Earnings Drive Record High Close – Weekly Update for August 15, 2016

Earnings Drive Record High Close - Weekly Update for August 15, 2016

Stocks rallied late last week as the S&P 500, Dow, and NASDAQ all closed at record highs on Thursday for the first time since New Year’s Eve 1999. The NASDAQ also notched a seventh week of gains, its longest winning streak since 2012. For the week, the S&P 500 gained 0.05%, the Dow grew 0.18%, the NASDAQ added 0.23%, and the MSCI EAFE grew 2.73%.

Earnings season is mostly behind us, and, with nearly all of the S&P 500 companies having reported in, we have a good overall picture of last quarter’s performance. Total earnings for the index so far were down 3.7% on -0.7% lower revenues relative to Q2 2015. However, 71.1% have managed to beat profit expectations, which has given stocks a boost in recent weeks.

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Here’s what we can take away from the second quarter:

Though earnings growth is still negative, it’s a vast improvement over what we saw in the first quarter from the same group of companies. Results are also better than the 4-quarter moving average. Revenue growth is also negative, showing that many companies are still (seven-plus years into the economic recovery) struggling with slow demand.

The energy sector is still bringing down overall earnings. Excluding Energy, earnings for remaining S&P 500 companies would be slightly up 0.1% on 2.4% higher revenues.

Third quarter earnings growth estimates are steadily coming down, indicating that business leaders are not expecting standout performance. Are companies sandbagging expectations to improve the odds of a positive surprise? That’s highly possible. However, we’re not expecting to see meaningful growth pick up this quarter.

Next week, we’ll get a look at notes from the last Federal Reserve Open Market Committee meeting. We’ll analyze these meeting minutes to get a sense of what the Fed is thinking about the economy and see how different members of the committee are voting. The rest of the week is also full of important economic releases, which could stoke volatility if we see any surprises. When markets experience a sustained rally over a period of weeks, it’s not surprising when investors pause for a breather to reevaluate the data.

Have questions about how all of this data impacts your portfolio as an investor? We’d love to chat with you. Feel free to leave a comment below or reach out to us at hello@hzcapital.com if there is anything you’re curious about. As always, our goal is to make sure you’re informed on the latest economic updates.

ECONOMIC CALENDAR:

Monday: Empire State Manufacturing Survey, Housing Market Index, Treasury International Capital

Tuesday: Consumer Price Index, Housing Starts, Industrial Production

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

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HEADLINES:

Consumer sentiment increases in August. A measure of American optimism about the economy increased this month, hopefully supporting future consumer spending.

Retail sales remain flat in July. Sales of retail goods remained surprisingly unchanged last month as Americans cut back on purchases, moderating expectations of a surge in consumer spending this quarter.

Business inventories rise slightly in June. Business stockpiles edged higher in June as sales surged, suggesting U.S. firms are having an easier time moving products off shelves.

Job openings edge higher in June. The number of available jobs rose slightly over May, suggesting moderate growth. An increased number of factory job postings could indicate movement in the manufacturing sector.

Q2 GDP Estimate: Present & Future Impact – Weekly Update for August 1, 2016

 

Q2 GDP Estimate: Present & Future Impact - Weekly Update for August 1, 2016

Stocks broke their four-week winning streak, closing mixed after the release of a surprisingly low estimate of second-quarter economic growth. For the week, the S&P 500 lost 0.07%, the Dow fell 0.75%, the NASDAQ grew 1.22%, and the MSCI EAFE added 2.36%.

The preliminary estimate of Q2 Gross Domestic Product (GDP) growth showed that the economy only grew 1.2% last quarter versus the 2.6% growth expected. Investors were understandably disappointed as they had hoped for a resurgence after a slow first quarter, but professional economists were surprised as well. The New York Fed had forecasted GDP growth of 2.1% and the Atlanta Fed had predicted 2.3% growth. Why the shock?

Digging deeper into the data, we find that the disappointment came from an unexpected fall in business inventories. On the positive side, the drop may boost future economic growth as businesses rebuild their stockpiles. Consumer spending was strong, growing 4.2% over the previous 12 months, and accounting for nearly all the GDP growth we saw.

So, though the headline number wasn’t thrilling, the underlying trends in consumer spending, labor market growth, and higher savings rates could set up a banner third and fourth quarter.

During last week’s Federal Open Market Committee meeting, the Federal Reserve’s monetary policy makers voted to hold rates steady, which was not a surprise. Citing recent economic data, the central bank said that “near-term risks to the economic outlook have diminished,” setting the stage for the next rate hike.

Will rates increase in September? December? Or will the Fed wait until 2017? We don’t know. Wall Street bets on future rate hikes suggest that most traders don’t think the Fed will move until December if they don’t wait until 2017.

The good new is the Fed seems confident enough in economic growth to cut back on stimulus. On the other hand, speculation around the timing of future rate hikes will continue to be a major market theme this year and may stoke additional volatility.

This week, investors will be watching Friday’s July labor market release and digesting more corporate earnings reports. We look forward to keeping you informed.

 

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Tuesday: Motor Vehicle Sales, Personal Income and Outlays

Wednesday: ADP Employment Report, ISM Non-Manufacturing Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Factory Orders

Friday: Employment Situation, International Trade

 

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HEADLINES:

Weekly jobless claims rise. The number of Americans filing claims for new unemployment benefits rose by 14,000, but the underlying trend still shows strength in the labor market.

Consumer sentiment drops in July. A measure of how consumers feel about the U.S. economy slipped as worries about the Brexit and the presidential election weighed on Americans.

June new home sales surge. Sales of new single-family homes rose to the highest levels in nearly 8-1/2 years. Sales were up 25.4% over June 2015, indicating that the housing market may be gaining momentum.

Durable goods plunge in June. Orders for long-lasting manufactured goods dropped, indicating weak overseas demand is affecting U.S. factories. Economists had predicted a 1.4% decline over June, but orders for goods like aircraft, appliances, and machinery actually fell 4.0%.

Fresh Data Suggestions: Economy Still On Track Weekly Update – April 13, 2015

Image courtesy of FreeDigitalPhotos.net/suphakit73

Image courtesy of
FreeDigitalPhotos.net/suphakit73

Stocks ended the second week of the new quarter on a high note, giving the Dow its first close over 18,000 for the month. Investors took confidence from some major corporate deals as well as fresh data that suggests the economy is still on track.1 For the week, the S&P 500 added 1.70%, the Dow grew 1.66%, and the NASDAQ gained 2.23%.2

With earnings season in focus, investors have temporarily put Fed worries and economic issues on the back burner in favor of seeing how U.S. businesses performed last quarter. Thomson Reuters analysts predict that S&P 500 companies saw their profits decline by 2.9% from Q1 2014.3 Falling oil prices and a strong dollar likely chipped away at energy company earnings as well as those of firms that depend on overseas sales (and had to convert profits back into dollars).

Earnings estimates have come down sharply in recent months. In the chart below, you can see that for the past year, the trend has been for earnings expectations to start relatively high (in blue), drop significantly as the quarter proceeds (in red), and then, in three of the last four quarters, exceed expectations (in green).4

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Corporate managers have an incentive to set the bar low so that they can over-deliver on earnings and reap the reward as investors react positively to the news. However, past performance is no guarantee of future return, and we’re not guaranteed to see positive earnings surprises this season. The size of negative earnings revisions is unusually large as companies were forced to account for slower economic growth and volatile oil prices. However, we can remain hopeful that the historical trend will hold.

As we look toward the official start of earnings season this week, we can count on seeing some winners and losers. While energy companies will likely be hit hard by petroleum prices, financial firms and medical firms may see outsized performance. Though we can’t predict the market, we can stay alert for opportunities amid the potential volatility.

ECONOMIC CALENDAR:

Monday: Treasury Budget

Tuesday: PPI-FD, Retail Sales, Business Inventories

Wednesday: Empire State Mfg. Survey, Industrial Production, Housing Market Index, EIA Petroleum Status Report, Beige Book, Treasury International Capital

Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Business Outlook Survey

Friday: Consumer Price Index, Consumer Sentiment

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HEADLINES:

Wholesale inventories edge up in February. Warehouse stocks of products for sale rose slightly in February, indicating that businesses may not be restocking aggressively because of weak sales.5

Import prices fall in March. The cost of imported goods fell last month as rising oil costs were offset by declining prices elsewhere. Import prices are a major contributor to inflation calculations and weak inflation may delay the Fed’s interest rate increases.6

Weekly jobless claims rise less than expected. The number of Americans filing for new unemployment benefits rose slightly last week, bringing the four-week average to the lowest level since 2000. These numbers suggest that the slow job growth in March was a seasonal fluke.7

Oil prices stabilize on production plateau. Global oil prices rose for the fourth straight week on expectations that drilling production will stabilize and the supply glut will recede. The number of oil rigs in the U.S. has dropped significantly, indicating that domestic production may be topping out.8

A Slow Week Ends in New Highs Weekly Update – November 17, 2014

Image courtesy of FreeDigitalPhotos.net/Idea go

Image courtesy of
FreeDigitalPhotos.net/Idea go

Markets ended a sluggish week of trading slightly up, notching another record close for the S&P 500. For the week, the S&P 500 gained 0.39%, the Dow grew 0.35%, and the Nasdaq added 1.21%.1

Though last week’s data was sparse, several important economic reports show that investors may have something to be excited about. The latest retail sales data shows that shoppers came out in droves in October, giving sales a 0.3% boost. The rise in sales is even stronger than it appears, because lower gas station sales (caused by falling gas prices) depressed retail sales growth. Excluding volatile categories like automobiles, food, gasoline, and building materials, retail sales surged 0.5%.2

Much of the increase can be attributed to lower gas prices – in freefall since July – giving consumers more discretionary income to spend. Gas now averages $2.91 across the nation;3 if per-gallon prices stay low, we could see a very healthy holiday shopping season.

In another sign of a solid retail season, Wal-Mart (WMT), America’s biggest retailer, beat earnings estimates. Same-store sales, often considered a better indicator of organic growth, rose 0.5%, indicating that shoppers are coming back. Many of Wal-Mart’s customers are low-income Americans; positive earnings results could show that many of these consumers are no longer feeling the economic pinch.4

Americans are also generally feeling much better about their prospects. Consumer sentiment rose in November to more than a seven-year high. Falling unemployment and lower gas prices boosted confidence, though many Americans are still worried about income gains.5

The week ahead is heavy with economic data on manufacturing, housing, and inflation, which could cause some volatility as investors digest reports. Analysts are also already thinking about Black Friday and the official start of the year’s biggest shopping season. With October’s better-than-expected retail sales data, low gas prices, and optimistic consumers, some are forecasting a great season for U.S. retailers. Are these tailwinds baked into stock prices yet? We’ll see.

 

ECONOMIC CALENDAR:

 

Monday: Empire State Mfg. Survey, Industrial Production

Tuesday: PPI-FD, Housing Market Index, Treasury International Capital

Wednesday: Housing Starts, EIA Petroleum Status Report, FOMC Minutes

Thursday: Consumer Price Index, Jobless Claims, PMI Manufacturing Index Flash, Philadelphia Fed Survey, Existing Home Sales

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HEADLINES:

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Great news: Americans are quitting their jobs. The latest Job Openings and Labor Turnover survey shows that workers are quitting their jobs at the fastest rate since 2008. This trend is another indicator of labor market strength because workers tend to quit jobs when they feel confident in finding better work.6

Business inventories rise 0.3% in September. Though sales remained weak, U.S. businesses added to their inventory stockpiles at a faster rate than in August. The modest rise indicates that businesses are optimistic about their ability to sell through inventory in the coming months.7

Eurozone growth rates edges upward. The latest economic figures from Europe show that the overall Eurozone grew 0.2% in the third quarter. While Germany and France (Europe’s biggest economies) posted anemic growth, Greece roared back from recession, posting 0.7% growth.8

Strong dollar and weak oil are helping Americans buy from abroad. While American companies worry about the effect a strong dollar will have on their foreign sales, Americans are benefiting from cheap oil and the strength of the currency to buy overseas goods. September import prices fell by the most in two years, led by a large drop in the cost of imported fuels.9