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Excitement Ahead? China Summit Meeting, Fed Minutes, Jobs Data All Loom

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April 5, 2017

(Wednesday Market Open) It’s still a waiting game on Wall Street, as investors prepare for Thursday’s U.S./China summit meeting and seek guidance from Fed minutes later today. This week seems back loaded, with so much on tap in the coming few days after a quiet start.

Though the markets appear to have a stronger tone early today based on some employment data, there’s also an air of frustration as the administration and Congress continue to negotiate tax policy and Congress prepares for a two-week recess. The markets have been awaiting more direction on taxes for a long time, but with the recess scheduled, it could put policy talk on hold for a couple of weeks. That might be why there’s so much noise coming from Washington this week. People may be trying to get things done before going out of town. Still, tax proposals keep flying around and there doesn’t seem to be much in the way of direction.

The March Non-farm payrolls report is now just two days away, and estimates are starting to come in. Wall Street analysts’ consensus is for jobs growth of 180,000, which would be well below the 235,000 reported in February but still close to the average seen over the last few months. Analysts expect the unemployment rate to hold steady at 4.7%, according to Briefing.com, and wages to rise 0.3%, compared to a 0.2% rise in February.

There was a bit of news on the jobs front early Wednesday, as private payrolls rose 263,000 in March, according to ADP. That was better than Wall Street analysts had expected, though the February number got revised downward a bit. The payrolls number seemed to give the markets a jump-start, at least in pre-market trade.

Another important release comes this afternoon when the Fed issues the minutes from its March meeting, where it raised rates for the second time in four months. The minutes often provide some insight into the Fed’s thinking.

On the data front Tuesday, factory orders rose 1% in February, according to the Census Bureau. That was pretty close to Wall Street analysts’ consensus estimates. New orders for manufactured goods have increased in seven of the past eight months. Also, the U.S. trade deficit came down a little in February, the government reported.

Volatility took a big dive Tuesday, with the VIX falling back well under 12. It’s tested higher levels several times over the past few weeks but keeps ending up back below 12, a sign perhaps that investors don’t see a lot of rocky patches on the horizon. Markets have been trading in a tight range as people await the next bit of news.

Overseas, Asian markets rose moderately ahead of the Trump/Xi meeting. And crude oil made solid gains, rising more than 1% to well above $51 a barrel as the commodity continues to recover from last month’s sell-off. Today brings the weekly U.S. oil inventory report.

There’s also some news on the sports front, as Amazon (AMZN) won rights to live-stream Thursday night football. The NFL draft is coming up, baseball is starting, and basketball and hockey are headed into the playoffs, so there’s plenty of action in the world of professional sports, even if the markets are rather quiet.

Dow Jones Transport Average

FIGURE 1: WHAT'S NEXT FOR TRANSPORTS?

The Dow Jones Transportation Average ($DJT), tracked here through Tuesday on the TD Ameritrade thinkorswim® platform, has fallen well behind the S&P 500 Index (SPX), represented by the purple line, in terms of gains over the last year. Some see transports as a good proxy for the economy’s health. Source: Dow Jones & Company; Standard & Poor's. For illustrative purposes only. Past performance does not guarantee future results.    

Seems Like Old Times: Two major industrial stocks with a combined history of nearly 56 years as components of the Dow Jones Industrial Average ($DJI) delivered solid performances on Tuesday. Caterpillar (CAT) and Boeing (BA) helped give the DJIA a boost, with CAT rising after a positive report on the company by a major investment bank and BA rallying in part on news of a $3 billion deal with Iran's Aseman Airlines. The industrial sector is one of the laggards over the last month but has climbed over the last week. Meanwhile, the financial sector is by far the worst performer over the last month but also has gains over the past few days. Weakness in these two sectors had been seen as a possible sign that the so-called “Trump Bump” might be over, so it could be interesting to watch if this slight revival continues.

Transports’ Skid Almost Over? Another laggard during the last 30 days is the Dow Jones Transportation Average ($DJT), down nearly 3.5% over the last month and flat over the last three months. The average, often seen as a proxy for U.S. economic strength, is up more than 16% from a year ago, but basically has been on a long plateau at high levels since roughly December. It also trails the gains of the much wider S&P 500 Index (SPX) since a year ago. Recently, the $DJT has shown some life, rallying back after posting a four-month low in late March. The average includes companies in the delivery, airlines, and rail industries, so keep an eye on it in coming weeks to see if it continues to revive. If it does, that could indicate improving consumer demand.

Can E Catch Up With P? A big question for the coming earnings season is whether company earnings can start to catch up with stock prices, which remain high from a historical perspective. Positive earnings growth is expected for Q1, but valuation levels are stretched. The S&P 500 is trading at a price/earnings (P/E) ratio 19.6 times trailing 12-month operating EPS, which is a 14% premium to its median since 1988, according to research firm CFRA. The research firm now predicts Q1 earnings to rise 9.9% year over year, which would be the third earnings advance in a row following four successive declines. Seven sectors are projected to see year-over-year increases, led by double-digit gains for financials, information technology and materials. But even a 9.9% rise in overall earnings would still mean a relatively high valuation for the S&P 500.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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