Market Update: Thursday, July 20, 2017

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Yesterday’s Market Activity

  • More new highs. Dow (+0.3%), S&P 500 Index (+0.5%), Nasdaq (+0.6%) set fresh record highs, helped by earnings news.
  • New high for tech, finally! It took 17 years but S&P technology’s 0.5% gain pushed it above March 2000 highs for the first time. Tech sector +23.8% year to date but still looks reasonably valued on a relative basis and a far cry from 2000 valuation levels!
  • All sectors rose, with energy at the top after oil +1.6% on inventory drawdown; earnings-driven weakness in transports (airlines, rails) caused industrials to lag with marginal gains.
  • Treasuries little changed, 10-year yield up marginally to 2.27%.
  • U.S. dollar near flat, with euro down slightly, yen up slightly.
  • Strong housing data. Better than expected housing starts and permits, solid month/month gains.

Overnight & This Morning

  • Stocks near flat at the open with investor focus on overseas central bank meetings.
  • European markets were mixed ahead of European Central Bank (ECB) Chief Draghi’s much-anticipated policy speech, helping tone in U.S. markets. ECB left rates, bond purchases unchanged, as expected. Euro is lower. Euro STOXX 600 flat.
  • Asian indexes gain on Bank of Japan (BOJ) announcement. Most Asian markets positive, continuing optimistic market environment from U.S. session on Wednesday. BOJ helped after pushing out its inflation target, maintaining securities purchase program, and slightly raising economic forecasts. Nikkei +0.6%
  • U.S. dollar higher vs. most major currencies.
  • Treasuries little changed. 10-year yield down 2 basis points (0.02%) at 2.25%.
  • Commodities mixed, with gold down 0.2% at $1240/oz., oil +0.7% near $47.60/bbl.
  • Today’s economic calendar includes jobless claims (down 15K to 233K vs. 245K consensus), the Philly Fed (+19.5 vs. +22 consensus), and leading indicators, though overseas central banks to get more attention. European interest rates influence U.S. rates.

 

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Key Insights

  • Good earnings season having more influence than Washington, D.C. As noted below, earnings growth is tracking nicely ahead of prior expectations. Double-digit year over year growth for S&P 500 Index earnings in Q2 is well within reach. Markets continue to focus more on fundamentals than headlines out of Washington, D.C., though we will continue to follow those closely to gauge potential economic and earnings impact in 2018-19. On that front, the Senate plans to take a vote on the Affordable Care Act repeal-only option next week, with Congressional Budget Office (CBO) scoring showing large numbers of uninsured (should it be repealed) and John McCain’s health complicating matters (our prayers are with Senator McCain and his family). We still put the odds of a corporate tax deal in early 2018 and resulting bump up in corporate profits at over 50%.
  • Central banks in spotlight. Two major central banks met this morning, and while neither actually did much, as expected they signaled very different paths for the future. The BOJ did not change policy and suggested that interest rates will continue to be low in Japan for the foreseeable future. The ECB also maintained the status quo but suggested there would be a policy announcement at its September meeting. Eventually, Japan is likely to be the only major country with easy monetary policy. For U.S. based investors, this puts Japan in the spotlight for trying to weaken its currency, which may diminish returns even if the policy is otherwise successful. Conversely, normalization of monetary policy in Europe may result in more attractive investment opportunities.

Macro Notes

  • Earnings season off to a good start overall. With about 50 index constituents having reported, the S&P 500 is tracking to an 8.7% year-over-year increase in second quarter 2017 earnings, 0.7% above estimates as of June 30, driven mostly by financials. A solid 78% of companies have beaten earnings expectations while an equally impressive 70% have exceeded revenues targets. Next week’s even busier calendar will go a long way toward determining if earnings growth will eclipse double digits again as in Q1 (likely, we believe) and generate the impressive 5% upside generated last quarter (less likely but still possible). Since June 30, 2017 estimates are down 0.2% (to +11.2%) and 2018 estimates are down 0.5% (to +11.3%).
  • U.S.-China trade talks fizzle. Senior U.S. officials, including Secretaries Mnuchin and Ross, met with Chinese officials in Washington on trade matters. The meeting ended with no agreement (not at all surprising) but also with no form of official statement. In contrast, at a similar meeting last year, an extensive 6,500 word statement was issued. Both the U.S. and China subsequently issued statements about the importance of the relationship, but the absence of a joint statement was noticed. The major issue appears to be the opening of China to U.S. services, particularly financial and other business services. Chinese steel exports are also a long standing issue between the countries. U.S. steel companies have been rallying on the possibility of tariffs placed on Chinese steel coming into the U.S.
  • New high for technology. It took more than 17 years, but the S&P 500 Information Technology sector finally closed at a new all-time high yesterday. The previous record was set on March 27, 2000 and it took 4,354 trading days until that peak was bested yesterday. One thing to remember is: Adjusted for inflation (real prices), tech is still 29.8% away from an all-time high.
  • Nasdaq does it again. The Nasdaq closed at another new high, but did it by closing in the green for the ninth day in a row. This is the longest win streak since 10 in a row in February 2015. It was the 40th new all-time high of 2017, which is the most since 61 in 1999. Going back 25 years, this is the 10th time the Nasdaq was up nine days in a row. It is worth noting that the Nasdaq was higher a month later eight of those times.

 

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • Philadelphia Fed Business Outlook (Jul)
  • Leading Index (Jun)
  • Eurozone: Current Account Balance (May)
  • UK: Retail Sales (Jun)
  • Eurozone: Consumer Confidence (Jul)
  • ECB: Deposit Facility Rate (Jul 20)
  • ECB: Main Refinance Rate (Jul 20)
  • ECB: Marginal Lending Facility (Jul 20)
  • BOJ: Kuroda
  • Japan: All Industry Activity Index (May)

Friday

  • UK: Public Sector Net Borrowing (Jun)
  • Canada: CPI (Jun)
  • Canada: Retail Sales (May)

 

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The economic forecasts set forth in the presentation may not develop as predicted.

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