April Earnings Deliver, But Roller Coaster Ride Continues

Geopolitical issues that drove the markets in March took a back seat in April as investors turned their attention to earnings and CEOs’ comments.

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Expectations were high that April might bring some relief to the markets as investors turned their attention to corporate earnings. And at first that seemed to be the case. By mid-April, the major indices were at their highest level in about a month with info tech, energy, and consumer discretionary stocks all performing well. From a technical basis, the S&P 500 (SPX) finally broke through a major resistance point at 2670. 

But the uptick turned out to be fleeting. Momentum seemed to reverse course in the final days of April as investors reacted to less than positive forecasts from CEOs and the 10-year Treasury yield surpassing 3% for the first time since January 2014. Breaking through this “psychological” threshold could renew fears of a weakening economy. Although, historically speaking, a 3% yield really isn’t that high.

Volatility in Check

VIX, the market’s most closely watched indicator of volatility, held relatively steady for most of April, which could potentially be a sign of positive investor sentiment. High volatility typically implies there’s more fear in the market. During the first few days of the month, VIX readings were in the 20-25 range likely due in part to concerns over a possible trade war with China and rising global tensions. It then dipped briefly to around 15 as tensions eased before moving back toward 20 at the end of the month.  

These readings are higher than in 2017, when VIX spent much of the time at historic lows below 10, but they’re not at an alarming level. Back in early February, VIX had jumped briefly to 50. 

Earnings Living Up to the Hype

As many analysts expected, initial earnings reports were strong. Sectors that have seen positive earnings movement early during Q1 earnings reports  included transports, where airline United Continental (UAL) and railroad operator CSX (CSX) both easily topped analysts’ Q1 forecasts; and info tech, where Netflix (NFLX) saw a big uptick in subscribers.

However, the strong numbers didn’t always translate into higher prices, as was the case for many bank stocks.  Despite exceeding analysts’ expectations, propelled in part by the recent tax reform legislation and in some cases solid equity trading and wealth management revenue, the major banks failed to gain much traction. Weakness in the banking sector persisted despite a late-month rise in the 10-year Treasury to around 3%, and a slight reversal of the trend toward a flatter yield curve. A steeper yield curve typically means higher net interest margin for banks.

Investors appear to be placing greater weight on what CEOs are saying. As a result, positive numbers are sometimes getting met with skepticism. The markets also appear to be taking a hard stance on any numbers that come in less than ideal, and on companies whose guidance disappoints.

Wage Growth Rising, Unemployment Holding Steady

The strength on Wall Street came despite a rather lackluster March employment report (released April 6) that showed job growth at just above 100,000, about half the expected level. Unemployment, however, stayed at near 20-year lows of 4.1%, while wages rose 2.7% year-over-year. The wage growth was pretty strong, but perhaps not enough to raise too many concerns over possible inflation. Earlier in the year, the January jobs report showed wage growth of nearly 3%, helping spark a sell-off in early February.

The fear was that possible higher inflation might force the Federal Reserve Bank (Fed) to raise rates more than the three times forecasted for 2018. In March, the Fed raised rates by 25 basis points, as Wall Street analysts had expected. The next hike is likely to come by June, according to Fed funds futures. The Fed continues to promise it will raise rates at a “gradual” pace, with a possible return to what it calls a “neutral” rate that might ultimately be near 3%.

Oil Gushes Higher

Oil prices — which had soared to three-year highs at the peak of the Syria tension — didn’t immediately fall back after the air strike. Falling U.S. stockpiles and OPEC’s continued production cutbacks had U.S. oil prices at close to $70 a barrel by mid-April, a possible concern heading into the peak driving season when gasoline demand typically climbs. Investors might want to keep an eye on major railroad and trucking companies to see if executives start expressing worry about higher input costs.

Keeping Things in Perspective

Volatility comes with investing so big market swings in both directions are to be expected. Rather than looking at how much the market is moving, investors may want to pay attention to the why—the factors behind the movement. It could provide a clearer picture of whether people are trading on data or emotions. April’s bumpy ride was mainly due to corporate earnings, CEO comments, and rising Treasury yields, unlike March which was fueled by geopolitical headlines. And that’s a good thing.

Visit the TD Ameritrade Markets Overview page, for timely market information, articles, snapshots, earnings releases, and more. 

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Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.

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