Market Update: Thursday, October 20, 2016


  • Stocks little changed as central banks in focus. U.S. markets are modestly higher this morning after the European Central Bank (ECB) left interest rates unchanged and New York Federal Reserve President William Dudley suggested that while a December rate hike is likely, there is no need to aggressively tighten monetary policy. Both the Dow and S&P 500 gained 0.2% yesterday; the energy sector jumped 1.4% as WTI crude oil advanced above $51.50/barrel on a report showing a surprise decline in stockpiles, even as gasoline inventories rose. Overseas, the Shanghai Composite closed flat for the second day in a row, the Nikkei added 1.4% and European shares are mostly higher in afternoon trading. Meanwhile, COMEX gold is up modestly to $1268/oz., the yield on the 10-year note is steady at 1.74%, and oil has slipped back near $51/barrel.


  • Unchanged is a victory. S&P 500 earnings estimates for the fourth quarter have barely budged during earnings season thanks to generally solid results thus far (remember estimates almost always start out too high and get cut, so unchanged is a victory). One key reason: financials, which have seen fourth-quarter estimates revised more than 2% higher this month. Despite the tough interest rate and regulatory environments, we have upgraded our financials view to neutral–see our latest Portfolio Compass for more details–reflecting improved results, attractive valuations, strong technicals, and the possibility of higher interest rates.
  • Claims bounce higher, but Hurricane Matthew likely to blame. Initial claims rose 13,000 to 260,000 after hitting a fresh 40+ year low in the prior week. The rise in the week ending October 15 was likely due to the impact of Hurricane Matthew in the southeastern U.S. Claims in the past 26 weeks are up 12,000. Claims provide a recession signal when they rise between 75,000 and 100,000 over a 26-week period, free of distortions.  So clearly, the claims are not sending a recession signal.
  • Philly Fed exceeds expectations in October. At +10, the Philadelphia Fed Manufacturing Index exceeded the consensus expectation (+5), and remained above zero–indicating an expanding manufacturing economy in the Philadelphia region–for the third straight month and the fourth time in the past five months. The details of the report were solid, with increases in new orders and shipments and an improvement in the employment index. The October Philadelphia Fed Index is another sign that the U.S. manufacturing sector is stabilizing after a 2+ year slowdown.
  • As expected, ECB leaves policy unchanged. The ECB left monetary policy unchanged this morning. However, its current bond purchase programs of 80 billion euros per month will expire in March 2017 and the market is looking for some clarification on whether this program will be extended (which is expected), and just as importantly, what the new rules will be. During his post-announcement press conference this morning, ECB president Mario Draghi suggested that the program will be extended, but likely to be tapered. Traders will look closely at the December meeting for more concrete guidance on policy. Markets were largely unchanged on today’s news, as no significant announcement was expected.
  • Stuck in a range near the highs. The S&P 500 hasn’t made a new high in 46 days, the longest streak in 15 months. Here’s the catch: it has also been within 3% of the all-time high for 79 straight days. In other words, it is staying close to new highs, but not surging higher or selling off. The last time it was this close to new highs for this long was May 1995. The bottom line is this much lack of activity this close to new highs is extremely rare and suggests when the move out of the range occurs, it could bring with it a good deal of volatility.
  • New 52-week high for crude oil. Crude oil gained 2.6% yesterday on a drop in inventories. Along the way, crude closed at $52.60/barrel, a new 52-week high for the first time in more than three years (785 days), the second-longest streak ever without a new 52-week high only to a 3.6 year (924 day) streak in the early 1990s. What does it mean? Going back 20 years, looking at the seven other times crude has gone more than a year without a new 52-week high, the returns after that initial new high are very strong–up a year later six of seven times with an average return of +31.4%.
  • Investors continue to worry. The American Association of Individual Investors (AAII) poll came out this morning and the bulls are down to 23.8%, the lowest number of bulls in four months–since right before Brexit. This is nothing new though, as the bulls have been beneath their long-term average of 38.5% for a record 50 straight weeks now and 83 of the past 85 weeks. As we noted in our Weekly Market Commentary this week, we are seeing record outflows from domestic equity mutual funds as well. So, investors aren’t just saying they are bearish in polls, they are acting by taking money out of stocks. From a contrarian point of view, should the economy continue to surprise to the upside, this could be a bullish catalyst.



  • Initial Claims (10/15)
  • Philadelphia Fed Mfg. Report (Oct)
  • Leading Indicators (Sep)
  • Eurozone: European Central Bank Meeting (No Change Expected)


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