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Market Update

No Summer Doldrums This Year: Jobs Report, Earnings Loom After Brexit Volatility

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July 5, 2016

(Tuesday Pre-Market) After a long holiday weekend filled with hot dogs and fireworks, investors return this coming week in anticipation of a key jobs report and the start of earnings season.

It’s a short week, but an important one, namely because of Friday’s monthly jobs report. It’s hard to forget the surprise of last month’s report, which showed just 38,000 jobs created in May, and revised downward job growth for previous months. But remember the context: A strike by Verizon (VZ) workers in May likely contributed to the anemic data, and in the past, VZ strikes have been followed by strong job creation the next month.

It’s also worth noting that many signs point to the U.S. economy doing pretty well since the last jobs report, as Fed Vice Chairman Stanley Fischer noted in an interview on Friday. Most of the recent housing data were strong; retail sales were strong; weekly unemployment claims have been low, and consumer spending and confidence seem firm. On Friday, investors got some additional data, with The Institute for Supply Management reporting that its national factory index rose to 53.2 in June from 51.3 in May. A reading above 50 indicates expansion in the manufacturing sector. However, a construction spending report the same day showed slippage for the second-straight month.

Whether the recent strong data point toward better job gains remains to be seen. The corellation isn’t always exact.

With all that said, the jobs report may not hold the same weight it did a month ago, when many looked to it for any signs that might point toward a possible Fed rate hike. The futures markets have basically ruled out chances for a rate hike any time soon. The first chance of a hike is in December, the futures market forecasts. Futures have even factored in a tiny chance of a rate ease in coming months.

With the Q2 behind, it’s time to start thinking about what sort of growth the economy saw during the quarter. The Atlanta Fed has been pretty steady in its recent predictions, with its gross domestic product (GDP) estimate at 2.6% as of Friday. The Atlanta Fed has kept its estimate in the 2.5% to 3% range for several weeks now.

GDP growth and earnings often go hand in hand, and starting the week of July 11, earnings season kicks in. The results may not look too stellar, with S&P Global Market Intelligence predicting a 4.9% drop in S&P 500 earnings for Q2. That’s an improvement from the 6.8% drop in Q1 earnings, and the research firm does expect just a 0.5% earnings loss in Q3. But that can’t hide the fact that the biggest U.S. companies are experiencing a long-term drop in profits.

And the weak earnings forecast comes at a time when the stock market remains somewhat highly valued. The current price-to-earnings ratio isn’t historically high, but it is above average, which may reflect in part a move by some investors to seek yield in dividend stocks due to bond yields remaining so low.

Speaking of yields, U.S. Treasury bond yields continue to astonish, touching record low levels Friday after Bank of England Governor Mark Carney said more stimulus is needed for Britain’s economy this summer. U.S. 10-year Treasury yields took out longstanding technical support at the 1.4% level before coming back slightly. These low rates make borrowing easier, but also speak to widespread concerns about the possibility of world economic weakness, particularly in the wake of Brexit.

The S&P 500 Index (SPX) pushed above 2100 at times during Friday’s session, and technical analysts point toward 2115 as a resistance area. Last week’s sharp recovery rally seemed partly linked to anticipation of dovish interest rate policy, and also may have reflected end-of-quarter “window dressing” by fund managers. Watch for possible pressure early in the week now that the quarter is over.

Also keep an eye on VIX futures, which fell sharply to below 15 during parts of Friday’s session, down from 25 at the height of the Brexit panic. With earnings and jobs ahead, volatility bears watching.

S&P 500

FIGURE 1: MANY HAPPY RETURNS.

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim platform, returned to levels above 2100 for the first time since Brexit. Resistance is now seen at the 2115 level. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Despite Everything, Markets Posted 1H Gains: Thursday’s close marked the halfway point for the year, and the S&P 500 Index (SPX) finished the half year up 2.6% at just a hair under 2100. Considering the market’s initial flop to a mid-February low of 1810, and then another slide below 2000 last week in the wake of Brexit, it seems somewhat surprising to hear the market is up for the year, but that’s the story when you take out all the sharp  fluctuations since Dec. 31. The bond market’s recent performance, along with the coming U.S. election, would seem to point toward a more range-bound type trade moving forward. 

Don’t Write Off Brexit, But U.S. Economic Data May Carry More Weight: Should investors remain concerned about possible Brexit implications? It’s never a good idea to count out chances for an impact, but on the other hand, investors may have over-reacted to the initial news, and it took a few days for clearer heads to prevail. Sometimes the pendulum swings too far, and the markets tend to react violently to unexpected events, which Brexit definitely was. St. Louis Fed President James Bullard summed it up well on Thursday when he noted that Brexit is a major event for Britain, but not so much for the U.S. economy. And on Friday, Fed Vice Chairman Stanley Fischer told CNBC that the Fed is taking a “wait and see” view on Brexit. Fischer added that the U.S. economy has done “pretty well” since the disappointing May jobs report, and that data remain more important to the U.S. outlook than Brexit.

Hey Buddy: Want to Buy a Car? If the answer is yes, it will cost about 2% more than a year ago, as U.S. new car prices in June averaged $33,652, according to data released Friday by Kelley Blue Book. That’s a $655 rise from a year ago and up $31 from the previous month. What’s driving these price gains? It’s probably those trucks and SUVs that seem to be everywhere now that gas prices have been weak for almost two years. “It is no surprise that strength in trucks and SUVs continue to drive up average transaction prices,” said Tim Fleming, analyst for Kelley Blue Book, in a press release. “In particular, mid-size trucks stand out as one of the strongest segments with pries up nearly 9% in June.” Mid-size truck sales are climbing, he said, because of their huge discount to full-size trucks. Prices for all domestic brands rose year over year, with General Motors showing the biggest increase. And even compact cars as a category now top $20,000 on average. Doesn’t seem so long since a Cadillac cost that much, but time does fly by.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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