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Energy Burst: New Records for Stock Market As Retail Earnings Season Rolls On

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May 16, 2017

(Tuesday Market Open) Major indices start the day at or near record highs after a boost from the energy market, and more good news came Tuesday in the form of solid earnings from Home Depot (HD). The rest of the week is crammed with retail earnings, though more political excitement in Washington, D.C., remains a potential distraction. 

Home Depot (HD) shares gained in pre-market trading after the company reported better than expected results and projected firm guidance. Same-store sales rose 6% year over year, another sign perhaps that the booming U.S. housing market is paying dividends for companies that serve homeowners. Staples (SPLS) also reported early Tuesday and delivered earnings that met Wall Street expectations, though overall sales fell short.

It almost happened several times, but not until Monday did the S&P 500 Index (SPX) manage a close above 2400. Though arguably it’s just a number ending in zero, it also represents a symbolic accomplishment for the closely watched index and might signal investor faith in the market. Sometimes the first close above a big round number generates additional buying interest. Both the SPX and Nasdaq (COMP) set new record highs, and the Dow Jones Industrial Average ($DJI) is within spitting distance.

Energy shares helped drive the SPX higher Monday after an announcement that Saudi Arabia and Russia support the possible extension of OPEC’s oil production cut for an additional nine months. Whether OPEC can stay disciplined is the question, and even if it does, there’s no guarantee oil prices will rise. We’ve seen this movie before. U.S. oil production is up sharply from a year ago, and that’s been a real barrier to rallies in the futures market despite OPEC’s plans. Oil prices rose again early Tuesday and are now up nearly 10% from recent lows. A higher close today would be the fifth straight day of gains.

Other strong sectors to start the week included materials and financials. The financial group has been lagging other sectors lately amid signs of a possible flattening of the yield curve. It’s often said that the market has trouble putting on much of a rally without financials, so let’s see if Monday’s action was a one-day move or perhaps represents the sign of something brewing.

When it comes to moves, volatility isn’t among them. The VIX stayed well below 11 early Tuesday as markets remain in a narrow trading range, and many people continue to wring their hands amid concern that investors might be getting complacent. We’ll see if at some point we get an “event” that triggers volatility.

On the earnings front, we’re entering prime retail space, with Target (TGT) tomorrow and Wal-Mart (WMT) on Thursday. The big department stores disappointed for the most part last week, so we’ll see now if TGT and WMT were able to buck the trend. TGT shares have been under pressure this year, and its previous quarterly report, which came with a lower 2017 profit estimate, received a harsh reception from Wall Street.

Investors, like the rest of the country, continue to follow news out of Washington, where controversy still swirls. It’s been a whirlwind the last week, and that seems to distracting from progress on tax reform and health care legislation.

S&P 500

FIGURE 1: FAIT ACCOMPLI.

The S&P 500 Index (SPX) plotted through the end of Monday’s session on the thinkorswim® platform from TD Ameritrade, posted its first-ever close above the 2400 mark and is up more than 300 points from its pre-election low. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Chinese Fortunes: Signs from China’s economy continue to be less than stellar. April data showed downturns from March growth in three important categories. Industrial rose 6.5% year-over-year, versus 7.6% in March; fixed asset investment increased 8.9% year-over-year, versus 9.2% in March; and retail sales climbed 10.7%, versus 10.9% in March. These data followed lighter-than-expected trade growth numbers released earlier this month. Increased regulatory restraints might be one force putting pressure on China’s economy, according to Briefing.com. Chinese stocks are down more than 3% over the last month. 

European Tour: While Chinese stocks sink, European stocks climb, with the German DAX index and the French CAC 40 index both up more than 11% since Jan. 1, easily outpacing the S&P 500’s (SPX) performance. Some say European stocks are out-performing U.S. shares because Europe is earlier in its economic recovery cycle, meaning investors might believe there’s a better chance of future growth there than in the U.S. Signs show more investor money flowing into European stocks than into U.S. stocks over the past few weeks, as well.

Want Optimism? Investors often seem to go out of their way looking for possible thunderclouds behind every rainbow. A nice counterpoint was last week’s speech by Philadelphia Fed President Patrick Harker, who gave a really sunny view of the economy, as reported by news media. The labor market, he said, “is more or less at full health.” Unemployment could fall to 4.2% by the end of next year, and job growth could average around 200,000 a month the rest of this year. Harker and other Fed officials have recently hinted at two more rate hikes this year, pretty much in line with what the market sees, judging from Fed funds futures.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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