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All Eyes on Washington: Inauguration and What Comes Next Both In Focus

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January 19, 2017

(Thursday Market Open) Earnings reports, speeches by Fed Chair Janet Yellen, and economic data are starting to take a backseat to a big event planned in Washington, D.C., tomorrow.

Let’s face it: Friday’s inauguration of Donald Trump as the 45th President is the underlying theme of this week’s market, though it’s somewhat difficult to quantify any immediate effect it may have on stocks and bonds as we transition from candidate promises to office holder implications. Currencies may already be feeling the Twitter impact, however, as Trump made some remarks about the dollar earlier this week that helped pressure the currency and seems to have spooked some overseas markets, particularly Japan’s Nikkei.

Market participants have heard many of the incoming administration’s plans, but there’s hunger for more information on how those plans might be implemented. The ongoing cabinet hearings, including that of Treasury nominee Steven Mnuchin, could be in the limelight as well.

Volatility spiked on Wednesday and it wouldn’t be too surprising to see VIX continue to show strength, in part because the market remains on tenterhooks awaiting more detail on the new president’s economic strategies. Perhaps we’ll hear more on Friday when he takes office. VIX remained above 12 early Thursday; higher than recent readings but still rather low historically.

Overseas, the Nikkei continued its recovery from Tuesday’s slide, and the European Central Bank (ECB) left rates and its bond-buying program unchanged. The ECB decision was as analysts expected, but the wildcard is what ECB President Mario Draghi might say in his press conference. In particular, it could be wise to listen to any comments he has on inflation, considering European inflation has started to perk up, causing some to call for the ECB to raise rates.

Looking ahead to this afternoon, we have IBM (IBM) earnings, the first big tech company to step to the plate this quarter. The focus could be on the outlook for the company’s strategic imperatives, as well as overall revenue and profit trajectory in 2017 and beyond. American Express (AXP) also reports after the close, and General Electric (GE) is tomorrow morning. As we’ve said in the past, if you want to watch a stock that arguably represents the economy everywhere, it might be GE, simply because it’s in so many businesses in so many countries.

The earnings highlight yesterday was an impressive report from Netflix (NFLX), which posted earnings per share of $0.15, above Wall Street analysts’ expectations of $0.13. Subscribership surged by more than seven million during the quarter, ahead of the company’s own forecasts. Revenue was in line with expectations. Shares of NFLX leaped 8% in pre-market trading.

Fed Chair Janet Yellen sounded upbeat in a speech Wednesday, saying the economy is near maximum employment and inflation is moving toward the Fed’s goal, which traditionally has been 2%. She added that the Fed expects to raise rates “a few times a year” between now and 2019, according to media reports. It’s not over yet: Yellen speaks again tonight, though her remarks aren’t expected to be market moving.

The U.S. dollar showed some strength after Yellen’s speech, and 10-year bond yields climbed above 2.44% early Thursday, up from recent lows of below 2.35%. The futures market now predicts around a 70% chance of a Fed rate hike in June.

S&P 500

FIGURE 1: GOLD PANNING OUT

The S&P 500 Index (SPX), plotted here through Wednedsay on the TD Ameritrade thinkorswim® platform, has been pretty flat lately, but gold (purple line) staged a decent rally from post-election lows. A tweet by Trump this week about the dollar being too strong gave the precious metal another boost before it slipped a little on Thursday. Gold could stay in the limelight, particularly if the new administration continues to publicly discuss the dollar. Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

How’s the Consumer Doing? Last Friday’s reading on December retail sales seems to have raised some concerns about the consumer. In turn, that could raise concerns about consumer-oriented stock sectors. Though overall retail sales rose almost as much as analysts expected at 0.6%, much of the power in the report came from automobiles, gasoline, and online shopping. Once we subtract autos and gasoline, it wasn’t a very impressive number. The question is whether so-called “brick and mortar” stores might reflect those slightly disappointing economic data when they begin reporting results. None of the big department stores reports in the next week or two, however, and the consumer discretionary sector is slightly outpacing the S&P 500 Index (SPX) over the last three months.

Avoiding Complacency: The rally in stocks that began after the election brought equity indices to new all-time highs can make it easy to forget about the potential for possible market downturns, but investors might want to stay on their toes. “Since 1945, the S&P 500 fell into a meaningful decline about every seven-and-a-half months,” CFRA said in a research note. “So the advent of a pullback, correction or bear market should come as little surprise to investors.” Past isn’t necessarily prologue, but with the markets still near record highs, investors may find it prudent not to take an “all in” strategy at this point.

Oil Steps Back Toward Recent Lows: Crude oil has been trending lower this week, hurt in part by a strengthening dollar and word from OPEC of a year-over-year increase in world oil supplies. Prices are back to near their lowest levels of the year, below $52 a barrel. The weekly Energy Information Administration (EIA) U.S. stockpiles report comes out at 11 a.m. ET today, followed by Baker Hughes oil rig data tomorrow. Weakness in crude put pressure on the energy sector on Wednesday.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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