- U.S. off to another timid start, Europe rebounding. Domestic equities are again near flat in early trading after Wednesday’s session saw a similar start, but stocks drifted lower throughout the session, briefly legging down following the Federal Reserve Bank’s (Fed) announcement that it would keep interest rates at current levels, though comments from Fed Chair Janet Yellen suggest a December hike is likely. Trading in the S&P 500 (-0.6%) was choppy following the Fed announcement; all 11 sectors ultimately finished lower with continued underperformance in rate-sensitive sectors. Overseas, a report showing strength in China’s service sector helped the Shanghai Composite (0.8%) move higher, though the Hang Seng (-0.6%) fell; the Nikkei was closed for a holiday. Shares in Europe are poised to bounce off of more than three-month lows and snap an eight-day losing streak on the heels of strong corporate earnings. Meanwhile, WTI crude oil ($45.12/barrel) continues to struggle after several days of declines, COMEX gold ($1300/oz.) is off 0.6%, and 10-year Treasury yields are inching up, near 1.81%.
- FOMC stands pat, but hints at December hike. As was expected, the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), decided to keep rates unchanged at the conclusion of its two-day meeting, making few changes to its assessment of the economy. The FOMC did note that the case for a rate hike continued to strengthen, and said it was awaiting “some further evidence of progress toward its objectives before acting”. Please see our LPL Research blog.
- Employment report preview. The Bureau of Labor Statistics will release the October Employment Situation report tomorrow, (Friday, November 4, 2016) at 8:30 AM ET. The consensus is looking for a gain of 175,000 net new jobs in October, an improvement from the 156,000 increase in September. A wildcard in this month’s report may be the impact of Hurricane Matthew, which hit the southeastern US in early October. The unemployment rate is likely to tick down to 4.9% in October from 5.0% in September while average hourly earnings are expected to increase 2.6% from a year ago. This is the final jobs report before next week’s election, but there is one more jobs report (in early December) before the Fed’s mid-December policy meeting. In our view, a distortion-free reading on jobs between 100,000 and 250,000 in October keeps the Fed on course to tighten in December. A reading below 100,000 may give the Fed pause, while a reading above 250,000 may cause the market to think that the Fed may be ‘behind the curve” on rate hikes.
- Time to call it-the earnings recession is over. It’s too early to call the election, but not the earnings recession: it’s over in a landslide. With 72% of S&P 500 companies having reported, earnings are tracking to a solid 3.3% year-over-year increase for the third quarter of 2016, 4% better than expectations on October 1 and tracking to an above-average upside surprise based on historical Thomson Reuters data. Financials and technology have still produced the most upside to prior estimates-it’s no coincidence that these sectors have outperformed the S&P 500 over the past month.
- Earnings estimates have inched lower but have remained resilient. Thomson-tracked estimates for the fourth quarter 2016 and first half of 2017 have fallen by 1-1.5%, better than the typical 2-3% reduction during earnings season. Technology and financials estimates have held up best. In the disappointment category, estimate reductions for industrials and materials have been sizable, reflecting ongoing commodity and currency challenges. So while there have clearly been hits and misses this earnings season, overall we consider it a success.
- Down 7 days in a row. The S&P 500 fell again, making it now seven consecutive days in the red. This is officially the longest losing streak since seven straight red days in late November 2011. The last time it was down eight days in a row? October 2008 and the heart of the financial crisis. Now, one major thing stands out about this time: although stocks have dropped seven days in a row, the selling has been minimal. Over this recent seven-day losing streak, the S&P 500 lost just 2.5%. You have to go back 20 years to a seven-day losing streak in 1996 that saw a smaller loss.
- How strange is this sell-off? Think about this, during the recent seven-day losing streak the S&P 500 is down only 2.5%. The most recent seven-day losing streaks before this one were in 2011 and those two lost 6.8% and 7.9%. Going back to 1950, the S&P has now had 76 seven-day losing streaks and the average drop has been 5.3%. In other words, the current 2.5% drop is one of the smallest drops ever for a seven-day losing streak – as only 11 times was there a better return during the seven-day losing streak.
- Where did the bulls go? The American Association of Individual Investors (AAII) Sentiment Survey came out this morning and the bulls came in at 23.6%, the lowest level since right before the Brexit vote. Incredibly, this is now 52 consecutive weeks the bulls have come in beneath the long-term average of 38.5%, trouncing the previous record of 33 weeks. This is only one gauge of investor sentiment, but we’ve also seen massive flows out of equity funds and other sentiment polls show increasing levels of concern ahead of the election.
- ISM Non-Mfg. (Oct)
- UK: Bank of England Meeting (No Change Expected)
- Employment Report (Oct)
- Lockhart (Dove)
- Fischer (Dove)