December Earnings & a Presidential Week – Weekly Update for January 17, 2017

2017-01-09 Blog ImageAs we look back on markets last week, we see mixed results with none of the major domestic indexes gaining or losing more than 1%. The S&P 500 was down 0.10% for the week, and the Dow gave back 0.39%, yet again failing to reach 20,000. On the other hand, the NASDAQ increased by 0.96% and reached its sixth record close in 2017 on Friday—pushed by a 1.36% rally for Facebook after Raymond James upgraded its stock. International stocks in the MSCI EAFE added 0.82%.

What We Saw Last Week

Big banks reported earnings. Earnings season is upon us. On Friday, we saw JPMorgan Chase, Bank of America, and PNC Financial beat profit expectations. These positive results add some weight to the post-election financials rally, where financial-sector equities in the S&P 500 have added 17% since the election. A number of other banks will report this week, and we will look to see if their performance also matches the growth we have seen so far.

Retail sales grew. The December monthly retail sales report showed a 0.6% increase, slightly below the 0.7% consensus expectations. With this growth, retail sales are now up 4.1% in the past year. However, not all retailers are performing well. General merchandise stores are suffering as consumers continue to shop online and move away from in-person retail stores. We see the results of this trend in declining retails sales numbers and large companies announcing store closures, including Macy’s, Sears, CVS, and many more.

Consumer sentiment was high but divided. The University of Michigan’s monthly report on consumer sentiment was 98.1, just below predictions but still near highs we have not seen since 2004. One interesting finding in the report is a strong partisan divide in consumer confidence. Richard Curtin, director of the consumer survey, described “extreme differences” between people’s expectations for whether new political policies would help or hurt the economy. He reminded people that the most impact on consumer sentiment will come from “actual changes in the economy” as a result of Trump’s work, which we will have to wait a few months to see.

What We’re Looking at in the Week Ahead

Earnings season continues. The markets will be watching earnings closely during this four-day trading week—specifically to see if other major financial institutions also beat expectations. Some analysts believe that to keep the current market rally going and demonstrate that there is weight behind the post-election growth, we’ll need to see excellent reports from most companies.

A number of high-profile companies report this week, including:

  • Morgan Stanley
  • Goldman Sachs
  • Citigroup
  • American Express
  • Netflix
  • IBM
  • UnitedHealth Group
  • General Electric Co.

Donald Trump becomes President. While earnings reports will be important to track, another event looms larger in many people’s minds: Donald Trump’s inauguration. After he takes the oath of office Friday morning and becomes President of the United States, we will begin to see how the market’s expectations for Trump’s policies match reality.

From trade to taxes to infrastructure and beyond, the next few months will give us a number of insights into how U.S. policies may change. Uncertainty remains, and we will watch for political developments that may affect the markets. In addition, we will continue to focus on the fundamentals that provide deep insight into how the economy is performing—and how we can strive to keep you on track toward your goals.

ECONOMIC CALENDAR:

Monday: U.S. Markets Closed in Observance of Martin Luther King, Jr. Day
Wednesday: Consumer Price Index, Industrial Production, Housing Market Index
Thursday: Housing Starts

Capture

Markets: Signal, Noise & Fundamental Factors Weekly Update – October 27, 2014

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

After several weeks of dismal performance, equities shook off their worries and rallied enthusiastically on solid quarterly earnings giving the S&P 500 its biggest weekly gain of the year. For the week, the S&P 500 gained 4.12%, the Dow grew 2.59%, and the Nasdaq surged 5.29%, erasing much of their losses from previous weeks.1

Last week, we discussed some of the factors behind the recent pullback; what changed in a single week? Fundamentally, very little. However, investors regained their optimism on the reminder that many companies are still doing quite well in the economic recovery. Traders also took the opportunity to buy the dip, which added buying pressure, pushing markets up.

Markets are fundamentally forward-looking, and while global growth fears remain, investors are looking at the earnings growth picture, and realizing that the picture looks reasonably good. Not great, to be sure, but so far, S&P 500 firms are reporting 4.1% year-over-year earnings growth on 4.7% revenue growth, with about 41% of the S&P 500 firms reporting as of October 24.2 If we leave out the struggling Finance sector, earnings growth jumps to 5.5%. These results are largely in line with performance in recent quarters, though earnings growth is below the four-quarter average, largely because of weak performance in the Finance and Technology sectors.3  All told: Firms seem to be holding their own and turning profits, despite some weak demand issues.

Does this mean that the pullback is over? Hard to say. Markets are responding more to perception and noise than they are to fundamental factors right now. That means that more turbulence – and perhaps downward movement – can be expected in coming weeks. On the other hand, if earnings and economic fundamentals continue to look good, we may see a continuation of the rally.

Looking ahead, earnings reports from the energy and healthcare sectors will dominate this week; the two sectors represent opposite sides of the market. Healthcare was one of the big success stories of the year, while energy companies have struggled with declining oil prices.4 While analysts expect weak results from many energy firms, they will be paying close attention to forward guidance; if energy leaders foresee a weak global economic environment, investors could respond with another attack of the nerves.

The week ahead is also heavy in economic data, with the Federal Reserve’s Open Market Committee meeting and a first look at Q3 Gross Domestic Product (GDP). The Fed is widely expected to announce the end of quantitative easing at this week’s meeting; analysts also expect the formal announcement at the end of the meeting to signal a more cautious Fed and their desire to let economic data decide future policy moves.5

Altogether, a big week ahead. We’ll keep you informed.

 

ECONOMIC CALENDAR:

 

Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey

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

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: GDP, Jobless Claims

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

Capture

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.

Jobless claims remain close to 14-year low. Jobless claims inched higher last week, but stayed below pre-recession levels, suggesting that the labor market is firming up. The four-week moving average of claims, considered to be a less volatile measure, fell to the lowest level since May 2000.6

New home sales at six-year high. Purchases of new single-family homes rose to a multi-year high in September, though revisions to August numbers suggest sales remain on a lower trend. Single-family home sales tend to be volatile, but lower mortgage rates could spur more sales.7

European Central Bank fails 25 in stress test. The ECB failed 25 Eurozone lenders during a series of financial health tests. Though banks have improved markedly since last year’s tests, a few still have to raise more capital to protect against another potential financial crisis.8

Inflation indicator remains tame. Overall consumer prices rose a tepid 0.1% in September after falling 0.2% in August. Year over year, headline inflation is up 1.7%, indicating that inflation remains soft and is giving the Federal Reserve breathing room to manage interest rates.9