Market Update: Monday, October 30, 2017

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Market Recap

  • Friday’s technology rally powered Nasdaq surge. Biggest one-day performance gap between Dow, Nasdaq since 2002. S&P 500 Index up for the seventh straight week, longest streak since 2014. Dow +0.11%, S&P 500 +0.8%, Nasdaq +2.2%.
  • Positive breadth on NYSE (1.6:1) in Friday’s session on above average volume.
  • Strong earnings drove rally in technology (+2.9%), consumer discretionary (+1.6%) sectors.
  • Treasuries rallied, despite solid gross domestic product (GDP) data, sending 10-year yield -5 basis points (0.05%) to 2.41%. U.S. Dollar Index still managed 0.26% gain.
  • Commodities – WTI crude +2.4% to ~$54/bbl., COMEX gold edged +0.2% to $1274/oz.
  • Third quarter GDP came in at 3.0% annualized, ahead of 2.5% consensus, slight drop from Q2 (+3.1%). Increase in business private fixed investments offset by decline in consumer spending.

Overnight & This Morning 

  • S&P 500 lower in early trading with focus on Federal Reserve (Fed), tax reform efforts, Spain-Catalonia, and impending charges from Special Counsel Mueller in the ongoing Russia investigation.
  • European stocks little changed overall; euro slightly stronger (+0.3% vs. USD) with Spanish equities higher as support for Catalan independence wanes.
  • Asian markets mixed. Nikkei flat, Shanghai Composite-0.8%, Hang Seng -0.4%.
  • Treasury yields slightly lower on risk-off tone overnight, 10-year yield down to 2.40%. President Trump reportedly leaning toward Powell for Fed chair, which may be putting some downward pressure on bond yields.
  • Oil prices little changed near $54/bbl. as media focuses on potential extension of OPEC production cut agreement; gold edging 0.2% lower to $1271/oz.; copper +0.3%.
  • Today’s economic calendar includes personal spending and income, Dallas Fed manufacturing Index.

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Key Insights

  • Earnings get a tech boost. The first half of the season has been good relative to expectations, particularly after last week’s boost from the technology sector. Earnings are tracking near a 7% year-over-year increase, 2% above prior expectations, with a solid 74% of companies having beaten estimates. Growth has slowed from the last two quarters, due partly to the impact of insured hurricane losses, sending financials earnings down 7%. Strong upside and big increases in technology and energy earnings have offset financials weakness and driven the upside relative to expectations. A solid earnings outlook continues to support U.S. stocks even at elevated valuations. This week 135 S&P 500 Index companies will report results.
  • Favorable earnings outlook intact. Forward guidance from corporate America has been good overall, with S&P 500 earnings estimates for the next 12 months down only 0.2% since the season began. This compares to the typical 3-4% drop in estimates during earnings season and should be viewed favorably. We expect solid results to continue in the coming weeks based on the strong macroeconomic backdrop, resilient estimates, and a weaker U.S. dollar.

Macro Notes

  • We continue our Halloween tradition of writing about what might scare markets. Investors are always worried about something, so it’s not hard to come up with things at this time of the year that make some of us a little nervous. While too much fear during stressful times for markets can lead to poor investment decisions, some skepticism in strong markets can be healthy. With that in mind, this week’s Weekly Market Commentary will discuss five things that have the potential to scare markets. Importantly, these risks do not change our expectation that stocks will add to this bull market’s gains in the coming year, albeit likely with more volatility. Economic momentum has picked up, the job market remains healthy, and earnings growth is solid with potential upside from a tax cut.
  • What to watch in November. The S&P 500 is set to enter what has historically been one of the best performing months of the year, but there are some catalysts that could potentially trigger the volatility that’s eluded equity markets so far in 2017. In this week’s Weekly Economic Commentary, we discuss the key events to monitor in November including: monetary policy meetings held by the Fed, European Central Bank, Bank of Japan, and the Bank of England; a ramp up in tax reform negotiations; and, the culmination of third-quarter earnings season.
  • Jobs report and ISM highlight big week of data. Job growth is expected to bounce back solidly in October after hurricane-related job losses in September. Consensus expects 312K new non-farm payrolls in Friday’s report. The key ISM report, due out Wednesday, is expected to dip a point or so but remain at a very strong 59.4 according to Bloomberg consensus. This week is also another busy one for the earnings calendar with over 130 S&P 500 companies slated to report.
  • Busy week of central bank meetings. The Bank of Japan meets Tuesday, the Fed policy announcement is Wednesday, the Bank of England meets Thursday, and we are expected to know who the next Fed chair will be by the end of the week. That’s a lot of monetary policy in one week, following last week’s European Central Bank meeting.
  • What will stocks do under a new Fed chair? President Trump is reportedly set to announce his selection in the very near future for the next Chair of the Board of Governors of the Fed, with Jerome Powell emerging as the likely nominee. But how has the market fared historically when a new Fed leader takes the helm? We take a look today on the LPL Research blog.

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Click Here for our detailed Weekly Economic Calendar

Monday

Tuesday

Wednesday

  • MBA Mortgage Applications (Oct 27)
  • ADP Employment Change (Oct)
  • Wards Vehicle Sales (Oct)
  • Markit Manufacturing PMI (Oct)
  • ISM Manufacturing Index (Oct)
  • Construction Spending (Sept)
  • FOMC Rate Decision
  • UK: Markit UK Manufacturing PMI (Oct)
  • Japan: Vehicle Sales (Oct)
  • Japan: Monetary Base (Oct)

Thursday

  • Challenger Job Cuts (Oct)
  • Weekly Jobless Claims (Oct 28)
  • Nonfarm Production and Unit Labor Costs (Q3)
  • Bostic (Dove)
  • Italy: Markit ADACI Manufacturing PMI (Oct)
  • France: Markit France Manufacturing PMI (Oct)
  • Germany: Markit Germany Manufacturing PMI (Oct)
  • Germany: Unemployment Change (Oct)
  • Eurozone: Markit Eurozone Manufacturing PMI (Oct)
  • Bank of England: Bank Rate
  • Japan: Consumer Confidence (Oct)
  • China: Caixin China Services PMI (Oct)

Friday

  • Change in Nonfarm, Private & Manufacturing Payrolls (Oct)
  • Unemployment Rate (Oct)
  • Average Hourly Earnings (Oct)
  • Average Weekly Hours (Oct)
  • Labor Force Participation & Underemployment Rates (Oct)
  • Trade Balance (Sept)
  • ISM Non-Manufacturing Index (Oct)
  • Factory Orders (Sept)
  • Durable Goods Orders (Sept)
  • Cap Goods Shipments & Orders (Sept)
  • Markit Services PMI (Oct)
  • Kashkari* (Dove)
  • UK: Markit UK Services PMI (Oct)
  • ECB: Coeure

Past performance is no guarantee of future results.

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

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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