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Market Update

Plenty to Chew On: Heart of Earnings Approaches Along with CPI, Fed Speakers

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October 17, 2016

(Monday Pre-Market) A heaping plate of earnings is on the way this coming week, accompanied by Fed speeches and a smattering of data. Investors looking for news aren’t likely to go hungry, and may actually suffer indigestion from an information overload.

It’s the heart of earnings season, and the coming week brings a full menu. Some of the key reports to watch include Bank of America (BAC) before the open Monday; IBM (IBM) after the close Monday; Netflix (NFLX) after the close Monday; Goldman Sachs (GS) before the open Tuesday, and Johnson & Johnson (JNJ) before the open Tuesday.

Mind you, all those reports come in the first two days of the week. There’s more after that, but to list them all here would take too long. Needless to say, investors might want to stay on their toes, especially anyone following the financial sector. Earnings on Friday from three of the big banking behemoths topped expectations, putting a charge into stocks, but whether the strength will last remains to be seen. One thing we have learned so far this earnings season, though we’re still near the start, is that revenue is king.

For instance, shares of JP Morgan (JPM) were rewarded for beating analysts’ expectations on revenue Friday even though the company’s profit slid compared to last year. So keep watching revenue numbers across sectors and get familiar with Wall Street’s consensus estimates.

Two other takeaways from Friday’s bank earnings: Wells Fargo (WFC) is in a battle to restore its reputation, but it did beat analyst expectations on revenue. Does that mean all is forgiven? Well, the bank is by no means out of the woods, as profit slipped in Q3, and WFC executives dealt with numerous questions from analysts on its conference call Friday about the recent fictitious accounts scandal. The other takeaway is some fundamental strength from JPM and Citibank (C), with fixed-income trading improving at JPM and trading revenue surpassing expectations at C.

Getting away from banks and earnings, there’s plenty of other stuff on investors’ plates next week, including a speech by Federal Reserve Vice Chairman Stanley Fischer on Monday afternoon, two speeches by New York Fed President William Dudley on Tuesday, the Consumer Price Index (CPI) on Tuesday morning, and leading economic indicators Thursday morning. It’s going to take lots of concentration and focus for investors to digest all this news as the week goes by. As the Fed speakers opine, investors need to watch Fed funds futures at the CME Group to see what the market forecasts as far as possible rate increases. Late last week, chances of a December rate hike rose above 65%, but chances for a November hike were below 10%, as that meeting occurs right before the U.S. election.

With chances for a rate hike at higher levels, bond yields have had a healthy rise lately. As of midday Friday, 10-year U.S. Treasury yields were at 1.76%. That may not seem high by historic standards, but it’s well above the levels we saw below 1.5% earlier this year. A technical resistance level in the 10-year yield is at about 1.903%.

Speaking of the election, volatility can often spike in these last few weeks heading up to voting day, so that’s another thing to watch. As of Friday, the CBOE Volatility Index (VIX) was at just over 16, well above recent lows near 12.

One other thing investors might monitor is the oil market, which reached one-year highs last week even though U.S. crude inventories rose for the first time in six weeks. OPEC’s plans to cut supplies have boosted crude futures by about 25% from summer lows, and the question is whether futures can get a foothold above $50 a barrel. That level has been a technical barrier in the past. The stock market has typically responded positively to stronger oil prices over the last few months, so let’s see if that trend continues.

S&P 500

FIGURE 1: SUMMER PEAK A LONG WAY BACK.

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim® platform, pulled back from big early gains. The 2128 level remained key from a technical perspective, and it’s now been more than two months since the SPX made a new all-time high.  Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Banks in Spotlight, But This Sector Won’t Fly Below Radar: Though bank earnings take center stage Monday with BAC, the airline sector also is in the middle of its key stretch of earnings reports, which took to the air late last week when Delta (DAL) reported, and goes into full throttle this coming week with United Continental (UAL) on Monday after the close and American Airlines (AAL) before Thursday’s open. Airlines have benefited from strong tailwinds over the past several years, with low oil prices, growing global demand, and industry consolidation helping some of the big carriers achieve record profits over the past year. But revenues have been declining at several of the major carriers in the first half of 2016, and the sector has slightly underperformed the broader market. Also, according to Federal Reserve CPI data, airline fares are at their lowest point since 2010. Delta’s Q3 earnings didn’t show any sign of a turn-around, with revenue slipping 5.6% year over year and a 6.8% decline in passenger revenue per available seat mile, an important fundamental indicator when looking at airline results. Both United Continental and American reported falling revenue in Q2. Can they recover from their stalls in Q3? Keep your seatbelt fastened.

Bundle Up; It’s Cold Out There! The U.S. might be headed for a cold winter, the Energy Information Administration (EIA) said last week, and that, along with higher energy prices, could make it more expensive to heat homes. Does this have a stock market implication? First, the EIA’s predictions: The EIA said it expects this coming winter to be about 13% colder than last, which was rather warm, but about 3% warmer than the 10-year average. At the same time, the price of nonelectric fuels like natural gas and fuel oil could be slightly higher than last year, and more along the lines of prices between 2010 and 2014, which amounts to about $635 for the average home using natural gas, about 22% higher than last winter. Can chilly investors find a way to profit from this icy scenario? The first thing that comes to mind is the energy sector, which is already up more than 15% year to date, making it by far the best-performing sector of 2016. Keep in mind, though, that energy has been a laggard compared to the broader market over the last decade, through periods of both high and low fuel prices. A bet on energy sector gains in cold weather isn’t always necessarily a slam dunk.

Presidential Election Hurting Confidence? The University of Michigan Index of Consumer Sentiment took a dive, falling to 87.9 in early October from 91.2 in September, and its chief economist cited the coming U.S. election as a factor. Expectations had been for a slight rise. The early October loss was concentrated among households with incomes below $75,000, whose confidence fell to its lowest level since August 2014. Middle and upper income confidence was nearly unchanged. “It is likely that the uncertainty surrounding the presidential election had a negative impact, especially among lower income consumers, and without that added uncertainty, the confidence measures may not have weakened,” said Richard Curtin, chief economist at the University of Michigan’s Surveys of Consumers, in a press release.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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