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What Fed Meeting? Earnings Party Helps Stocks Hit Highs As Fed Seen Holding Pat

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July 26, 2017

(Wednesday Market Open) Heat up the coffee and get ready for another day bursting with earnings news, accompanied by a Fed meeting for a bit of extra intrigue. Stocks are coming off another session of new record highs.

Normally, the Fed meeting’s conclusion this afternoon would grab headlines. However, with the futures market showing little or no chance of a rate hike, and no press conference scheduled, it’s looking like more of an after-thought. In fact we have to go out to December to get more than a 50% probability of a rate hike, according to Fed funds futures. The Fed statement after the meeting is more likely to be the focus (see below), and could provide insight into the Fed’s economic expectations for the rest of the year.

That leaves us with earnings, and there’s plenty to go around. Facebook (FB) reports after the close today, and investors might want to consider taking a close look at the company’s advertising revenue. Before then, this morning brings fresh earnings from a long lineup of big companies, including Baxter (BAX), CocaCola (KO), Ford (F), and Boeing (BA). Looking at the numbers out so far, most of the major companies are posting earnings wins, and that helps explain why all three major indices hit new record highs on Tuesday.

The Dow Jones Industrial Average ($DJI) scampered to a 100-point gain Tuesday, but remember that the DJIA is far from representative of the stock market as a whole, and got a big boost from bellwethers Caterpillar (CAT) and McDonald’s (MCD). Both those companies reported strong earnings and shares rallied sharply. The broader S&P 500 (SPX) also cruised to a new record high Tuesday, but gained less than 0.3%, compared with a nearly 0.5% gain for the DJIA.

While earnings drove much of yesterday’s gains, data also played a role. The consumer confidence number scored a big win, posting its second highest reading since 2000. Consumer confidence is one of those “soft numbers” some analysts talk about, but it’s important in its own right as a marker of sentiment. If retail sales or durable goods start to pick up steam, we might look back at rising consumer confidence as one of the reasons.

From a sector standpoint, telecom performed in line with the overall SPX Tuesday, but health care got slapped around despite the Senate voting to move forward with future votes on health reform. Lack of clarity around the legislation means there’s still no real sense of what it might ultimately mean for key companies like health insurers, and it looks like investors are taking a cautious approach. Health care sector stocks have outperformed the SPX over the last three months, but trail it since a month ago.

Oil is on the comeback, bouncing sharply from last week’s lows amid talk of Saudi Arabia potentially cutting exports and reports in the media about a possible large draw last week in U.S. stockpiles. Stay tuned for the government’s weekly supply numbers later today. From a technical standpoint, it looks like oil’s inability to test support at $44 a barrel last week has turned it around for a possible test of $50. Oil moved above $48 early Wednesday, and the energy sector has been drawing some power from oil’s rally.

Bond prices, meanwhile, headed south Tuesday, sending 10-year yields back up to well above the 2.3% mark. However, 2.4% has represented pretty strong technical resistance, so let’s see what happens if the yield starts heading toward that level. A rise in yields would likely be seen as bullish for the financial sector, but might cause more misery for telecom.

Overseas, European and Asian markets posted solid gains earlier Wednesday, while the U.S. dollar moved higher against the euro and yen.

On the economic calendar, be on the watch today for new home sales, followed by durable goods early tomorrow.

VIX

FIGURE 1: IF THEY GO LOW, WE'LL GO HIGH.

The VIX fell to all-time intra-day lows Tuesday even as the S&P 500 (SPX), the purple line on the chart, posted new all-time highs. VIX, the market’s most closely followed volatility indicator, bottomed out at just above 9, eclipsing the previous historic intra-day low posted in late 1993, before closing at 9.43. The all-time closing low is 9.31, a mark set on Dec. 22, 1993, during President Bill Clinton’s first term. Data sources: CBOE, Standard & Poor’s. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Don’t Sleep Through the Fed: Since a rate hike doesn’t appear to be in the cards, and Fed Chair Janet Yellen just finished two days of public testimony to Congress two weeks ago, it’s fair to ask why investors should even care about this week’s Fed meeting, which concludes this afternoon with no press conference scheduled. Remember, no Fed meeting is ever a non-event, and there’s likely going to be something to glean from the Fed’s statement after the meeting ends Wednesday afternoon. This time, it might be more information on the Fed’s balance sheet plans, or possibly the Fed’s read on the most recent inflation numbers. One way to learn about the Fed’s stance might be to compare what today’s statement says to Yellen’s mid-July testimony to Congress and look for subtle changes in tone or language, especially on the inflation and growth sides of the equation.

Carry On Without Me: After leading markets upward for most of the year, the tech sector stepped back and let others take the baton Tuesday. While the market buzzed with an early rally, the info tech sector stood on the sidelines while sectors like materials, financials, and energy stepped up to the front of the parade. Big earnings wins from companies like Caterpillar (CAT), McDonald’s (MCD), and General Motors (GM) might explain part of the change in leadership, but there was also a negative reaction to Alphabet’s (GOOG) earnings, and perhaps a little trepidation heading into earnings today from Facebook (FB). Generally, the big tech earnings so far have been good, with both GOOG and Netflix (NFLX) beating Wall Street analysts’ expectations, but tech companies are also under the microscope. GOOG got beaten down Tuesday as some analysts expressed concern about rising costs, and others like FB, Apple (AAPL), and Amazon (AMZN) could face similar scrutiny. When you’re leading the pack, investors often hold you to very high standards. Profit taking, which appeared to constitute part of the GOOG selling Tuesday, is another factor that could come into play.

Back of the Pack: While the tech sector continues to easily lead all others in year-to-date percentage gains, we have a new last-place sector: Telecom. Until recently, energy had owned last place for the year, but telecom now brings up the rear, having fallen more than 15% so far this year vs. energy’s decline of around 14%. A highly competitive pricing environment is the big factor behind telecom’s woes, as several major companies struggle to undercut one another. There appears to be some new interest in the sector, however, because as Treasury bond yields continue to struggle, the high yields of some telecom companies like AT&T (T) and Verizon (VZ) send a beacon out to the market. That said, neither of those two stocks have really been lighting things up. Both are down over the last month.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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