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Market Update

Move Over Fed, It’s Time To Debate: Market Focus May Shift Toward Election

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September 26, 2016

(Monday Pre-Market) The Fed meeting is over and earnings are still well ahead, meaning the spotlight this coming week may shine on politics as the U.S. election draws nearer.

Monday night’s scheduled Presidential debate between Democratic nominee Hillary Clinton and Republican nominee Donald Trump could draw some investor attention, though huge market moves aren’t likely unless there’s some sort of unexpected and dramatic development. It might be interesting to keep an eye on how stock futures behave as the candidates debate issues, as the futures market can often give a real-time reaction to what happens on stage. Remember also that volatility sometimes gets a shot of adrenalin during the weeks before a major election, so keep those seatbelts fastened as voting gets closer.

The coming days also bring a host of economic data, but none of the real big reports that could potentially move markets dramatically, like employment or retail sales. Investors will get a look Thursday at the government’s third estimate for Q2 Gross Domestic Product (GDP), but that’s a backward looking indicator. Other reports to watch include new home sales on Monday, consumer confidence on Tuesday, durable orders on Wednesday, and PCE prices on Friday, an indicator said to be closely watched by the Fed.

There aren’t any Fed meetings to prepare for until early November, though the futures market doesn’t predict much chance of a rate rise at that time, right before the election. As of Friday, the CME Group’s Fed funds futures market put the odds for a November rate increase at around 12%, but it’s in December when things get interesting, with futures putting the chance for a rate hike then at about 58%.

The government’s GDP figure can sometimes play a part in determining the Fed’s strategy, so it’s worth it to watch on Thursday for any changes from the previous 1.1% growth estimate for Q2. For the current Q3, which is rapidly approaching its end, the Atlanta Fed predicts 2.9% GDP growth, down from its previous estimate of 3%. The Atlanta Fed said the decrease was related to the Consumer Price Index (CPI) numbers released earlier this month, which showed prices rising more than expected.

On Friday, selling that appeared based in part on weak oil and profit taking crept into the market after two days of big gains that saw record highs for the Nasdaq and positive returns in every sector of the S&P 500 Index (SPX). How much of this strength is left in the market remains to be seen, but it’s worth noting, as we did on Friday, that the Fed and Bank of Japan’s recent actions had the effect of flattening the yield curve. That could have the effect of intensifying investors' search for yield in other places, and stocks are one area they might be looking. The U.S. 10-year Treasury yield was down Friday at 1.62%, while average yield on SPX stocks held just above 2%. High-yield sectors like utilities and real estate were among those gaining strongly last week, perhaps a sign that investors are looking to park more of their money in dividend-paying stocks. 

Though it’s often said that Presidential elections can bring volatility, there’s not much evidence of that yet this year. The VIX volatility index, which hit 20 earlier this month partly in anticipation of the Fed meeting, slid below 12 for part of the day Friday, back toward summer lows. And from a seasonal perspective, it’s been 10 years since VIX levels were this low in late September, back before the Great Recession.

S&P 500

FIGURE 1: PROFIT TAKING?

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim® platform, fell back Friday on what appeared to be some profit taking after testing 2177 resistance on Thursday. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Start Preparing for Q3 Earnings: It’s not too early to begin getting ready for Q3 earnings, with the first major companies due to report starting just about two weeks from now. In Q2, S&P 500 earnings fell 1.8%, which doesn’t sound good, but was above expectations. It would have been far better without the energy sector’s 86.1% earnings decline. Energy earnings are starting to lap themselves, meaning the comparisons get a bit easier from here on, and energy sector earnings are expected to decline “just” about 65% in Q3, according to S&P Capital IQ. That could help overall S&P 500 earnings, but not enough to prevent a fifth-consecutive quarter in the red, S&P Capital said. The firm predicts a 0.7% decline in Q3 S&P 500 earnings. But without energy, earnings for Q3 would be up 2.6%, S&P Capital believes. Seven of 10 S&P sectors are projected to report EPS growth, led by materials (+8.8%), utilities (+5.0%), and health care (+4.2%). And remember, pre-earnings predictions have tended to be too conservative the last couple of quarters, so there’s always the chance for a better-than-expected performance.

Brother, Can You Lend Me a Dollar? Though the Fed’s decision to keep rates unchanged injected some vigor into stocks last week, it weighed slightly on the U.S. dollar index, which traded below 95.50 on Friday after popping over 96 earlier in the week. The Fed’s continued easy money policy could keep putting pressure on the dollar, but the greenback is still roughly in the middle of its 52-week range between 91 and 100. If the dollar weakens much further, that would likely help the bigger multinational U.S. companies, some of which suffered earlier this year from dollar strength that limited their overseas sales. As earnings season gets underway, we’ll likely get a better picture from executives of how the currency situation may be affecting companies now. Information technology, automotive, and farm machinery companies tend to be among the best canaries in the coalmine when it comes to assessing currency impact.

Bucking the Trend: Though retail sales and jobs data haven’t really indicated the sort of strong consumer-driven economy seen during spring and summer, there is one economic indicator that may be pointing toward continued consumer strength: Oil.

U.S. crude oil stocks have fallen all month, though earlier drawdowns were related in part to weather issues such as a tropical storm that disrupted imports. However, the latest drop of more than 6 million barrels last week doesn’t seem related to any weather or production issues, analysts said. It may indeed be simply a sign of growing consumer demand, unusual during a time of year when the so-called U.S. “driving season” has ended. However, the oil futures market hasn’t really shown much of a reaction, continuing to pivot around $45 a barrel. That’s in part because supplies of 504 million barrels remain historically high, up 11% from a year ago and up 40% from two years ago, according to the Energy Information Administration (EIA). Even if drawdowns continue at 6 million barrels a week from now through the end of the year, a rather unlikely scenario considering seasonal factors, there would still be about 30 million barrels more in storage by the last week of December than the five-year average for that date, EIA data show.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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