Market Update: Friday, October 27, 2017

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Market Recap

  • Stocks finished mostly higher on busiest day of earnings season. S&P 500 Index +0.1%, Dow +0.3%, Nasdaq -0.1%.
  • Materials led big (+1.3%) on solid results from chemicals, followed by financials and telecommunications. Healthcare lagged on biotech/pharma underperformance.
  • Breadth on NYSE slightly positive (1.1:1), volume picked up again (123% of 30-day average).
  • Treasuries softened, moving the 10-year yield 2 basis points (0.02%) to 2.45%. Dollar strengthened notably against the euro.
  • Commodities – WTI crude oil (0.9% to $52.65/bbl) increased to highest level since April; COMEX gold dipped slightly (-0.9%) to $1267/oz.
  • Central banks back in the headlines on perceived dovish commentary from the ECB and Janet Yellen reportedly being out of contention for the Fed chair position.

Overnight & This Morning 

  • U.S. stocks opened slightly higher, S&P 500 +0.5%, Nasdaq +1.5% following strong tech earnings last night.
  • European stocks higher across the board, adding to yesterday’s gains after the ECB kept rates unchanged and gave a dovish outlook, euro pushed lower. Spain’s IBEX (-1.5%) only laggard, Euro STOXX 50 +0.6%.
  • Asian markets mostly higher. Nikkei +1.2%, Shanghai Composite +0.3% amid fairly quiet news day. Tech and financials led session.
  • Treasuries little changed, 10-year yield at 2.45%.
  • Commodities – Crude oil and gold lower on dollar strength. Industrial metals mixed: copper, nickel down; aluminum, zinc higher.
  • Today’s economic calendar highlighted by Q3 gross domestic product (GDP) and deflater, October Michigan Consumer Sentiment.

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Key Insights

  • What does the ECB mean? The European Central Bank (ECB) will taper bond purchases to 30 billion euro per month from 60 billion euro, starting in January 2018. It was widely taken as being more dovish than expected, as the euro and yields fell. But what does it mean? Continued accommodation from global central banks, including the ECB and the Bank of Japan currently outweigh the impact of the Federal Reserve’s (Fed) rate hike campaign and recently implemented balance sheet normalization program. But as the Fed’s program continues to accelerate, ECB purchases shrink, and other central banks such as the Bank of England shift toward more restrictive monetary policy, we believe that we may be moving closer to a time when central banks could begin to fade as the primary drivers of the markets, and fundamentals may return to the forefront.

Macro Notes

  • The best six months of the year. We all know about “sell in May and go away” as the May to October period historically is weak for equities. The good news is that we are close to the best six months of the year. Going back to 1950[1], the May to October period is up an average of 1.5% for the S&P 500, while it is up 7.0% on average the other six months. Today on the LPL Research blog we will take a closer look at this phenomena and what it could mean given how strong the worst six months have been this year.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
  • Third quarter GDP beats expectations. The advance estimate for third quarter GDP came in at 3%, well above the 2.6% expected and just slightly below the second quarter’s 3.1% rate of growth. Consumer spending was the main driver of the beat, though business fixed investment also picked up. The Bureau of Economic Analysis didn’t mention the impact of the hurricanes directly, but at least part of the gain in consumer spending was driven by motor vehicle sales, as consumers replaced storm-damaged vehicles. However, given that the geographical scope of the hurricanes was limited, and the fact that growth came in as strong as it did, continues to point to strength in the broader U.S. economy.

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Friday

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