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Market Update

Can Bank Earnings Keep Humming? Financial Sector Remains Key In Busy Week

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July 18, 2016

(Monday Pre-Market) Economic data slows quite a bit in the coming week from its recent frenzied pace, but that’s more than made up for by a heavy earnings docket.

The financial earnings season continues in full swing with Bank of America (BAC) reporting early Monday, followed by Goldman Sachs (GS) and Morgan Stanley (MS) on Tuesday and Wednesday mornings, respectively. So far, financial sector results have been resilient, with trading and loan volumes higher. JP Morgan (JPM) noted in its earnings call last week that the U.S. economy was improving as businesses and consumers turn to borrowing again. What’s more, Brexit, Britain’s vote to leave the European Union, gave a boost to trading activity. Did other banks also see these benefits, and will the next set of bank earnings set a positive tone for the rest of the market?

Investors may want to continue looking at bank earnings for what they say about consumer borrowing, because that’s a huge factor in the health of the economy. When people feel optimistic and secure in their jobs, they’re typically more likely to take on loans for big purchases like homes and cars. And it’s those big-ticket items that drive economic growth.

Certainly, the data late last week painted a picture of an economy that appears to be doing better than many had expected. A 0.6% rise in June retail sales came in above expectations, and industrial production rose 0.6% as well. Core consumer price index (CPI) growth of 0.2% was slightly below expectations, but core CPI was up 2.3% year over year. That’s slightly above the Fed’s 2% target.

Naturally, banks aren’t the only important sector with earnings next week. Other key names from a potpourri of industries reporting early in the week include IBM (IBM) after Monday’s close; Lockheed Martin (LMT), Johnson & Johnson (JNJ), and Philip Morris (PM) before Tuesday’s open, and Microsoft (MSFT) and United Continental (UAL) after Tuesday’s close.

As earnings season continues, it may become more evident whether the market’s recent optimism was indeed prescient. But in the meantime, investors do seem to be stepping away from the safety-first mentality they had a few weeks ago. For instance, the Japanese yen, considered a popular “safe” investment, retreated a bit against the dollar late in the week.

There is some economic data this coming week, but it’s pretty light compared to the cascade of numbers investors have absorbed the previous two weeks. The highlights are housing starts on Tuesday and existing home sales on Thursday. And of course, the July 26-27 Fed meeting is approaching quickly. The futures market now shows a very small possibility of a July rate hike, at just under 3%. The market is pricing in about a 14% chance of a September rate hike. Those aren’t high probabilities, but certainly up a good deal from the big fat zero forecasts seen earlier this month.

So the stock market heads into the latter part of July still near record highs, an amazing development if one considers the action immediately after the Brexit vote just a few weeks ago. But it also offers investors time to step back and reflect. Stocks have come a long way fast, and financial earnings seem to be saying that the economy is doing better than some may have expected. Investors have to be careful and be disciplined about when to invest. That is, think in partials. Going “all in” at all-time highs can be a dangerous predicament.

S&P 500

FIGURE 1: ARE MORE RECORD HIGHS AHEAD?

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim platform, set new record highs last week. Some analysts see resistance up near 2180, with support at 2134. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Consumer Sentiment Takes a Summer Dip: Consumers felt a bit less confident about the economy at the end of June, according to the University of Michigan’s final June Survey of Consumers, released Friday morning. It showed sentiment falling to 93.5, from 94.7 in May. That contrasted with some upbeat government data related to consumers, including a 0.6% rise in retail sales, released Friday. The big gain of 287,000 jobs reported by the government in June likely has investors looking to see if those new jobs get reflected in other data, like sentiment, but at least this time, it didn’t seem to pull through. “While no recession is anticipated, consumers increasingly expect a slower pace of economic growth in the year ahead,” said the survey’s chief economist, Richard Curtin, in a press release. “Importantly, the persistent strength in personal finances will keep the level of consumer spending at relatively high levels and continue to support an uninterrupted economic expansion.”

How Is Q2 GDP Shaping Up? Investors don’t get the government’s first read on Q2 gross domestic product (GDP) until July 29, but retail sales, the June jobs figure, strong June industrial production, early indications from financial sector earnings, and the stock market rally all seem to suggest a possibility for improvement over the sluggish 1.1% growth seen in Q1. As of midday Friday, the Atlanta Fed predicted just 2.3% GDP growth, still a relatively weak figure. If GDP comes in at that level, it may reflect slow job growth earlier this spring, as well as consumers pulling back a bit on big-ticket items like automobiles. There was a slight drop-off in sales of cars and trucks in the first two months of the quarter.

Yields Show Signs of Life; Is There an Equity Impact? After descending recently to all-time lows, yields on U.S. Treasury bonds started showing some life late in the week, with 10-year yields climbing to 1.58% by midday Friday, the highest in several weeks. And the German 10-year bund climbed out of negative territory for the first time in a while. There was some talk in the market on Friday that 10-year yields, which have risen from well below 1.4%, could be dragging on stock prices a bit. Remember, though, that back in March when stocks rallied so strongly from their winter lows, yields were at much higher levels than they are now, with the 10-year yield nearly touching 2% at one point. Also keep in mind that when investors start to sell Treasury bonds, it typically means they’re feeling more sanguine about putting their money into higher-risk investments, a sign of confidence.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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