Market Update: Friday, October 21, 2016

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  • U.S. follows overseas trading lower amid dollar strength. Domestic indexes are lower this morning while overseas markets are mixed as traders focus on central bank chatter, notably from the European Central Bank (ECB) and Bank of Japan, and the ongoing barrage of quarterly earnings reports, including McDonald’s, Microsoft, and General Electric. This follows a lackluster session on Thursday in which all three major indexes fell slightly (the S&P 500 and Nasdaq dipped -0.1%), led down by telecom and industrials; healthcare was the only sector to move higher. Stocks in Asia were mostly red to close out the week; the Nikkei snapped a five-day winning streak, though the Shanghai Composite managed a 0.2% gain. European exchanges are declining in afternoon trading as earlier momentum from corporate earnings and merger and acquisition activity fizzles. Elsewhere, COMEX gold is little changed ($1267/oz.), WTI crude oil ($50.43/barrel)  is down 0.4%, the dollar is nearing a seven-month high, and Treasury yields are down 0.03% to 1.73%.

 

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  • The week ahead: More than just earnings.  More than 170 S&P 500 firms will report Q3 earnings next week and provide guidance for Q4, 2017 and beyond in the week before the Federal Reserve Bank’s 7th policy meeting of the year on November 1-2, 2016. On Monday morning, October 24, markets will already be reacting to the release of the manufacturing PMI data for October in Japan and the Eurozone, and preparing for the U.S. report later in the morning. U.S. data for August, September, and October on durable goods orders and shipments, new home sales, and pending home sales early in the week provide the lead-in to the key releases of the week on Q3 gross domestic product (GDP) and Q3 Employment Costs on Friday. The Federal Reserve Bank’s “quiet period” ahead of the Federal Open Market Committee (FOMC) meeting kicks in next Tuesday afternoon, but not before several appearances by Fed officials on Monday and early Tuesday. Overseas, the German IFO report for October, a speech by ECB president Draghi, the September reading on bank lending and money supply in Europe along with Q3 GDP readings in South Korea, France and the UK will keep market participants busy.
  • Tougher road for consumer discretionary. We have lowered our consumer discretionary sector view in our latest Portfolio Compass publication. Factors behind the move include technical weakness, deterioration in earnings estimates, the age of the business cycle (the sector tends to perform better earlier in the business cycle), and the risk of higher oil prices. E-commerce disruptions and changing demographic preferences add to the challenges. So although valuations have become reasonable and consumer spending growth remains steady, we continue to find technology the most attractive economically-sensitive sector, followed by industrials and energy.
  • Busiest week of earnings season on tap. Next week (October 24-28) is the busiest week of third quarter earnings season with over 170 companies slated to report results. The energy sector will see the biggest portion of its constituents report while a significant number of reports from healthcare, consumer staples, and technology companies are due out. By the end of next week, with more than half the reports in the books, we will be in a strong position to pull out themes. Overall, results to date have been good, though there have been soft spots, including transports and legacy technology areas (“old tech”).
  • The final 50 days of 2016. Yesterday kicked off the last 50 trading days of 2016. As we head into the home stretch of the year, what could be in store for the rest of 2016? The good news is the last 50 days of the year have been historically strong for the S&P 500. Going back to 1980, the final 50 days of the year are up 3.6% for both the average and the median return, while higher 78% of the time. Today on the LPL Research blog we will take a closer look at this phenomenon and what it could mean in an election year and when prices are strong (or weak) for the year up to this point.
  • This hasn’t happened in 41 years. We noted yesterday how the S&P 500 had been within 3% of its all-time high for 80 consecutive days now, the longest streak in 21 years. Now turning to the Dow, it has closed beneath its 50-day moving average, but above its 200-day moving average for 30 consecutive days- topping the streak of 29 days in late 1989. This is now the longest such streak since 33 straight days in 1975. What does this mean? Equity markets have traded in a historically tight range since mid-July and this is yet another way to show that.

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Friday

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