After The Close
Mid-Day Update - 11:35 AM EDT
The U.S. equity market started the week with a slightly bearish tone to trading. Save for a move higher for the NASDAQ Composite on the strength of strong earnings results of late from a number of technology behemoths, the major averages are trading modestly lower in the week’s first session. Overall, the movement has been quite muted, which is not all that surprising as traders are unlikely to make another big move ahead of busy week on Wall Street, which includes a number of headline earnings reports, the latest reading on employment and unemployment, and the Federal Reserve’s monetary policy decision at 2:00 PM EDT on Wednesday.
As noted above, we are seeing some selective profit taking after last week’s feverish pace of buying that included 2.2% advance for the NASDAQ Composite on Friday. In general, there are more down than up arrows among the 10 major equity groups and declining issues are outpacing advancers by a modest margin on both the Big Board and the NASDAQ. Still, investors may want to take note of the decline in the broader small-cap sector, with the Russell 2000 down more than a half-percentage point in intra-day trading. This may suggest that the bears will continue to hold a slight advantage today.
From a sector perspective, the biggest laggard is consumer discretionary group. We also are looking at some weakness in the industrial and healthcare categories. Conversely, we are seeing buying again in the white-hot technology sector and the energy issues are trading notably to the upside. The buying in these two high-weighted sectors is providing a level of support for equities and limiting the overall move to the downside.
Meantime, while earnings news is relatively light today, we did get some data from the business beat that showed increases in both personal incomes and expenditures. There also was some major merger and acquisition news this morning. Specifically, reports surfaced that homebuilder Lennar Corporation (LEN) has agreed to buy industry peer CalAtlantic Group (CAA) in a deal valued at $9.3 billion, which includes the assumption of $3.6 billion of CalAtlantic debt. The deal is a good sign about the overall strength of the new residential construction market. On point, new home sales jumped last month, coming in well ahead of expectations.
Looking ahead to the second half of the session, the bears hold the slight advantage, and by looking at the movement so far in the small and mid-cap sectors it may well stay that way. Overall, we don’t expect the moves to be pronounced in either direction ahead of the aforementioned onslaught of news starting tomorrow morning, which we now know will include the announcement of the new Fed Chair from President Trump on Thursday. Stay tuned.
— William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The penultimate trading day of October, a month that at times has been quite volatile, is set to begin with little trace of such in the market right now. The S&P 500 Volatility Index (or VIX), also known as the “fear gauge”, sits at a level that indicates investors are showing no fears of adding risk to their portfolios, even with the major averages continuing to trade at or near record levels.
There are a number of factors that pushed the market higher over the last fortnight, not the least of has been another very supportive earnings season. With the good majority of S&P 500 companies having reported results, more than 75% have meet or exceeded bottom-line expectations, while more than 65% have posted positive sales surprises. This is providing a good deal of support for equities in this continued low interest-rate environment. In addition to the overall positive quarterly results, the market is getting a boost from some strong economic data (more below) and continued hope that some tax reforms are on the horizon. The passage of a budget last week by Congress removes a huge roadblock in the hopes of getting some corporate and individual tax cuts by year’s end. If the Trump Administration and the Republican-led Congress are successful in cutting the corporate tax rate, it is likely to be well received by Corporate America and Wall Street.
On Friday, the main catalyst was strong earnings news, particularly from the technology sector. Of note, were impressive quarterly results from Dow-30 components and technology behemoths Intel (INTC - Free Intel Stock Report) and Microsoft (MSFT - Free Microsoft Stock Report) and their stocks responded in kind on the final trading session of last week. Those reports, along with good showing from Amazon (AMZN) (stock rose 13% on Friday), pushed the technology heavy NASDAQ Composite forcefully higher, soaring 144 points (or 2.2%). The NASDAQ provided the leadership in a market that also saw the large-cap Dow Jones Industrials and broader S&P 500 Index jump 33 and 21 points, respectively. The Dow 30 was held back a bit by shares of Exxon Mobil (XOM -Free Exxon Mobil Stock Report), Chevron (CVX -Free Chevron Stock Report), and Merck & Co. (MRK - Free Merck Stock Report), which all finished lower after reporting quarterly results. Still, it was a bullish day on Wall Street on Friday, with the small-cap Russell 2000 and the S&P Mid-Cap 400 Index each up about a half-percentage point. Advancing issues led decliners by 1.8-to-1 on both the NYSE and the NASDAQ.
Meantime, the investment community received some good news on the U.S. economy on Friday. Specifically, the Commerce Department reported that GDP expanded by 3.0% in the third quarter, exceeding the consensus expectation of 2.6%. It was another good reading on output. That report, along with strong data on new home sales and durable goods orders earlier in the week, though, raised the likelihood that the Federal Reserve will raise short-term interest rates one more time this year, likely at its December monetary policy meeting. The Federal Reserve will be in the spotlight this week, as the central bank commences its two-day FOMC meeting tomorrow morning. Maybe even more important than this week’s monetary policy decision for equities will be the forthcoming selection by President Trump to lead the Federal Reserve beginning in 2018. Current Fed Chair Janet Yellen appears to be out of the running. The selection of a new central bank head has the potential to have a notable impact on the U.S. equity market. A more hawkish leader than Chair Yellen would likely prompt some selling in a market that has been helped immensely over the last nine years by a very accommodative central bank.
In addition to the Fed monetary policy decision this week, we will get a number of headline earnings reports, including the latest results from technology titan Apple (AAPL - Free Apple Stock Report) and pharmaceutical giant Pfizer (PFE - Free Pfizer Stock Report). On the business beat, we will get a number of important reports, a few of much are expected to create headlines, including data on manufacturing and nonmanufacturing activity, and the much anticipated reading on October nonfarm payrolls. And just moments ago, the Commerce Department reported that personal income increased $66.9 billion (0.4%) in September, while personal consumption expenditures jumped $136.0 billion (or 1.0%). This is a good sign ahead of the all-important holiday shopping season for the retailers, which officially kicks off in little over three weeks with Black Friday.
With less than an hour to go before the start of another very busy week for Wall Street, the futures are presaging a slightly bearish opening for the U.S. stock market. It should be noted that trading overseas today has been bullish thus far. Specifically, the strong rally in the technology sector helped drive global stocks to record highs today, and a recovery in Spain’s equity market is helping push European shares higher after an opinion poll smoothed investors' concerns over a possible Catalan secession. Stay tuned.
— William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
