Archives for April 2016

Stocks End Mixed as Tech Falls on Earnings – Weekly Update for April 25, 2016

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Stocks ended last week mixed on earnings that were largely better than expected, though the tech sector disappointed. For the week, the S&P 500 gained 0.52%, the Dow grew 0.59%, and the NASDAQ lost 0.65%.

First-quarter earnings reports drove a lot of market activity last week. Though analysts expect overall S&P 500 earnings to be negative for the fifth quarter in a row, the news so far is more about earnings surprises and fewer negative revisions to estimates. Given how low the bar was set by many corporate teams, it’s not so unexpected to see positive surprises. With reports in from 132 S&P 500 members, overall earnings are down 7.9% on 1.1% lower revenues, though nearly three-quarters beat their earnings estimates. Capture1

However, the tech sector is another story. Tech stocks sold off after disappointing results from major players. Overall, much of the tech sector is painting a picture that is the inverse of the rest of the market — many companies are failing to rise to the expectations built over previous quarters of strong growth, disappointing investors.

Will investors hold on to their optimism in the days ahead? We’ll see.

The week ahead is packed with important economic data, including the first estimate of first-quarter economic growth and a measure of consumer sentiment. The Federal Reserve Open Market Committee also meets next week to discuss interest rates; though no one expects the Fed to raise rates this month, analysts are hoping for more clarity on the timing of future hikes.

Last week, a Reuters poll of economists found that about two-thirds expect a June rate increase while another 20% are betting on September. In March, the Fed acknowledged its concerns about global risks, stating that it expects two more rate hikes this year, only half as many as were planned in December.

Earnings season also heats up next week with releases by 183 S&P 500 companies. By the end of the week, we’ll have seen quarterly results from about 60% of the index and will have a much more complete picture of business activity last quarter. With all the reports coming out, we can expect some volatility in the days ahead as investors digest the latest data.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Mfg. Survey

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

Wednesday: International Trade in Goods, Pending Home Sales Index, EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: GDP, Jobless Claims

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

 

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HEADLINES:

Housing starts drop. Groundbreaking on new houses dropped 8.8% in March, and permits for new home construction fell, indicating that home builders are expecting the sector to cool off.

Existing home sales bounce 5.1% higher. Resales of existing homes rose more than expected in March, suggesting that the housing market had legs last quarter. Though monthly sales are volatile, growth was solid across all four U.S. regions.

Jobless claims drop to multi-decade low. The number of weekly applications for new unemployment benefits dropped to the lowest level since 1973 in the latest sign that the labor market is steaming ahead despite slow economic growth.

Oil prices post third week of gains. Benchmark crude oil prices rose again last week on expectations that the global oil supply glut is easing and demand will rise in the peak driving season.

Dow Ends Best Week in a Month – Weekly Update for April 18, 2016

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Image courtesy of FreeDigitalPhotos.net/hywards

Stocks rallied again last week on better-than-expected earnings and some reassuring news about China’s economy, giving the Dow its best weekly performance since mid-March. For the week, the S&P 500 gained 1.62%, the Dow added 1.82%, and the NASDAQ grew 1.80%.

Earnings reports are trickling in and the news so far is not as bad as expected. Since advance estimates had prepared investors for very weak earnings reports, the weak reports we’re seeing so far are being treated as victories. Out of 35 S&P 500 firms reporting in so far, total earnings are down 9.0% from Q1 2015 on 0.1% higher revenues with 71.4% beating their earnings estimates. As earnings season continues to unfold in the weeks ahead, we may see more of the same, which could give markets room to rally. On the other hand, investors could take the weak earnings picture as a sign that the economy is struggling to produce sustainable growth.

After months of gloom on China’s economy, a new report shows that China’s economy grew 6.7% in the first quarter. Though this is down from the fourth quarter’s 6.8% rate of growth, it’s not as bad as investors had feared. U.S. investors treated the news as a win, though China experts are skeptical about the reliability of these statistics. Since China’s ruling body has staked its political legitimacy on economic stability, officials have a lot of pressure to produce reassuring data. Overall, it’s not likely that China’s economic woes are over.

The European Union gave us some headlines at the end of the week as Britain officially launched a campaign ahead of a referendum on leaving the EU on June 23rd. Current polls on a “Brexit” are evenly split with a significant number of people undecided on the issue. However, if Britain were to exit the EU, it would likely have a serious knock-on effect on markets, trade agreements, and currencies.

In other international news, several major oil-producing nations met over the weekend to discuss coordinating oil output to stabilize prices. If they come to an agreement, oil prices might bounce higher and offer some relief to the beleaguered energy sector; however, closing a deal between a large group of producers with widely varying national interests will be tough.

The week ahead is packed with earnings reports from 101 S&P 500 companies, including heavy hitters like Caterpillar [CAT], General Electric [GE], General Motors [GM], and Yum Brands [YUM]. Investors will also get a look at housing market data and see how well the sector is doing during the spring real estate season.

ECONOMIC CALENDAR:

Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: Existing Home Sales, EIA Petroleum Status Report

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Retail sales fall unexpectedly. U.S. retail sales dropped last month as Americans cut back on purchases of cars, trucks, and other big-ticket items. The stumble suggests economic growth likely slowed last quarter.

Weekly jobless claims fall. Weekly claims for new unemployment benefits fell by 13,000 to levels last seen in 1973. Claims for the prior week were also revised lower.

Consumer sentiment drops. A measure of consumer confidence fell for the fourth straight month last week, showing that volatility and recession talk are weighing on optimism.

Federal Reserve survey shows economy still expanding. The Beige Book survey indicated that energy weakness and a slow manufacturing sector didn’t hold the economy back too much between late February and early April.

Stocks Post Worst Week Since February – Weekly Update for April 11, 2016

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Stocks tumbled last week on downward revisions to U.S. economic growth and worries about global growth. For the week, the S&P 500 fell 1.21%, the Dow lost 1.21%, and the NASDAQ gave up 1.30%.

After a rosier-than-expected fourth quarter, economic forecasts suggest that the economy barely grew in the first three months of 2016. A report showing that wholesale inventories declined in February caused estimates of Q1 real economic growth to plummet from 0.7% to just 0.1%. In mid-March, the estimate was as high as 2.3%, but forecasts are dropping fast.

A couple of things to keep in mind: 1) these are very early estimates that are missing a lot of data; 2) early forecasts are very sensitive to updates to the data. Other economists think that the seasonal bias against first-quarter results could be pushing down estimates and that underlying economic growth could be closer to 2.0%. We’ll know more when the first estimate of Q1 Gross Domestic Product (GDP) growth comes out on April 25.

Last week, attention turned to the upcoming Fed meeting at the end of April. Minutes from the March meeting show that opinions among voting members of the Open Market Committee are running against an April rate hike. Other economists seem to agree; currently, just 1.0% think the Fed will raise rates in April. 75.0% think a June hike is likely.

In a public session with three other former Federal Reserve chairs last week, current Chair Janet Yellen reiterated her upbeat stance on the economy and stated that the Fed is on a “reasonable path” to future rate hikes. Her predecessor, former chair Ben Bernanke, supported her position by saying he doesn’t believe that recession risk is much higher in 2016 than in other years, which could pave the way for more hikes later this year. Given that the Fed has little room to lower rates again if economic growth slows, and plenty of room to raise rates if growth surprises, Yellen seems determined to be cautious.

The next few weeks are packed with earnings results, which will likely mean more market volatility. We know that the growth picture is weak and that the earnings outlook is negative. However, we also know that managers like to sandbag expectations so that they can post better-than-expected results. Will we see positive surprises next week? We’ll let you know.

ECONOMIC CALENDAR:

Tuesday: Import and Export Prices, Treasury Budget

Wednesday: Retail Sales, PPI-FD, Business Inventories, EIA Petroleum Status Report, Beige Book

Thursday: Consumer Price Index, Jobless Claims

Friday: Empire State Mfg. Survey, Industrial Production, Consumer Sentiment, Treasury International Capital

 

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HEADLINES:

Factory orders fall in February. Orders for manufactured goods fell in February for the third time in four months, showing that the manufacturing sector is still struggling.

Trade deficit widens more than expected. The difference between imports and exports increased in February as an increase in exports was offset by growth in imports. However, a weakened dollar could mean that the increase in exports is sustainable.

Jobless claims fall more than expected. Weekly claims for new unemployment benefits dropped by 9,000, indicating that the labor market continues to gain strength despite modest economic growth.

Tesla receives over 325,000 deposits for $35,000 electric car. The Tesla Model 3 launch blew away expectations as fans placed $1,000 deposits for the automaker’s mass-market electric car. The success leads analysts to wonder: Can Tesla successfully make the transition from niche manufacturer to major automaker?

Special Quarterly Update: Roller Coaster Q1 Ends Mixed – Weekly Update for April 4, 2016

Image courtesy of FreeDigitalPhotos.net/Sira Anamwong

Image courtesy of FreeDigitalPhotos.net/Sira Anamwong

After a rocky start to the year, most stocks ended the first quarter slightly higher, which is remarkable considering the negative sentiment that caused stocks to selloff in the early weeks of 2016. For the quarter, the S&P 500 gained 0.77%, the Dow grew 1.49%, and the NASDAQ fell 2.75%.

Markets faced serious headwinds last quarter due to slowing economic growth around the world. Combined with rising interest rates, a strong dollar, and falling commodities prices, we faced a perfect storm of factors that ticked off a stock market correction. However, after falling by as much as 10.5% earlier in the quarter, the S&P 500 gained 6.7% in March. That’s the best performance since October 2015. Given the roller coaster ride we’ve had this year, the recent gains are a testament to the resilience of investors.

Let’s talk about what happened last quarter.

What affected markets in Q1 2016?

Slowing global economic growth. Concerns about overseas growth were responsible for a lot of market activity. China’s ongoing economic woes caused major turmoil in markets around the world as investors digested the news that the world’s second-largest economy is slowing. Though China is grappling with a transition away from a manufacturing-centered economy, experts fear that the move won’t come without pain. Europe also faced its share of concerns. China’s slowing demand for foreign goods will hit European firms harder as many worry about terrorism and the migration crisis currently facing the borderless Schengen region.

Volatile oil prices. Oil producers faced falling demand and stubbornly high oil supplies, which caused oil prices to plunge. At the end of the quarter, prices appear to have stabilized somewhat as oil-rich nations like Kuwait and Saudi Arabia seek to stabilize prices through cooperation between producers.

The volatility and prolonged lows will likely be felt in energy sector earnings for the first quarter; however, low prices were a boon to consumers. Though gasoline prices will likely rise as refineries switch to summer blends ahead of the peak summer driving season, the average cost per gallon hit a 12-year low in the first quarter. The national average for the quarter was $1.86 per gallon—saving Americans nearly $10 billion, or about $45 per licensed driver. Did Americans plow those gas savings back into the economy through spending? We’ll see when spending data for the quarter is released.

Recession worries. At the beginning of the year, investors became increasingly concerned that global issues could come home to roost in the form of a recession. Though fears of a slowdown are serious, some domestic economic data suggests that a recession may not be nigh. The labor market added 628,000 jobs in the first three months of the year. Other employment factors also improved; the labor force participation rate increased and the number of discouraged workers decreased. Wages also increased 2.25% in March from a year earlier. Consumer spending, which is a significant contributor to U.S. economic growth, also increased, albeit sluggishly.

Central bank actions. Markets also responded to decisions by the Federal Reserve, European Central Bank, and Bank of Japan. While the Fed is working to bring interest rates closer to historic averages, the BOJ and ECB are struggling to stoke economic growth by lowering rates into negative territory and buying up assets. The big questions remain: When will the Fed raise rates again? Do central banks have enough bullets left to fight a global slowdown?

What’s in store for Q2 2016?

After the first quarter’s wild ride, we can hope for a smoother second quarter. Current estimates peg U.S. economic growth at 0.7% in the first three months of 2016. That’s a big comedown from the 1.4% growth in the fourth quarter, but it’s in line with the slow start the economy has experienced in several of the past few years. Is the economy still at risk of a slowdown? That’s very possible, and may depend on how much consumers open their wallets this year.

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Our view

What can we look forward to in the second quarter? Well, more uncertainty is certain. Though some fears have abated, most of the headwinds are still with us as we head into the second quarter. However, a lot of the potential pain facing the economy may already be priced into markets, and analysts are considerably more optimistic than they were during the rocky ride in January and February.

If first-quarter results show a rosier picture, then investors could react with a resumption of the rally. A lot depends on what the Federal Reserve has in store for interest rates; currently, the odds favor a June hike. Fed Chair Janet Yellen has struck a dovish tone in recent remarks, indicating that she plans to “proceed cautiously.” However, the rosy March jobs report could increase the odds of an April rate hike. We’ll know more in the coming weeks.

ECONOMIC CALENDAR:

Monday: Factory Orders

Tuesday: International Trade, JOLTS, ISM Non-Mfg. Index

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Janet Yellen Speaks 5:30 PM ET

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HEADLINES:

Economy adds 215,000 jobs in March. Though the unemployment rate increased to 5.0%, economists view it as a good sign that jobseekers are reentering the market.

Motor vehicle sales rise. U.S. car makers expect to have sold 1.66 million autos last month, roughly a 7.0% increase over a year ago. One estimate suggests that carmakers had the best monthly sales in a decade.

Consumer sentiment drops slightly. Though one gauge of consumer optimism fell in March, it came in better than economists had expected. The steady pattern suggests that consumers are still fairly optimistic about their finances this year.

Construction spending falls. Spending on new construction projects fell in February by the largest amount in three months following a January gain. However, residential construction rose solidly.