Caterpillar Bulldozes to a Big Quarter, Giving Market A Positive Early Ride

Caterpillar's strong results today gave the market a positive early spin, but rising commodity costs and a falling dollar are both stories to watch.

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(Thursday Market Open) Stocks steamrolled to big gains in pre-market futures trading after Caterpillar (CAT) blew the doors off again with its Q4 results. Later, investors will hear from Intel (INTC) and Starbucks (SBUX) as the tone of earnings season continues to look good.

CAT reported earnings per share of $2.16 and revenue of $12.9 billion, topping Wall Street analysts’ consensus of $1.77 and $12.01 billion. In a press release, CAT cited “positive economic indicators across most of the world and in many of the company’s end markets.” Even more impressively, CAT raised full-year guidance to between $8.25 and $9.25 a share, above Wall Street’s forecasts of $8.15.

CAT’s success sends a strong signal that worldwide growth continues. Remember, CAT is one of the major multi-national U.S. companies with huge sales overseas. When people say foreign currencies are strong, it’s because things are going well around the world, and CAT has been one of the beneficiaries.

While CAT’s earnings impressed, Ford’s (F) had the opposite effect. Shares of the company fell after F missed Wall Street’s earnings projections. Revenue did climb pretty nicely, however. In its earnings call, Ford’s CEO said the company hasn’t done enough to become “fit” financially. Higher commodity costs could be another burden.

Looking beyond earnings, the weaker dollar index continues to be a huge story, falling below 89 on Thursday. Treasury yields pulled back early Thursday after rising to new three-year highs Wednesday. Crude oil jumped above $66 a barrel in the early going after the record 10th-consecutive week of falling U.S. stockpiles, and natural gas is also moving higher. Look for possible minor resistance at $68 for crude and major resistance at $70.

Consider listening to earnings calls from railroads, trucking companies, and airlines to see how oil is affecting them. Both F and United Continental (UAL) discussed rising commodity prices in their calls this week, and a lot of airlines are hedging their risk. Southwest Air (LUV) and Alaska Air (ALK) both report this morning. While most transport-related companies might suffer from oil gains, this could raise interest in electric and hybrid cars.

As Briefing.com pointed out, it wouldn’t be too surprising to see an increase in inflation expectations if the combination of higher yields, higher commodity prices, higher equity prices, and dollar weakness persists. While there’s no data yet showing any real inflation bulge, it’s something investors need to keep in mind in case the Fed starts to get more hawkish in the face of these developments. A key inflation report is due next Monday prior to the Fed meeting. (see below).

Wednesday saw a course reversal on Wall Street, with the Nasdaq (COMP) giving up nearly all of Tuesday’s gains while the broader S&P 500 (SPX) oscillated before finishing a little lower. The $DJI leaped to new record highs early on but finished just a touch higher on the day. Small caps lost ground. It was the second time in just over a week that the stock market drove quickly to record highs early in the session only to pull back. What we’re seeing here is a little more volatility than people were used to in 2017, so it might seem a bit alarming. The VIX rose back toward 11.4 by the end of the day Wednesday and hasn’t been under 10 since Jan. 12.

Though the Nasdaq is known for being tech-heavy, Wednesday’s slide wasn’t like some of the others over the last year in which tech stocks dragged the entire Nasdaq lower. Some tech stocks fell and the sector was weaker overall on the day, but that wasn’t universal. Netflix (NFLX), for instance, kept right on humming. Apple (AAPL), on the other hand, fell pretty hard after an analyst report cited what it said is weakening demand for AAPL’s flagship iPhone X. And Facebook (FB) continued to encounter a few reefs, perhaps related to the company’s plans to change its news feed. Some analysts say this could slow ad growth for the company.

Shares of airlines got pounded Wednesday, with United Continental (UAL) tumbling 11% and competitors also down sharply after UAL said it was looking to add capacity. That raised concerns of possible industry price battles even as airlines face rising fuel costs.

Checking the calendar, President Trump takes the economic stage Friday when he’s scheduled to speak in Davos. Heading into the speech, Trump drew praise for his economic policies from Lloyd Blankfein, Chairman and CEO of Goldman Sachs (GS). Blankfein told CNBC that the market would be lower without Trump — in part because there’d likely be more regulation — and that Trump has helped raise the market’s “animal spirits.” That said, he also has some concerns about the markets. Blankfein worries about continued low interest rates, saying he’d feel “a lot better” about where asset prices, including equities, are, if interest rates were “normalized.” Trading at GS, he added, is “soft,” but businesses that correlate to global growth are doing well.

It’s unclear if Trump’s speech could move the markets much, but investors might want to be ready for any possible ramifications. Recently, the administration has taken a tougher tone on trade, introducing new tariffs earlier this week and drawing criticism from China. We’ll see if the speech continues in that protectionist sort of vein. It could also be interesting to see if Trump, like Treasury Secretary Steven Mnuchin, uses the Davos speech to talk down the dollar.

New home sales are due today after existing home sales for December missed Wall Street analysts’ expectations yesterday.

Dollar Index

FIGURE 1: WEAK DOLLAR NOT SCARING STOCKS.

This one-year chart comparing the dollar index (candlestick line) to the S&P 500 (SPX, purple line), could indicate that investors aren’t letting dollar weakness bother them much. While a falling dollar sometimes evokes fears of U.S. economic problems, that doesn’t seem to be the case this time, at least not judging from the SPX’s sharp rally over the same time period. Data source: Standard & Poor’s, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Sector Shuffle: One interesting development this week has been a slight rebound in some of the so-called “defensive” sectors. On Tuesday, real estate and utilities shined, while telecom and consumer staples made some gains Wednesday. So far, there’s no sustained move, and the general trend looks like it’s favoring some of the growth sectors. Still, it seems like every few days, investors start playing a little defense, possibly seeking protection as the markets keep making new highs and concerns grow about a possible pull back. That said, higher yields on Treasury bonds could continue being a headwind for dividend-yielding sectors like utilities. 

Fed Ahead: With a weaker dollar and rising wages triggering a bit of concern about possible inflation, it seems appropriate that one of the Fed’s most closely watched inflation measures — Personal Consumption Expenditure prices for December— bows first thing Monday as the Fed gathers for its Tuesday and Wednesday meeting. The core PCE price index has been stubbornly low for a long time. In November, core PCE prices rose just 0.1% from the prior month and just 1.5% year over year, well below the Fed’s 2% target. The January Fed meeting isn’t expected to be much of a headline maker, with futures prices indicating a 98.5% chance of rates staying unchanged. However, what the Fed says after the meeting about inflation, the dollar, and wages all could help set the tone for the weeks ahead.

Political Distraction Not Over: Don’t discount the possibility of political noise distracting markets in days and weeks to come. The shutdown last weekend and the government’s Feb. 8 deadline to reach a new budget deal remain front and center, and headlines now indicate that the Russia investigation might be gathering steam. Any sign of that investigation moving into final days could raise volatility and perhaps cause some people to move toward the sidelines for protection. If you remember, last spring the markets suffered a setback when the investigation began and controversial news seemed to spring up every hour. This isn’t a political column, but markets don’t like uncertainty, and no one knows quite where this probe might go. Investors should consider taking care and keeping up with the news.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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