Market Update: Thursday, October 27, 2016

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  • U.S. indexes undecided amid busiest day of earnings season. After a higher start, domestic equities have returned to breakeven as investors eye a plethora of corporate earnings out today including Alphabet, Amazon, and Dow component Altria. A modest rebound in crude prices after yesterday’s 1.4% decline is also providing some support. This comes after a mixed session on Wednesday in which both the S&P 500 (-0.2%) and Nasdaq (-0.6%) fell, while the Dow (+0.2) eked out a small gain thanks to an earnings beat from Boeing, which boosted the stock 4.7%. Financials and real estate were the leader and laggard, respectively, among sectors thanks to rising bond yields. Overseas, major indexes in Asia closed broadly lower, with the Nikkei off 0.3% despite a weakening yen after the Bank of Japan noted it may discontinue its asset purchasing program; the Hang Seng (-0.8%) and Shanghai Composite (-0.1%) also fell. Elsewhere, European stocks are little changed in afternoon trading, oil ($49.50/barrel) and gold ($1268/oz.) are modestly higher, and the yield on the 10-year Treasury note is up six basis points to 1.85%.

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  • Is that all? Earnings estimates have barely budged. Earnings estimates for the fourth quarter of 2016 and first half of 2017 have fallen just 0.5% since October 1-encompassing all of earnings season-with more than 40% of the S&P 500 having reported results. This modest decline, better than the typical 2-3% drop, suggests broadly that the outlooks for corporate management teams are at least stable despite election uncertainty. Financials still top the Q3 sector upside rankings, followed by utilities and technology. For Q4, estimates have risen for financials, technology, and-surprise-energy.
  • Claims fall to remain near 40-year lows. Initial claims for unemployment fell modestly for the week ending October 22 but may still be slightly elevated due to distortions from Hurricane Matthew. Claims fell 3,000 to 258,000, just above the median forecast of 256,000, and remain near 40-year lows. Claims have risen by just 1,000 over the last 26 weeks and would need to rise between 75,000 and 100,000 over a 26-week period, free of distortions, to signal a recession.
  • Upward revision offsets near flat durable goods orders, but business spending remains cautious. New orders of durable goods fell 0.1% in August versus consensus expectations of a 0.2% increase, but an upward revision of August’s number from 0.0% to 0.3% signals some internal strength. Excluding the volatile transportation segment, new orders rose 0.2%. Shipments of non-defense capital goods ex-air, which feed directly through to gross domestic product (GDP) as business spending, rose 0.3%, the first increase since April of this year. Businesses remain cautious as uncertainty around global growth, the U.K.’s planned exit from the EU, and the U.S. election persists, but the report does point to continued stabilization in manufacturing.
  • U.K. surprises. U.K. GDP rose 0.5% in Q3, better than the expected increase of 0.3%. Economic growth in the U.K over the past 12 months was 2.3%, positively thrilling in the low growth environment. All of the quarterly gain was from services; production and construction declined during the quarter. Global bond markets sold off (rates rose) as the unexpected good news may postpone any further interest rate decreases from the Bank of England. Though some in the U.K. will disagree, we think it’s premature to use this data to suggest that the Brexit will have no negative impact on the U.K. economy.
  • The next five days are seasonally strong. The next five days are historically one of the strongest five days of the year for the S&P 500. Going back to 1950, the last three days of October and first two days of November have been up an average of 1.1% and higher 72.7% of the time. The past two years, these five days have gained 2.1% and 1.4%. In election years, going back to 1952, these five days have been up in 14 of the past 16 cycles, and higher 87.5% of the time. We will take a closer look at this today on the LPL Research blog.

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Thursday

Friday

  • Employment Cost Index (Q3)
  • GDP (Q3)
  • Germany: CPI (Oct)

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