After The Close
On a day that saw many equities slip from recently set all-time highs, the major U.S. indexes exhibited modest weakness. The Dow, which opened slightly higher, fell quickly into the red and scarcely showed signs of a recovery. The S&P 500 and NASDAQ were a bit more resilient at times, with each composite group rising briefly above their respective breakeven line in the afternoon. But a late-day selloff saw each index fall sharply, while overall breadth favored declining issues (which outnumbered advancers two-to-one).
Though optimism stemming from tax reform remains a positive force on the market, recent, selective bearishness has arisen as the U.S. Government veers towards a potential shutdown. Whether lawmakers on either side of the aisle will offer a compromise and avert a partial suspension of public services remains to be seen, but the prospect has emboldened some profit taking within the persistently elevated equity market. Still, we are not overly concerned about the long-term implications of a shutdown, which historically only impacts stock prices temporarily.
Elsewhere, traders are largely confident in the U.S. economy. Yesterday afternoon’s release of The Beige Book revealed a moderately positive tone across all of the Federal Reserve’s 12 Districts. The economy’s continued expansion has been underscored by solid updates on the business beat in previous sessions, including favorable data on industrial production and capacity utilization.
Meanwhile, U.S. crude oil pulled back a few cents per barrel. But the closing level represents a modest recovery from earlier levels, when fears over inventory levels spurred some selling. Still, the commodity bounced back after the Cushing, Oklahoma delivery hub reported a record decrease in crude stockpiles. Also helping the bring the price back near the breakeven level is unrest in Nigeria and other producer nations which, coupled with OPEC’s drilling accord, has helped to bring per-barrel valuations to within striking distance of three-year highs.
Going forward, earnings updates are likely to play more of a role in day-to-day trading in the coming weeks. While the potential of a government shutdown will weigh on trading, a solid quarterly showing from Corporate America (which will also include projected guidance for the recently passed tax reform measure’s impact) would likely help to drive equity prices even higher. Stay tuned.
– Robert Harrington
At the time of this article’s writing, the author did not have any positions in the companies mentioned.
Before The Bell
If at first you don't succeed, try, try again. That time-worn bit of advice could well be the lesson for yesterday. On point, one day after the Dow Jones Industrial Average had soared to an early gain just north of 280 points, and to an intraday peak above 26,000 in that composite, before surrendering all of that early advance and then some, the Dow regrouped yesterday and jumped to an initial gain of 160 points before again falling back briefly in mid-morning. On Tuesday, the reason for the reversal was the fear of a late-week government shutdown. Yesterday, the early rise was the result of optimism about corporate earnings.
As to earnings, they are generally coming in better than expected. One example of this strength was provided by Bank of America (BAC), as that large financial institution surpassed analyst expectations with its latest quarterly metrics. Still, notwithstanding the early gains, which saw the Dow mostly stay above the 100-point advance mark during the morning, there remains the logical fear of a government shutdown by Friday unless Congress can pass a spending bill by that time. The strong start for equities in 2018 adds to the concerns, as the elevated level of prices makes the market very vulnerable to bad news.
Meanwhile, prices continued to trend higher as the morning progressed, with the major averages all solidly higher, but with the advance-decline ratio, albeit positive, not overwhelmingly favorable, as the Big Board showed just a four-to-three margin late in the morning, while the NASDAQ's ratio was only nominally favorable. Still, nine of the top ten equity sectors were in the green, with consumer noncyclical stocks, a laggard in recent weeks, leading the way higher -- lifted by the packaged food companies. The lone casualty at that time was the telecom group, with, suitably enough, shares of Verizon (VZ – Free Verizon Stock Report) modestly lower at that point.
In other news, the economy was back on the front burner, as data issued at 9:15 AM (EST) showed that industrial production had climbed by a solid 0.9% in December, which was nearly double the forecast increase of 0.5%. Also, capacity utilization rose from 77.1% in November to 77.9% last month. Especially strong gains were seen by the utility sector on colder-than-normal temperatures late in the year. This strong showing, coupled with other solid recent metrics, suggest that the economy probably expanded by more than 3% in the final quarter of 2017. Meanwhile,
The market strengthened further as we reached the noon hour in New York and then began the afternoon, with the Dow climbing to past 26,000 once more with an advance of more than 260 points. As before, the food processing stocks, which are included in the consumer non-cyclical category, led the way higher with gains in several companies in that sphere. Elsewhere, interest rates were mixed, rising on the short end and easing back on longer-term maturities. All the while, investors awaited the 2:00 PM (EST) release of the Federal Reserve's Beige Book economic summation.
That issuance was sufficiently benign, as it related that the 12 Federal Reserve Districts had seen modest to moderate economic growth since the last Beige Book six weeks ago, and a similar pace of inflation. So, absent any inflation panic, the market firmed up even further, with the Dow's advance eclipsing 300 points by late afternoon en route to a closing gain of 323 points in that index. Also of note, the S&P 500 added 26 points and the NASDAQ climbed to just shy of 7,300 with a final advance of 75 points. A late rush by the tech groups, which joined the consumer noncyclical sector as market leaders, aided the final advance.
Looking out to a new day now, we see that shares in Asia were mixed in overnight dealings following the big gains yesterday in New York. Meantime, the principal bourses in Europe are now tracking modestly higher. In other markets, oil is up slightly and interest rates, which nudged higher at the close yesterday on both the intermediate and longer end, are showing gains so far this morning, with the 10-year Treasury note's yield climbing just past 2.60%. Finally, U.S. equity futures are now edging higher in early trading, save for the NASDAQ. As before, we expect one eye trained on earnings today and another on the latest doings in Washington, where the two political sides seek to work out a spending accord.
— Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
