After The Close
Amidst mostly mixed overall market breadth, the major U.S. equities traded higher for most of the day, driven by optimism stemming from corporate earnings season and an encouraging update from the Federal Reserve. The positive sentiment was driven once more by the Dow Jones Industrial Average, which broached the 23,000 threshold at the open and added to its daily gains as the session wore on. While recent strength would suggest some possible vulnerability down the road, the prospect of tax reform could well spur the blue chip index toward 24,000 by the end of the year. By the closing bell, however, both the S&P 500 and NASDAQ had fallen back toward their breakeven lines.
So far into third-quarter earnings reporting season, Corporate America has outperformed expectations. Today’s headliner was International Business Machines (IBM - Free IBM Stock Report), which realized its best single-day gain in years, as highlighted in our midday commentary. Dow component American Express (AXP - Free American Express Stock Report) will announce its quarterly performance after the closing bell, which ought to help determine where the index opens on Thursday morning.
The bullish tone was solidified by the Federal Reserve’s Beige Book summation. Released at 2:00 PM EST., the anecdotal survey showed optimism for business growth in each of the central bank’s twelve regions, an improvement from prior updates’ more-selective nature. Though the inflation rate remains low, we continue to expect a tightening of monetary policy during the Fed’s December meeting. Accordingly, financial stocks were one of the strongest performing sectors on Wednesday.
Meanwhile, U.S. crude oil rose to its highest level since late September. The $0.16 per-barrel gain (to $52.04) was spurred by a 5.7 million barrel reduction in domestic inventories. The impact of Hurricane Nate, which temporarily shut down more than 90% of U.S. refineries in the Gulf, contributed to the shortfall. With demand set to ramp up in the winter, as well as in China through next year, the Energy Information Administration’s weekly data bolstered the cautious optimism for the commodity.
Looking out, the next few weeks of trading will continue to center largely on earnings reports. With many equities and all three of the large-cap indexes trading near their historic highs, we suspect some levelling off to intermittently hold back additional buying. Ultimately, though, it will likely take more than selective profit taking to derail the most recent chapter of this bullish rally, which also assumes some advancements in the way of tax reform are imminent.
— Robert Harrington
At the time of this article’s writing, the author did not have any positions in the companies mentioned.
Mid-Day Update - 11:50 AM EDT
Another day, another rally, it seems like. Stocks once again pushed into record-high territory on Wednesday, but the gains are now concentrated in the venerable Dow Jones Industrial Average. Right around the noon hour on the East Coast, the Dow is up a strong 140 points. Elsewhere, the S&P 500 and NASDAQ are not moving much, and market breadth is mixed, with gainers topping decliners on the NASDAQ, but vice-versa on the New York Stock Exchange.
Stocks lately have been responding to generally favorable earnings reports. Today’s action on the Dow, in particular, is being helped by a rise in shares of International Business Machines (IBM – Free IBM Stock Report), which is enjoying its best percentage gain in about 15 years. Big Blue topped analysts’ expectations for revenue and earnings, and could be on track to end a multi-year trend of revenue declines.
Many more companies will be reporting this week and next week, so there is a lot of earnings data to go through. So far, Corporate America is doing its part to keep stocks on the upswing.
As far as other issues affecting Wall Street’s prospects, the pending debate and negotiations on tax reform could affect market sentiment. Congress and the Administration have been at odds at times, so it is unclear to what type of package will be passed, if any, and how quickly. No legislative action might well be a negative, though.
Meanwhile, although far from a given, there is a bit more clarity on the direction of interest rates. The Federal Reserve has been in a tightening mode for more than a year, and aims to push rates higher once more this year, if possible. For the most, investors are used to the gradual pace of tightening, but they could become alarmed if rate hikes, possibly because of higher inflation, became more frequent. But the probability of a rapid rate-hike scenario currently seems low. We will get a more up-to-date picture when the Fed releases its Beige Book at 2:00 PM EDT.
In other markets, the benchmark grade for U.S. oil is slightly ahead for the session, hovering near $52 a barrel. Inventories of crude oil have been falling, while global tensions with Iran and the threat of an escalation of fighting in Iraq are supporting quotations.
— Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The stock market, up modestly last week, and incrementally better to start the week on Monday, also got off to a good start in early trading yesterday. On point, as the first hours of the latest session rolled along, the Dow Jones Industrial Average ticked up by more than 40 points, an early gain that lifted the blue-chip composite to record high territory above 23,000. The Dow was initially joined by the other large-cap indexes--the S&P 500 and the NASDAQ--albeit with decidedly less conviction. Behind the day's modicum of initial strength was a better-than-expected profit report from Dow member UnitedHealth Group (UNH - Free UnitedHealth Stock Report).
A stellar showing by fellow Dow issue Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report), on solid quarterly net, also boosted that index's performance. In general, the health care group was one of the beneficiaries of the UnitedHealth Group's initial 10-point gain. However, there were few other sectors that indicated much conviction. So, the advance, albeit solid from the perspective of the leading equity averages, was less widespread than on some recent days. In fact, as traders broke for lunch, there were nearly twice as many losing stocks as winning issues on the Big Board, which normally is a bad omen for the afternoon's action.
As to influences yesterday, in addition to earnings, which are now flooding in at a rapid pace, particularly among the larger names, there additionally is the economy. Here, on the heels of last Friday's breakout report on retail spending, which had seen sales surge by 1.6% in September, the Commerce Department reported that industrial production, a notable laggard during August, had perked up some last month, rising by 0.3%, boosted by increasing output at the nation's utilities. Factory use, also measured in the report, likewise edged up modestly in September.
But the big story remained earnings, and in the absence of reassuring news out of Washington on tax reform, which still may be some time off, the major influence likely will remain corporate profits over the next fortnight, at least. As to taxes, a lot of work still needs to be done, but the apparent willingness of the Republicans in Congress to go along with deficit increases to get tax reform passed, is solidifying the market at this time. Regarding earnings, a whole host of corporations are issuing their metrics now, and hundreds of others will follow on a daily basis in the sessions to come.
Meanwhile, after an uneven morning on Wall Street, investors began the afternoon with a little backtracking, as the Dow's modest gain was pared, while the S&P 500 Index and the NASDAQ dipped ever grudgingly below the breakeven line. This mixed pattern then continued into the middle stages of the afternoon. Thus, as we moved inside the final two hours of the trading session, the Dow, boosted by the aforementioned UNH and JNJ reports, continued to hold onto modest gains, generally in the range of 15 to 25 points, while the S&P 500 and the NASDAQ remained a little under water. A watchful waiting game clearly was under way.
This mixed pattern then continued into the latter part of the session, although as we neared the close, there was some additional firming in the Dow, with that index again crossing the 23,000 threshold following a several-hour respite. But with the other indexes laboring somewhat, the task of staying above that psychologically important plateau wound up being a little too much of a task. So, while the Dow would end the session ahead by 40 points, it would come up a bit short of 23,000. The NASDAQ ended slightly lower, while the small-cap Russell 2000 fell five points.
Looking out now on a new day, and following yesterday's unimposing close, we see that the markets in Asia were mostly higher overnight, while in Europe, the principal bourses are showing early gains, as well. Elsewhere, oil prices are now rising on tighter U.S. supplies; gold is little changed; and Treasury yields, which hardly moved yesterday, are moving nicely higher in early trading this morning. Finally, the equity futures are now ahead strongly as we prepare to start trading on our shores.
— Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
