headwinds that challenged firms in the second quarter stayed with us.

Why do earnings matter? For stock investors, earnings season matters because underlying earnings influence price movements. Since stocks are just ownership shares of a company, (all things being equal) good news for the underlying firm will generally result in upward movement of the stock. Bad news is usually greeted with a drop. Now, these relationships get tricky when investors anticipate good or bad news and buy or sell a stock to speculate before earnings reports come out. That’s one reason markets are often more volatile during earnings season.

For everyone else, earnings reports are a good way to get a look at the business climate for U.S. firms. Earnings reports contain a lot of information: revenues, profits, challenges, expectations about the future, and often special notes by company managers. This data is a goldmine for analysts as they create forecasts about the future.

As financial professionals, it’s our job to search for the individual success stories for our clients. We are always on the lookout for opportunities and strategies to help our clients pursue success in challenging markets. If you have any questions about earnings or strategies for volatile markets, please let us know.

The week ahead is brimming with more earnings reports that should further clarify the business picture for U.S. companies. The Federal Reserve is also hosting its October Open Market Committee meeting and will announce any rate changes or other moves on Wednesday. Very few (if any) analysts expect the Fed to change interest rates at this meeting; however, investors will be interested to see if the Fed issues any guidance about whether to expect a hike in December or early next year. Has “Fed fatigue” set in? Maybe, but markets could still react to unexpected news from central bankers. The other big data release is our first look at third-quarter economic growth. We’ll keep you updated.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Mfg. Survey

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: International Trade, EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: GDP, Jobless Claims, Pending Home Sales Index

Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment

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HEADLINES:

Jobless claims edge upward. New claims for unemployment benefits rose slightly last week, although the number still remains close to historical lows. While no seasonal factors were officially reported, employers could be preparing for the holiday shopping season by hanging on to employees.

Existing home sales rise in September. Sales of existing housing stock spiked to the second-highest level since February 2007. The increase puts existing home sales 8.8% higher than September 2014, likely due to favorable mortgage rates and an improving labor market.

Housing starts soar in September. Groundbreaking on new U.S. properties rose more than expected last month on rising demand for rental apartments. While the boost in housing market activity is great news, higher rental demand may come at the cost of lower home purchases.

China’s central bank cuts rates again. The People’s Bank of China cut interest rates for the sixth time since last November in an effort to boost economic activity. The bank also lowered bank reserve requirements, making it easier for banks to finance loans.

Stocks Post Third Weekly Gain on Hopes of Fed Delay Weekly Update – October 19, 2015

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

Stocks ended last week on another strong note as markets surged on the strong possibility that the Fed won’t raise rates this year. For the week, the S&P 500 gained 0.90%, the Dow grew 0.77%, and the NASDAQ rose 1.16%.

Investors greeted mixed economic data with cheers as it raised hopes that the Federal Reserve will delay hiking rates. We’re back to another round of “bad news is good news” market activity. Investors have exhibited this contrary behavior around key Fed decisions in the past, so it’s no great surprise. Right now, investors are so nervous about rate hikes that they cued into last week’s lackluster data as an indicator that the Fed could delay a rate raise until 2016.

Among the reports that might give the Fed pause was data that showed industrial production slipping for two months in a row, potentially showing that the manufacturing sector is sufferingWall Street economists are also paring back Q3 economic forecasts, expecting to see just 1.7% growth following the second quarter’s strong final reading of 3.9%. On the positive side, consumer sentiment rebounded strongly, suggesting that the economy remains strong despite challenges from a strong dollar and weak global growth.

So far, earnings season has been lackluster. Although we haven’t heard from enough U.S. companies to draw conclusions, reports from heavy-hitters like Wal-Mart [WMT] and Yum Brands [YUM] show that many companies are cautious about growth prospects. Economic developments in China and volatility abroad are making projections difficult, but companies expect challenges to growth to continue.

This week is light on U.S. economic data, so markets will likely focus on earnings reports and key economic data out of China. Is last week’s rally likely to last? We can hope so, but we’re expecting more volatility as earning season progresses and investors digest fourth-quarter forecasts.

ECONOMIC CALENDAR:

Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, Existing Home Sales

Friday: PMI Manufacturing Index Flash

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Retail sales flat in September.
Sales of retail goods barely rose in September. However, cheaper gas weighed on the overall data while spending on automobiles and other goods rose. So-called core spending (which closely follows consumer spending) slipped 0.1%.

Business inventories unchanged in August. After piling up inventories over two quarters, businesses failed to add more in August as they work through their stockpiles. The slow pace could weigh on Q3 economic growth.

Fed Beige Book shows modest expansion in last two months. A key report from the Fed’s 12 regional districts shows that wage growth was subdued despite a strengthening labor market. Other key measures show modest economic growth.

Jobless claims fall to match 40-year low. The number of Americans filing new claims for unemployment benefits fell last week to match the 40-year low reached in mid-July, suggesting that employers are laying off fewer people.

S&P Posts Biggest Weekly Gain of 2015 Weekly Update – October 12, 2015

Image courtesy of FreeDigitalPhotos.net/CuteImage

Image courtesy of FreeDigitalPhotos.net/CuteImage

Stocks ended last week on a strong note, regaining a lot of lost ground and giving the S&P 500 its best week of the year. For the week, the S&P 500 gained 3.26%, the Dow grew 3.72%, and the NASDAQ rose 2.61%.

Markets started off the week by continuing the previous Friday’s rally, buoyed by the expectation that the Federal Reserve won’t be raising rates at the October meeting. Are they right? Probably.

The chart below shows the results of monthly surveys of professional economists by the Wall Street Journal. Notice how the responses have changed substantially over time. At the beginning of August and September (in blue and green, respectively), the majority of economists believed that a September rate hike was coming. Now in October (in red), bets are on for a December hike, though many believe the Fed might hold off until March or later.

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Who’s right? Who knows. This kind of uncertainty is often what is behind market turbulence. When world-class economists can’t agree on even a single data point like a coming interest rate increase, is it any wonder that investors respond nervously?

Earning season is already under way, with reports out from 24 S&P 500 companies as of Friday. The season will kick into high gear in the coming weeks, and we expect that to drive a lot of market activity as investors digest corporate profitability. So far, expectations are muted.

Total earnings from S&P 500 companies are expected to be down 5.7% from the third quarter of 2014 on lower revenues. The same issues that plagued companies in the first half of the year drove this rocky performance: namely, slowing global growth, a strong U.S. dollar, and weakness in the Energy sector. Analysts know that U.S. companies have been dealing with a challenging business environment but they’re hoping for some standout performances.

How will markets react to earnings reports? We can’t predict anything for sure, but we can expect continued volatility with the major indices bumping up or down depending on how investors are feeling about fourth-quarter prospects.

Is it frustrating to be so uncertain heading into the last months of the year? You bet it is. But that’s just part and parcel of being an investor in today’s markets. One of the (many) reasons you work with a financial professional is so that we can help chart a course through challenging markets. Though indexes and sectors may go up and down, we’re always looking for opportunities and individual success stories to help our clients thrive in different market environments.

 ECONOMIC CALENDAR:

Monday: Banks closed, markets open for Columbus Day Holiday

Tuesday: Treasury Budget

Wednesday: PPI-FD, Retail Sales, Business Inventories, Beige Book

Thursday: Consumer Price Index, Jobless Claims, Empire State Mfg. Survey, Philadelphia Fed Business Outlook Survey, EIA Petroleum Status Report

Friday: Industrial Production, JOLTS, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Jobless claims fall again. After an unexpected rise the week before, claims for new unemployment benefits dropped last week to a 42-year low. Though weekly claims can be very volatile, the data points to a strengthening labor market.

Chain store sales fall. The latest data from retail chains shows that shoppers cut back on their spending in September. Low sales may bode ill for the holiday shopping season.

U.S. trade gap widens on weak demand. August exports abroad took a major hit from the ailing global economy and a strong dollar, sending the trade gap – the difference between imports and exports – to its highest level in five months.

Consumer borrowing falters. Americans borrowed money from lenders at the slowest rate in August in six months. Though household borrowing still grew, Americans lost their appetite for auto and education lending.

Hixon Zuercher October 2015 Monthly Video Update

Quarterly Edition: Top news for Q3 Weekly Update – October 5, 2015

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of
FreeDigitalPhotos.net/jscreationzs

Stocks ended the final days of the third quarter on a positive note, even though stocks were still down for the quarter. For the week, the S&P 500 gained 1.04%, the Dow added 0.97%, and the NASDAQ grew 0.45%.

After hovering around historic highs for months, stocks fell in August on concerns about economic issues in China and other emerging markets. September was marked by continued volatility as investors grappled with uncertainty. Though pullbacks are never pleasant, many analysts had been predicting a correction.

 What contributed to market performance last quarter?

Fears about slowing global growth dogged markets for much of the quarter. China, the world’s second-largest economy, took center stage in mid-August when its central bank unexpectedly devalued its currency. Later in the month, markets worldwide plummeted when reports showed that China’s economy may be heading toward a recession. Since then, data releases have underscored that China’s economy is in trouble. Will China slip into a recession? No one knows for sure, but it’s looking increasingly likely.

The Federal Reserve has also added to investor uncertainty as it debates raising interest rates from their near-zero lows. Though the Fed has pledged to raise rates soon, concerns about China and the recent market turmoil caused the central bank to hold its current rate levels until October at the earliest.

The September jobs report showed a big miss in job creation, possibly indicating that the labor market is slowing. The economy added just 142,000 jobs in September, and new hires were revised downward to 136,000 in August. Though the unemployment rate remained stable at 5.1%, the labor force participation rate dropped to 62.4%, the lowest rate since October 1977.

While a couple of months of weak hiring isn’t terrible, the numbers are below the 200,000 trend that we’ve seen in recent months, and well short of the 203,000 jobs economists had been expecting. While we don’t want to draw too many conclusions from a single data release, it’s fair to say that months of weak commodities prices, volatile oil, and weak global demand may be taking a toll on U.S. companies. Though Fed Chair Janet Yellen expressed support for raising rates this year, the weak jobs report could cause the Fed to hold off on a rate raise until 2016.

What can we expect in the weeks ahead?

Growth will be on everyone’s minds in the coming weeks and months as analysts look for evidence that global economic worries have reached American shores. Some analysts worry that emerging market woes risk leading the world economy into a slump. A September survey of economists showed that though many are concerned about the effects of China’s slowdown on U.S. growth, most expect the effect to be relatively mild. However, a significant minority expect China’s issues to have no real effect on the economy, despite market turmoil. The U.S. economy may be mostly shielded from the effects of slow global growth because domestic demand drives so much of our economic growth.

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In the coming days, earnings reports will give us more information about how U.S. companies fared in the last three months. Though we don’t have a lot to go on yet, we have positive expectations after a tough September. The October Federal Reserve Open Market Committee will also be closely watched by analysts to determine whether the Fed is likely to raise rates this year.

Bottom line: We can expect more volatility in the coming weeks as investors digest data and wait for more certainty. While pullbacks and turmoil are often stressful, we are always on the lookout for opportunities and ways to help our clients pursue success amid the uncertainty. If you have questions about your portfolio or how you are positioned for today’s markets, please give our office a call. We are always happy to answer questions and offer a professional perspective.

ECONOMIC CALENDAR:

Monday: ISM Non-Mfg. Index

Tuesday: International Trade

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, FOMC Minutes

Friday: Import and Export Prices

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HEADLINES:

Weekly jobless claims rise more than forecasted. The number of new applications for jobless benefits rose slightly, though claims remained below the important 300,000 line. Since the four-week moving average dropped, the underlying trend still suggests strength in the jobs market.

Consumer confidence jumps in September. Despite global turmoil, U.S. consumers weren’t fazed and continue to feel positive about their financial prospects.

Construction spending grows more than expected. Spending on construction grew in August by 0.7%, surprising economists who had expected 0.6% growth. The increase was led by private sector construction, indicating that the economy continues to expand.

Factory orders drop in August. Factory order, an indication of the health of the manufacturing sector, fell 1.7% in August. Though factory orders are notoriously volatile, economists had projected only a 1.3% drop.