After The Close
Profit takers came out in force on Wednesday, taking advantage of elevated valuations and a string of disappointments from corporate earnings season in what was one of the worst days for the market in several months. The Dow, NASDAQ, and S&P 500 each shed value through the morning hours and hit their respective nadirs shortly after the midday. The former fell largely on selling of Boeing (BA – Free Boeing Stock Report) stock, as revenue pressures continued to mount in two of the aerospace giant’s key segments, while the broad-based S&P 500 saw a portion of its losses stem from a weak quarterly showing by Chipotle Mexican Grill (CMG). As the session progressed, none of the composites was able to move into positive territory, though they each recouped some of their losses in the afternoon.
Although there were a few pockets of strength today, namely the homebuilding industry, which benefitted from an impressive increase of new home sales, each of the market groups occupied the red at the closing bell. The telecommunications sector was the worst performer on Wednesday, dragged down by AT&T (T) shares, which lost nearly 4% after publishing soft quarterly data. The energy, industrials, and basic materials sectors also struggled meaningfully. Market breadth overwhelmingly favored declining stocks, which outnumbered advancing issues by a 3.0-to-1.0 ratio.
Meanwhile, U.S. crude oil lost $0.29 per barrel on the day. A surprise rise in U.S. crude inventories, per the Energy Information Administration, was the main culprit for the loss in value. Even so, that the commodity still trades above $52 is a sign that the market remains optimistic that OPEC’s drilling accord can be extended through 2018. Recently, overtures from Saudi Arabia and Russia have offered some reassurance.
Looking ahead, earnings season is expected to be the main factor influencing trade in the coming weeks, while investors are also keeping an eye out for developments on interest rates and tax reform. The market continues to predict a tightening of monetary policy in December, while the latter figures to get some much-needed clarity next week when House Republicans unveil their proposed bill.
– 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
Stocks have reversed course today as investors hit the pause button on the big rally the market has enjoyed over the past year. Right around the noon hour on the East Coast, the Dow Jones Industrial Average is down about 90 points; the NASDAQ is off 52 points; and the S&P 500 is lower by 15 points. Market breadth is following suit, with decliners well ahead of advancing issues. But in a sign of the market’s recent strength, more stocks are hitting 52-week highs than lows.
Earnings are still an important story these days and, while most big-name companies are topping analysts’ estimates, disappointments on the part of Chipotle Mexican Grill (CMG), Advanced Micro Devices (AMD), and AT&T (T), may be temporarily weighing on sentiment.
Reporting season still has a way to go, though, and reports from several big tech names after the close of trading on Thursday could have a pronounced effect on the near-term direction of stocks.
Another possible drag today is the increasing realization over how difficult it may be to legislate tax reform. Deficit hawks in Congress are making their feelings known, and a tough battle is shaping up. While it is difficult to quantify how much the possibility of lower taxes has helped stocks, the chance that it might not get done could be causing investors to see more limited gains ahead.
Meanwhile, a clear plus today was a pair of economic reports that showed strong advances in durable goods and new-home sales for September. The durable-goods report indicates that spending on business equipment is on the rise. Notably, too, new home sales rose to their highest level in a decade, buoyed by customer demand. The good news on home sales is helping homebuilding stocks, such as PulteGroup(PHM), buck the downturn today.
The favorable news on the economy supports the case for another interest-rate hike by yearend. The prospect of higher rates may be weighing on the shares of interest-rate sensitive groups, such as utilities and telecommunications stock, which are among the laggards among the various sectors today.
In other markets, oil prices are off slightly, partly on the heels of a moderate rise in inventories, instead of a decline, as reported by the Energy Department.
Heading into the afternoon session, profit taking has been the rule thus far today.
— Robert Mitkowski
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
It is mostly about earnings these days on Wall Street. To wit, while the economy is never far from the minds of investors, and the political winds continue to blow, the story right now is about the flood of corporate earnings hitting the Street for the third quarter. And here, the news has been good. In fact, it has been much better than expected, with more than three-fourths of the companies domiciled in the S&P 500 Index beating expectations--some by a wide margin. Indeed, that was especially so yesterday morning, as two mainstays in the Dow Jones Industrial Average, Caterpillar (CAT - Free Caterpillar Stock Report) and 3M Company (MMM - Free 3M Stock Report), handily beat forecasts.
As such, they led a charge that lifted the aforementioned Dow by 190 points in the first minutes after the starting bell had sounded. Unfortunately for the bulls, this was not a tide that was lifting all boats equally, so even as the Dow flourished, the S&P 500 and the NASDAQ barely inched ahead. That was not the story for the two Dow stars, though, as shares of Caterpillar surged by 6%, on a strong earnings beat, while 3M stock did almost as well, as that diversified blue chip manufacturer modestly exceeded net targets. Most other Dow components changed little in the early going.
All told, this is the busiest week for earnings of the cycle. And with many economically sensitive corporations beating expectations, the stock market is responding well. So, the records continue to fall. In other news, the economy is still waxing and waning these days. Of note, we will get additional news out later this morning when the government issues September data on new home sales. Forecasts are that this metric backtracked modestly last month. Then on Friday, in a very critical release, the government will report on third-quarter gross domestic product. The consensus view here is that GDP grew by 2.6% last quarter.
Meanwhile, the blue chips continued to rally yesterday morning, with the Dow's gain holding in the 170-point range through much of the opening half of the trading day. Elsewhere, the averages were range-bound, but with more modest increases being tallied. The Dow continued to strengthen as we moved into the afternoon, passing the 200-point advance mark just after lunch. The other indexes perked up a little, too, but continued to lag well behind the blue chip composite. This pattern would continue through the middle stages of the afternoon.
Then, after crossing the 200-point gain mark, the Dow eased back for a time, but still held onto a formidable advance. That moderation in the day's gain continued into the final half hour, capping the Dow's gain at a still impressive 168 points. But the increases in the S&P 500 and the NASDAQ, while steady, at four and 12 points, respectively, notably trailed behind. It was a similar story for the smaller indexes, while the advance-decline ratio on the Big Board, at 15 to 13, was just mildly positive. As for the leading groups, six of the 10 advanced, with notable strength in the basic materials offset by weakness in health care.
So, as we move more deeply into the week, we see strong earnings and hopes for tax reform--a tax package is promised for release by the Republicans in Congress by next Wednesday--being in the vanguard of the leadership on Wall Street. Meantime, in overseas dealings so far today, the major markets are mostly higher so far in Asia, save for Japan, while in Europe, the leading bourses are tracking in a mixed fashion thus far in the morning. Finally, with more heavy earnings on tap and additional economic metrics set for release, the early read on our futures is largely uneven.
— Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
