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Market Update

Volatility Spikes as Stocks Fall To Near 4-Month Low: Fed, Facebook on Tap

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November 2, 2016

(Wednesday Market Open) There’s intrigue galore going into World Series Game Seven tonight, but the conclusion of today’s Fed meeting could hardly bring less anticipation.

In fact, it’s difficult to remember a Fed meeting in recent history as unexciting as this one, where the probability of a rate rise is a whopping 8%, according to the futures market. We’ll be back here later today after the meeting concludes with additional analysis. Investors may want to keep an eye on things just to see if the Fed has anything interesting to say about the economy that might provide clues going into next month’s meeting. Chances for a rate hike then are more than 70%, futures prices indicate.

Those seeking drama today have some choices. They can watch to see if the S&P 500 (SPX) has enough vigor to break its recent losing streak, which on Tuesday took the index down to levels not seen since mid-July. In pre-market trading, SPX futures were down fractionally.

As stocks stumbled, volatility soared, with the CBOE’s VIX index recently trading above $18, the highest since mid-September (see chart below). It's as though the market has woken up this week to the fact that we are in the midst of a highly contested presidential and congressional Election.  The VIX is up over 40% in eight calendar days.  However, it’s still short of $20, the level where concern historically kicks into gear. It’s also not far from levels seen going into the 2012 presidential election.

As next Tuesday’s election approaches, many investors seem to be taking protection in safety assets, including bonds and gold. The yield on 10-year Treasuries fell back below 1.8% early Wednesday, down from this week’s high of 1.87% and the lowest since last Wednesday. Gold has sprung to life the last few days, and it briefly popped above $1,300 in early trading Wednesday.

If anyone thought crude oil might rush to the stock market’s rescue, it hasn’t happened yet this week. U.S. oil futures fell to new one-month lows below $46 a barrel early Wednesday and closed in on technical support at around the $45 mark amid reports of over-supply. The question is whether crude can hold $46 on the close. The American Petroleum Institute (API) reported late Tuesday that U.S. crude stocks rose by a hefty 9.3 million barrels in the last week, compared to around 1 million barrels that analysts polled by Reuters had expected. Official government data are due later today. Last week, the government’s report showed a small drop in stockpiles despite the API reporting a rise, so we’ll see if there’s a repeat of that discrepancy.

Earnings are far from over, with Facebook (FB) due after the close today. The company is expected to report a 70% increase in earnings thanks to strong sales and advertising growth, Marketwatch said, quoting analysts. Earnings per share are projected at 97 cents, compared with 57 cents a year ago, according to Briefing.com.

And on the economic front, private companies created 147,000 jobs last month, compared with analyst expectations for 165,000, ADP said early Wednesday. That’s the smallest increase since May. The official jobs report from the government is due Friday morning (see below). Factory orders data from the government are on the schedule tomorrow morning.

S&P 500

FIGURE 1: STOCKS CRUNCHED AS VOLATILITY SOARS.

The S&P 500 (SPX), plotted through Tuesday on the TD Ameritrade thinkorswim® platform, ., is down near four-month lows this week as pre-election nerves grip the market. That anxiety is reflected in the VIX volatility index, represented by the purple line, which has soared in recent days. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Getting Ready for Friday Jobs Data: Friday is jobs day, and estimates are coming in a bit higher than the 156,000 reported in September, according to Briefing.com. Consensus among analysts now is for job growth of 175,000 in October, with hourly earnings growth of 0.3% beating the 0.2% recorded in September. Unemployment, right at 5% in September, is expected to tick down a notch to 4.9%, Briefing.com said. The hourly earnings figure might be a good metric to watch, because wage growth has been tracking well above the Fed’s 2% inflation target. Wages and salaries rose 2.4% over the last year, the Bureau of Labor Statistics said last week. If job growth comes in near the consensus estimate, it would be at just about the 2016 monthly average of 177,000. This year’s job gains have been well below the full-year 2015 average of 229,000.

Q4 GDP Growth Estimate Trimmed: Last Friday brought investors the government’s estimate for Q3 gross domestic product (GDP) growth, and it was a better than expected 2.9%. It’s a long time until anyone gets an official estimate on Q4 GDP, but with one month down and two to go, the engines seem to be running slightly cooler, with growth expected at around 2.3%, the Atlanta Fed said Tuesday. That was down from its previous estimate of 2.7%. The Atlanta Fed pinned its lower forecast on a couple of economic factors. “After this morning's Manufacturing ISM Report from the Institute of Supply Management, the forecasts of the fourth-quarter growth rates of real consumer spending and real nonresidential equipment investment declined from 2.4 percent to 2.1 percent and 4.3 percent to 2.7 percent, respectively,” the Atlanta Fed said. Keep watching, as the Atlanta Fed updates its estimates regularly.

Earnings Season Goes to China: Chinese e-commerce giant Alibaba (BABA) reported earnings and revenue early Wednesday that both topped analyst expectations. Earnings per share reached 79 cents, compared with expectations for 70 cents. This comes after a somewhat disappointing earnings report from the leading U.S. e-retailer, Amazon.com (AMZN). As investors examine BABA’s results, they may want to keep an eye on the company’s expansion progress and its cloud computing business, which has been a big revenue driver in recent quarters. For more insight into giant U.S. retailers, we have to wait until the week of Nov. 14, when Wal-Mart (WMT), Home Depot (HD), Lowes (LOW), and Target (TGT) all are scheduled to report.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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