Trying to Avoid an “Unlucky” Seven: Mood Turns Positive As Banks Report

There seems to be a more positive tone on Wall Street to start the day after the six-day losing streak and sharp weekly losses. Bank earnings this morning kicked off reporting season.

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Key Takeaways

  • After two days of sharp losses, there appears to be a more positive vibe this morning
  • Europe and Asia both saw moderate gains earlier Friday, though not on any major news

  • Bank results kick off earnings season today, with JP Morgan beating analysts’ projections

(Friday Market Open) The question today is whether the market can avoid an unlucky seven: That is, seven-straight days of declines for the S&P 500 (SPX). That hasn’t happened in nearly two years. The SPX is now down nearly 6% for the week and nearly 7% below its Sept. 20 record close.

Early on, there seemed to be a more positive vibe, in part due to rebounds in Europe and Asia earlier Friday and also in response to an earnings beat from JP Morgan (JPM) as the new reporting season kicked off. On Wall Street, stock futures pointed toward possible lofty gains, but investors might feel skeptical about whether things can stay in the green after all the jumpiness of the last two sessions.

Most markets around the world rose Friday despite a lack of any really major news event. It seemed like some investors simply began to shake off the fears that sent every major index in the U.S. and overseas to dramatic losses Wednesday and Thursday and put the Nasdaq (COMP) back in correction territory.

Banks Make First Deposits in Earnings Season

Back home, JP Morgan (JPM) reported Q3 earnings per share of $2.34 and revenue of $27.8 billion, compared with third-party consensus estimates of $2.25 and $27.5 billion. Shares rose more than 1% in pre-market trading. 

Looking deeper at the results, profit in consumer banking rose 60% as the company benefited from higher interest rates and growing deposits which resulted in higher interest income. The bank saw what it called “mixed results” in fixed income, but “strong performance” in in equities. 

In the company’s press release, Chairman and CEO Jamie Dimon offered praise for the economy’s current health, but also delivered a warning.

“The U.S. and the global economy continue to show strength, despite increasing economic and geopolitical uncertainties, which at some point in the future may have negative effects on the economy,” Dimon said. 

Investors might want to consider finding the transcript of the bank’s conference call this morning for more insights from Dimon about the banking sector and the economy as a whole. According to media reports, Dimon said in the call that economic growth is “broad-based” and not going to diminish any time soon, but also that he sees interest rates moving higher.

The two other big banks reporting early Friday—Citigroup (C) and Wells Fargo (WFC)—delivered a mixed bag, but shares of both rose moderately in pre-market trading.

Citigroup’s earnings of $1.73 surpassed third-party projections of $1.69, but revenue of $18.39 billion didn’t hit the average estimate of $18.45 billion. Trading revenue at the bank rose 7%, however, which was better than some analysts had expected. The company also managed to cut expenses by 1% as the cost-cutting measures it promised earlier this year appear to be taking effect. Lower taxes might have given C’s results an additional tailwind.

Wells Fargo came up four cents shy of expectations with its earnings per share of $1.13. The company’s $21.9 billion in revenue was in line with third-party consensus estimates.

A Little Confusion 

Though it’s never a good idea to generalize, it feels like many investors are trying to get a sense of where their money should actually be right now. Both Treasuries and stocks have taken big hits over the last week, and emerging markets have been under pressure for a while. Gold is up a bit, but still well below the 2018 highs. 

With all of these asset classes sagging, there don’t seem to be many places to hide. Worries about rising interest rates, trade with China, and what the earnings season might bring all could be playing into the bearish scenario haunting Wall Street.

One thing characterizing recent days is what appears to be the outflow of some money into simple cash as investors wait for some of the dust to settle. There was also arguably some money flowing back into Treasuries on Thursday, as the 10-year yield dropped steeply and is now down about 11 basis points from highs above 3.26% earlier in the week.

The S&P 500’s current decline is the longest since a nine-day skid shortly before the 2016 presidential election. Taking a longer view, the SPX is still up 27.5% since President Trump’s election nearly two years ago, and is still up 2.1 percent in 2018. If you bought a basket of SPX stocks at the start of the year, that investment might still be in the black, even it doesn’t feel good right now.

Yield Curve Back in Focus

One thing to consider keeping an eye on is another narrowing in the yield curve, as the 10-year Treasury yield gained far more ground yesterday than the two-year. The gap in yields is now back below 30 basis points. Some analysts look at this with a fisheye because in the past, inverted yield curves have often accompanied recessions. That said, the 10-year yield popped up a little early Friday, reaching nearly 3.16%.

Technically, things also look somewhat bleak. All of the major U.S. indices are now trading below their 200-day moving averages, Briefing.com pointed out. Some of the big-name stocks that helped carry the market most of the year, including Amazon (AMZN) and Alphabet (GOOG, GOOGL), are in correction, down 10% or more from their highs. 

All 11 SPX sectors dropped yesterday. Volatility as measured by the VIX is at its highest level since February. The big banks all suffered steep losses ahead of their earnings reports.

On a positive note, Delta (DAL) shares posted gains Thursday after the airline seemed to impress analysts with results that beat Wall Street’s estimates. The company is doing a good job of offsetting higher fuel costs with cost-cutting elsewhere, one analyst noted. On the negative side, DJIA component Walgreen’s Boots Alliance (WBA) fell 2% Wednesday after missing analysts’ average top-line estimate. 

As noted yesterday, now isn’t necessarily a good time for investors to go “all in” or “all out” of the market. Consider letting things settle down, or if you do venture in, consider only trading partial increments, even if that might raise trading costs. The market is moving quickly now, and emotions are running high. Let’s see what the next few weeks of earnings bring, and where rates go next.

FIGURE 1: : Is Gold Regaining Some Swagger? After failing to show much response early in this week’s stock sell-off, gold seemed to get the message Thursday and jumped to its highest level since July. At the same time, 10-year Treasury note yields (purple line), pulled back a little from recent highs as it looked like some investors began getting more interested in that market amid this week’s nearly 6% decline in stock prices. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Silver Lining? Every cloud supposedly has one, and that’s arguably the case with this week’s big market crunch. First of all, the the big slump could make stocks look a bit cheaper. The forward price-to-earnings ratio for the S&P 500 (SPX) is now just under 17, according to some analyst estimates. That’s off a bit from recent highs and might be getting closer to more “normal” levels near the long-term average of around 15. Assuming Q3 earnings actually do rise 20%, as many analysts expect, and stocks don’t recover much from current levels right away, that could make stocks start to appear less pricey. On the other hand, if earnings fail to meet expectations, the price-to-earnings multiple might not move too much. 

Another possible benefit of stock market losses: Lower crude oil prices. The crude market, which had reached the mid-$70’s for U.S. oil earlier this week, dipped below $71 a barrel by late Thursday, in part on pressure from the crumbling stock market but also in reaction to a massive U.S. supply build last week and forecasts for lower demand. If crude stays under pressure, it could help ease some of the profit concerns weighing on transport stocks.

Here Come Earnings: With bank earnings starting the new Q3 earnings season off with a bang today, analysts still see profitable times ahead for major U.S. corporations. At this point, S&P 500 earnings are expected to rise 21.3% in Q3 and 21.9% for all of 2018, according to research firm CFRA. And don’t be all that surprised if the estimate rises in coming weeks. Q2 marked the 26th consecutive quarter in which actual earnings growth exceeded end-of-quarter estimates, CFRA noted. For this quarter, earnings are projected to be up for 10 of 11 sectors, with above-market growth coming from the energy, financials, information technology and materials sectors. The weakest advances are expected for consumer staples, real estate and utilities. While earnings season isn’t likely to be a cure-all for what’s ailing the markets, it certainly could help take some attention away from forces outside of companies’ control, including tariffs and energy prices.

Attention Grabbers: When a famous (and deep-pocketed) investor steps in to buy shares of a company—which we saw with Starbucks (SBUX) earlier this week—some investors might feel tempted to follow suit. After all, if that big name bought it, they must have had a reason. Not so fast. While it certainly could make you feel better about a stock you already hold if a big name steps in, it isn’t necessarily a buy signal or something you can necessarily speculate on. As with any decision about the markets, it’s important to see how a new purchase fits in with your long-term strategy and current portfolio, and not to buy something on a whim because you see a news item. That’s not to say anything bad about SBUX, by the way. In fact, what’s arguably more interesting than the recent headlines about the famous investor taking a stake is the way companies like SBUX, Dunkin Brands (DNKN) and Domino’s (DPZ) have been using phone and mobile technology to pull people into loyalty programs. The three companies have been first movers in this, tying in tech to their businesses and making headway. This could potentially be supportive in the long-term. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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