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As Earnings Season Wanes, Worries About Bank Policy Back on Front Burner

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April 29, 2016

(NOTE TO READERS: JJ Kinahan is traveling on business today, so the following is a guest Market Update column written by Scott Connor, of the Trader Education group at TD Ameritrade, managing Swim Lessons trader educational programming, which can be accessed live beginning 10:30 a.m. CT each trading day from the Support/Chat function within the thinkorswim platform).

(Friday Market Open) With the bulk of earnings season fading in the rear-view mirror, interest rate policy is back on the front burner Friday and uncertainty is the key word. Uncertainty typically bodes ill for stock prices, and markets were down slightly in the early going.

Both the U.S. Fed and the Bank of Japan left rates unchanged this week, but there’s a debate raging about the long-term effect of negative interest rates in Japan and Europe, as well as how the Fed will play out its planned rate increases. Two famous investors, Carl Icahn and Warren Buffett, expounded on the rate situation in television interviews late this week, adding to the sense that this discussion may continue to dominate. Icahn talked about “a day of reckoning” for the stock market related in part to low interest rates, and though Buffett expressed optimism about stocks, he said he wasn’t sure what the long-term effect of low rates might be, calling Europe’s negative rates “uncharted territory.”

It’s the last trading day of the month, and the S&P 500 Index (SPX) is up a fraction for April but started Friday down nearly 2% from the monthly high mark set on April 20. Stocks posted a decent rally in the middle of the month, but slumped toward the end, pressured in part by disappointing earnings numbers, a falling U.S. dollar, weak gross domestic product (GDP) data, and concerns about overseas markets. The first quarter is expected to be the third quarter in a row of falling profits for U.S. companies, the longest stretch since the 2008/2009 financial crisis.

Still, there were glimmers of light late this week on the earnings front. Energy giant Exxon Mobile (XOM) beat estimates with its earnings report Friday before the open and the stock rose in pre-market trading. Earnings were down sharply from a year ago but better than expected, and revenue also came in above consensus. And Amazon (AMZN) earnings after the close Thursday blew away estimates, coming in at $1.07 per share vs. 58-cent estimates. The stock rose 12% in after-hours trading. Amgen (AMGN), a major biotech name, also beat estimates and raised guidance.

Commodities like oil and gold continue to strengthen, with oil at its highs for the year and gold hitting a seven-week high, but these rallies could well be a function of the weak dollar more than any fundamental issue. The dollar was sinking against both the euro and yen early Friday.

S&P 500

FIGURE 1: SUPPORT BREACHED

The S&P 500 (SPX), plotted here through the end of Thursday on the TD Ameritrade thinkorswim platform, closed right at 2075 support, and the next key level to the down side is 2050. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

No Help From GDP or BOJ: Thursday’s first estimate for Q1 U.S. gross domestic product (GDP) was an anemic 0.5, below 0.7% consensus. And if it weren’t for consumer spending on services and residential investment, the numbers would have been considerably worse. The weak data came after both the U.S. Federal Reserve and the Bank of Japan (BOJ) kept rates unchanged this week. The BOJ’s decision hurt markets early Thursday, but perhaps it shouldn’t be too surprising that BOJ backed off further stimulus and weakening the yen considering Japan hosts the Group of 7 (G7) next month and may want to avoid the appearance of being overly aggressive with currency policy or ‘instigating’ currency wars.

The Power of One Man: Not many investors can help sink a stock just by saying they no longer own it, but that appears to be exactly what billionaire Carl Icahn did Thursday when he told CNBC he no longer holds shares of Apple (AAPL) and no longer considers the company a “no brainer” investment. The stock, which had fallen sharply on Wednesday after disappointing earnings, dropped another 3% after Icahn’s comments. Though the famous investor told CNBC that he still considers Apple a “great company,” he sold his shares because he’s worried about Apple’s position in the China market. Apple’s revenue for the greater China segment fell 26% in Q1. Icahn at one point owned a little less than 1% of Apple’s shares. Apple closed at $94.83 on Thursday, its weakest settlement since Feb. 23, and is now down about 10% for the year. Shares fell more than 4% in 2015.

Other Techs Also Falter: Arguably, Icahn’s negative comments about Apple influenced other technology stocks as well, because when Apple dropped the weakness appeared to spread like a contagion in the last hour of the day with stocks like Microsoft (MSFT), Cisco (CSCO), IBM (IBM), and Alphabet (GOOG) all falling sharply. After the market close, the tech sector got an injection of good news with earnings beats from Amazon (AMZN), LinkedIn (LNKD) and Baidu (BIDU), but after all the carnage in the sector late Thursday, with the tech sector finishing down 1.4% on the day, will the strong post-close earnings results be enough to rally the market on Friday?

Good Trading,
Scott

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