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New Record Ahead? March Toward All-Time Highs Eyed as Weekend Looms

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November 18, 2016

(Friday Market Open) A frenzied week is nearly over, leaving investors with a major question as the weekend approaches: Can stocks set a new record high today?

Futures trading early Friday pointed to a slightly lower open, but the S&P 500 Index (SPX) closed Thursday just about six points away from the all-time peak just above 2193 posted in mid-August. Other major indices are also very close to their all-time records. A slew of Fed speakers and leading indicators highlight today’s calendar.

Another theme continues to be the strong U.S. dollar, which surged to its highest levels in more than a decade earlier this week and remains strong early Friday vs. the yen and the euro. One thing to note is that dollar strength can sometimes lead to earnings questions, especially for companies that rely heavily on exports. We’ll see if that starts to be a concern or not, but the continued weakness in bonds has led to higher yields, making it tough for the dollar to slow down.

Ten-year Treasury yields traded at 2.27% early Friday, a little off the 16-month highs they posted Thursday. Meanwhile, odds for a December rate hike continued to gather steam after Fed Chair Janet Yellen hinted Thursday that a move could be coming. The futures market continues to price the chance of a December hike at above 90%.

After some less-than-stellar economic data earlier in the week, the numbers began to look better as the weekend approached, with Thursday’s reports showing October housing starts climbing 25% and weekly jobless claims falling to the lowest level since 1973. It’s also becoming more clear that Q3 earnings are on pace to rise year-over-year (see below), something not everyone expected going into reporting season.

Although economic data looked more positive, retail earnings on Friday came in somewhat mixed, as several companies reported, including Foot Locker (FL) and Gap (GPS). FL beat analysts’ consensus expectations on earnings and delivered revenue close to forecasts. GPS met expectations on earnings, but posted a drop in revenue. Shares of both companies fell in pre-market trading. More than two-thirds of retailers listed on the S&P 500 have reported earnings so far this reporting season. Of those that have reported, 59% have exceeded earnings estimates, while 32% have fallen short, TheStreet.com reported. 

The seesaw battle continues in crude oil, as rumors about a possible OPEC production freeze wax and wane. By late Thursday, there was growing doubt an agreement could be reached, and oil slumped, before rising slightly early Friday and holding above $45 a barrel. But check again later because you never know when things might change in this market.

S&P 500

FIGURE 1: IS TEST OF ALL-TIME HIGH AHEAD?

The S&P 500 (SPX), plotted through Thursday on the TD Ameritrade thinkorswim® platform, tore through resistance in the 2180 area, which some technicians think sets the market up for a test of the all-time high just above 2193. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Where Do Rates Go After December? Chances of a December hike appear pretty much baked in, but it could be interesting to see how the market prices the odds of future hikes once we get past next month’s Fed meeting, and also to see how quickly the new president is able to push his proposed infrastructure spending and tax cuts through Congress. Some economists have said these proposals could invigorate growth, and a galloping economy could presumably raise chances for more rate hikes to help prevent inflation. Inflation appears tame for now, with core inflation growth at 2.1% over the last year.

Earnings Keep Rising: Q3 2016 S&P 500 EPS are now expected to have risen nearly 4%, vs. an early-in-the-quarter estimate for a 1.5% decline, according to S&P Global. And the research firm now projects full-year 2017 EPS growth at around 12%, compared to a flat 2016. However, there would have been earnings growth this year without the weight of the slumping energy sector. With Q3 earnings season basically over, the big leaders are financials, materials, and utilities. Energy and telecom services bring up the rear, with both sectors posting Q3 earnings losses.

Economic Growth Seen At 2-Year Peak: U.S. economic growth could hit two-year highs, according to the Atlanta Fed’s GDPNow Forecast, which predicts Q4 Gross Domestic Product (GDP) of 3.6%. That would be the best quarter since Q3 2014, and is up from the previous 3.3% estimate. What’s propelling GDP higher? “The forecast of fourth-quarter real residential investment growth increased from 4.5 percent to 10.8 percent after this morning’s new residential construction report from the U.S. Census Bureau,” the Atlanta Fed said Thursday.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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