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Who’s Up First? Financial Sector Leading Off As Q4 Earnings Season Begins

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January 9, 2017

(Monday Pre-Market) With the December jobs report in the rear-view mirror, it’s time to buckle our seatbelts for the start of earnings season. The financial sector will be the first major port of call.

The beginning of the week looks a bit slow on the earnings front. But it’s on Friday when things really come to a head, as three major banks are scheduled to report before the open. Bank of America (BAC), Wells Fargo (WFC) and JP Morgan (JPM) could put the financial industry back in the spotlight by the end of the week, and what their executives say not only about their own companies’ financial performance, but also about what they see in the months ahead, may give investors a better idea of what to expect from the economy.

Bank stocks are among the leaders since the election, boosted by a steep rise in interest rates, as well as hopes for stronger infrastructure spending, deregulation, and lower taxes under a new administration. As of the end of last week, the financial sector was up an impressive 21% over the last three months, but much of those gains came during an initial spurt in November. The sector is up just 3% in the last month, which isn’t too shabby but puts it behind some other sectors for that time period.

The big banks’ Q4 results may attract less attention than what their executives say on earnings conference calls this time around, though of course trading volume, as always, remains a fundamental factor to monitor. Many investors want to know what bank industry leaders expect from Washington in the coming months, and how much any new policies might affect the economy. Questions about rising yields, proposed rate raises and infrastructure spending are likely among investors' concerns.

It’s also worth tuning in to hear what bank executives say about the housing and automobile markets in the current environment of higher interest and mortgage rates. Do they anticipate demand for high-ticket items like cars and housing slowing if rates rise to a certain level?

While watching financial earnings, it’s important to also keep an eye on economic data this coming week. Key reports include the Producer Price Index (PPI) and retail sales, both due out Friday morning, the same morning the big banks report. That could well be an exciting day on Wall Street, depending on the data and earnings results. Keep in mind that the December jobs report showed wage growth up 2.9% year over year, which keeps it well ahead of core consumer price inflation, last seen at around 2.1% year over year. The PPI rose a relatively steep 0.4% in November, so the December number bears close watching for any signs of an incipient rise in prices.

Looking at the technical situation for the S&P 500 (SPX), we saw the index pierce key resistance at 2272 early Friday and subsequently post a new all-time high. The psychological mark of 2300 could be the next resistance point. Meanwhile, the Dow Jones Industrial Average (DJIA) came very close to the 20,000 mark on Friday, but couldn't quite make it (see below).

S&P 500

FIGURE 1: NEW ALL-TIME HIGH!

The S&P 500 Index (SPX), plotted here through late in the session Friday on the TD Ameritrade thinkorswim® platform, posted a new all-time high for the first time since mid-December. Psychological resistance rests at the big round 2300 level.  Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Bond Market Shows Some Life: In something of a turnaround, the struggling bond market has staged a bit of a comeback recently. On one day last week (Thursday), the 10-year yield fell 10 basis points to around 2.36%, a pretty steep drop, and well below highs seen last month around 2.6%. Debate in Washington, D.C., about repealing and replacing the Affordable Care Act may have played into the fledgling bond rally, Briefing.com, noted, saying that the focus on health care may have disappointed some market participants who had been hoping the first focus of the incoming administration would be on financial stimulus. Whatever the case, by midday Friday, bonds had given up some of their earlier gains, and yields were back above 2.4%.

Keep an Eye on Manufacturing Jobs as Year Continues: President-elect Trump campaigned in part bringing back high-quality manufacturing jobs to the U.S., but it might be a tough road ahead. Manufacturing employment fell by 63,000 positions in 2016, the U.S. Bureau of Labor Statistics said. Friday’s jobs report, however, showed employment edging up in manufacturing during December, with 17,000 jobs added, including a gain of 15,000 in the durable goods component. The December jobs report was the last full report for the Obama administration, which only is in office for part of this month. From Jan. 20 on, it will be interesting to see if new economic policies can light a fire under the manufacturing sector.

Oh So Close! It was around midday Friday that the DJIA made its closest approach yet to the 20,000 mark after weeks of nearing that level. At one point, the DJIA reached 19,999.63, a fraction of a point from the big round number. But it wasn’t to be, as the index pulled back and ended the day still seeking the elusive 20K. What will it take to get over the hump? Maybe some strong earnings action. We shall see.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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