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Market Update

Major Market Benchmarks Open at Record Highs. Again. Can they Hold?

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February 21, 2017

(Tuesday Market Open) Another week of trading begins and talk of market expectations are ripe as all three major benchmarks opened at record levels again. If that holds throughout the day, it will make it eight out of nine days, and four straight weeks, that the markets are in positive territory.

Retail stocks appeared mostly on the upside amid a mixed bag of earnings results from some of the nation’s largest merchants. Wal-Mart (WMT), the world’s largest retailer, turned in Q4 earnings that outpaced expectations by a penny at $1.30 a share. Citing a robust online business, WMT said revenue ticked up 1% to $130.9 billion.

Home Depot (HD) reported a profit of $1.44 a share, well above projections of $1.34 a share on revenues of $1.74 billion as housing trends appear to be getting better. The do-it-yourself retailer also announced a $15 billion share buyback plan.

Meanwhile, Macy’s (M) managed to beat Wall Street’s per-share forecast with earnings at $2.02, above the $1.96 expected, though revenues fell 4% to $8.86 billion. Chief Executive Terry Lundgren said in the earnings release that “2016 was not the year we expected,” but noted that “significant progress” was made on key initiatives as the department-store retailer continues to struggle with balancing bricks-and-mortar sales and its online business.

Shares of all three retailers moved modestly higher ahead of the bell. A slew of U.S. retailers, both big and small, are slated to turn in their Q4 results this week. That might give us some insight on how consumers are spending their money.

Meanwhile, the VIX, the market’s closely watched so-called fear gauge that measures volatility based on 30-day futures contracts, has been sitting at an unusually low point of its lifetime range at 11.98. It has hovered at the 11 and 12 levels throughout the month but even dipped below 10 in early February. And that has some analysts wondering what has happened to volatility at a time when economic policy is still an uncertainty. We may find out in the coming weeks.

The markets might be reactive to the spate of economic news, beyond retail earnings results, that is on the docket for this week. Wednesday and Thursday are ripe with reports on housing, jobless claims and commodities. Then we end the week with new-home sales and a take on consumer sentiment, courtesy of the University of Michigan.

Also of interest Wednesday afternoon is the Federal Reserve’s release of the minutes of the Federal Open Market Committee meeting last month. Though the voting members stayed in lock step to keep interest rates untouched, the minutes might give us a better flavor of what their thoughts were and whether there was any hint of opposition.

The markets appear to be primed for a June rate hike, according to the CME Group’s FedWatch tool that also uses the 30-day futures prices to determine the likelihood of an interest-rate increase. The probability of a hike in March sits only at 22.1% today but shoots up to 74.8% in June and 74.1% in July. Maybe the minutes or the trio of Fed speakers out today will sway the numbers.

S&P 500

FIGURE 1: STEADY AS SHE GOES.

The S&P 500 Index (SPX), plotted here on the TD Ameritrade thinkorswim® platform, couldn't have found a flatter ground to end on Friday. Still, the index climbed 1.8% on the week, and logged its 10th straight week without moving 1% or more in a single trading day. Source: Standard & Poor’s, Nasdaq Stock Market. For illustrative purposes only. Past performance does not guarantee future results.

OIL AT $70 A BARREL? That’s the prediction for year end from Citigroup analysts amid the pledge by the Organization of Oil Producing Countries’ (OPEC), and non-OPEC countries including Russia, to cut oil production and reduce global stockpiles in the first six months of this year. So far, analysts say, there’s been 96% compliance on the pact, and at least one OPEC official said the group will push for full compliance, according to published reports. Crude was higher by 1.8% to $54.38 in the early going.  

Remember this about the price of oil in the last year: Despite expectations that it would rise, it has had trouble getting over that $56 a barrel hump. Stay tuned.

LOOKING AHEAD TO Q1 GDP: It’s still awhile before we see the government’s final projection for Q4 gross domestic product (GDP), but that doesn’t mean it’s not too soon to start thinking about how Q1 might turn out. The Atlanta Fed’s latest Q1 projection just rose to 2.4% from the previous 2.2%, according to its GDPNow report. Why the upward estimate? A jump in housing expectations.

“After this morning's new residential construction release from the U.S. Census Bureau, the forecast for first-quarter real residential investment growth increased from 3.9% to 7.8%,” the Atlanta Fed said Thursday. The next GDPNow update is scheduled for Monday, Feb. 27.

HERE’S WHAT ECONOMISTS THINK. They are in tandem with the Atlanta Fed, with expectations for growth to climb 2.4% this year and 2.5% next year, according to the Wall Street Journal’s latest survey of economists. On joblessness, they see the unemployment rate shrinking to 4.5% from its current level of 4.8% with the risk of a recession in the next year at only 15%.

What they fret about, however, is a trade war or “other form of damage to the U.S. economy from new trade restrictions,” according to 75% of those polled, the article said. Still on the worry list is a global economic slowdown that could ricochet to the U.S.

Here’s the good news: The share of economists who think there’s more upside risk to the economy than downside risk is still higher, albeit not by much. 

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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