Three Market Factors to Watch as Springtime Earnings Commences

Geopolitical tensions, a Congressional recess and the start of earnings season may set the tone for the market in the near term.

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When T.S. Eliot wrote that April is the “cruelest month” nearly a century ago, he wasn’t, we think, talking about the American stock market.

Still, investors and traders can surely relate–weird stuff does tend to happen this time of year, with the weather and other things.

As the first quarter gets smaller in our rear-view mirror, we’d be wise to size up what’s basically a three-headed animal in front of us, says JJ Kinahan, chief market strategist at TD Ameritrade. A trifecta of factors that may affect markets in the weeks ahead include:

1. Aftermath of the U.S. missile strikes in Syria last week;

2. U.S. House and Senate on spring recess April 10-21;

3. First-quarter U.S. earnings season (underway this week).

Head #1: Geopolitics

“We’re at a really interesting time for the market,” Kinahan said, citing the U.S. missile strikes in Syria in particular as the sort of sudden, geopolitical event that seizes headlines away from the more routine market matters.

Could such a U.S. military action foster a renewed sense of unity, cooperation and shared goals, in Washington, D.C., and elsewhere, Kinahan wondered?

Time will tell. For now, market impact from the strikes has been relatively muted. Syria is a bit player in global oil production (ranking No. 64 last year at 33,000 barrels a day, according to U.S. government data).

Still, flare-ups in the Middle East tend to get traders’ attention. Benchmark U.S. crude oil futures spiked higher early April 7 in the few hours after the strikes, before pulling back. Early this week, crude futures crept above $53 a barrel, the highest levels since early March.

Head #2: Congress Goes Away (Sort Of)

The next of the three factors is characterized more by an absence of “news” – or, more precisely, a temporary respite from the minute-by-minute, blow-by-blow generated by the pundits and politicians on Capitol Hill.

“We’ll get a break from all the policy talk for a few weeks,” Kinahan said.

What will fill in the void? As Senators and representatives return to their home states, it bears watching and listening to what might come out of “town hall” meetings with constituents, and what they bring back to D.C. with them. “Will we see a change of attitude and sense of cooperation?” Kinahan said.

With health care legislation sidelined for now, progress on potential tax reform should be squarely on investors’ radar, said Sam Stovall, chief investment strategist at CFRA.

If Congress fails to make headway on tax reform, “Trump ‘hype’ should turn to ‘gripe,’ and make stocks vulnerable to the oft-projected pullback or correction,” Stovall said.

Head #3: Earnings Hope Springs Eternal?

In first three months of 2017, U.S. corporations generated reasonably broad-based profits amid the continuing economic expansion, CFRA’s Stovall said.

Operating earnings per share for Standard & Poor’s 500 companies rose 9.9 percent during the quarter, compared to the same period in 2016, according to CFRA. That would be the third consecutive year-over-year increase in quarterly profit.

Seven out 11 industry sectors tracked by CFRA posted quarterly earnings growth, led by information technology (16.5 percent), financials (16.1 percent) and materials (13.5 percent).

Kinahan said he’s particularly focused on watching banks and other financial companies, because that sector often sets the tone for the overall earnings season and serves as a barometer for broader economic sentiment.

“There was a lot of optimism” among consumers and businesses after the U.S. election, Kinahan said. “We will see if they’re still confident.”

As the earnings season unfolds, pay close attention to CEO comments on earnings calls for clues on their outlook for the rest of the year.

Bonus Heads: Eye on Gold, T-Bonds & the VIX

The performance of three critical market indicators might also bear watching: Gold prices, Treasury bond prices and the CBOE Volatility Index, or VIX. All three indicators moving in the same direction, higher or lower, may convey growing confidence, or skittishness.

Indeed, volatility perked up recently, with the VIX on Wednesday rising above 16, to its highest level since the November election. 

Whatever the seasons bring, it’s important to remember things can and will change quickly, but you must keep your wits and make rational, thoughtful decisions, Kinahan said.

“You can’t get too emotional,” he said. “Don’t be crazy-reactionary. Think things through and let the dust settle before making decisions.”

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