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Market Update

Bumpy Trading Sessions Continue, but Benchmarks Point to October Advances

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October 31, 2017

(Tuesday Market Open) A day after the trio tumbled in tandem, the stock markets’ major benchmarks all appeared looking to start today’s session on the upside amid what could shake out to a busy day packed with earnings and hearings in Congress.

Despite the bumpiness of the markets in recent sessions, stocks still seem to be on track for their best annual showing since 2013 and are pointing toward an October closing to the upside. Also today, the Federal Reserve opens the first of its two-day meetings that might turn out more perfunctory than meaningful (see below).

In the early going, shares of Pfizer (PFE) and Aetna (AET) were moving ahead. Both reported earnings that beat Wall Street’s expectations, and PFE raised its full-year outlook. Archer Daniels Midland (AMD) shares slid more than 3% lower early on. The food-processing giant and crop trader missed analysts’ estimates that it blamed on margin weakness and a glut in the global grain market.

MasterCard’s quarterly profits and revenues outpaced Wall Street’s expectations, and shares were moving higher in the early going. Under Armour (UA) shares were tumbling in the early going. The athletic-wear retailer cut its full-year outlook again amid a sharp drop in Q3 earnings, though it was still profitable after two straight quarters of losses.

The tech-dominated Nasdaq Composite (COMP) started Monday’s session on the upside and looked like it could clock another closing high. Until it didn’t. Stocks across the broader markets appeared to take a turn to the downside not long after a Bloomberg story said that the House is considering phasing in the proposed 20% corporate tax rate cut gradually till 2020, rather than an immediate reduction.

The Dow Jones Industrials’ ($DJI) and the S&P 500 (SPX) struggled at the open, but were narrowing their losses until mid morning. At the finish, they both were off moderately, with the Dow closing lower by 0.36% and the SPX erasing 0.32% after seven of the 11 components retreated. Nasdaq lost some ground, too, but only 0.03% after shares of Apple (AAPL), a heavy weight on the index, tapped all-time highs, and finished 2.25% to the upside.

Facebook (FB) shares also found a fresh peak yesterday ahead of today’s earnings report, which might be tied to higher expectations for the stock after last week’s technology run up. The social-media site is expected to report after the bell, but FB executives, along with leaders from Alphabet (GOOG) and Twitter (TWTR) are on three separate agendas in Congress today, expecting to disclose new details about Russian manipulation on their platforms before and after the presidential elections last year, according to published reports. Remember that what happens in D.C. is mostly noise though we might hear some more details about the proposed tax plan.

Speaking of tiny market moves, MarketWatch reports that the Dow actually carved out fresh history on Monday in the form of pullbacks. It marked the 51st straight session without a 1% decline—that’s the longest period dating back to 1930.

Wall Street’s so-called fear gauge, the Volatility Index (VIX), which tracks 30-day options on the SPX as a measure of market instability expectations, moved up better than 7% yesterday but still has barely budged off the 10 line, settling in historically low levels at 10.5 (see chart). Early today it was off a tad.  

Double analyst downgrades of retailers Macy’s (M) and J.C. Penney (JCP) might have been partly responsible for the high single-digit drops of both stocks yesterday and an overall decline in the retail sector.

Crude oil prices continued to notch gains Monday, with Brent crossing above $60 a barrel and closing at its highest since July 2, 2015, according to the Wall Street Journal. West Texas Intermediate crude also picked up, closing at $54.15 a barrel, its highest closing since late February. Prices were off slightly in the early going.

Treasuries appear to be switching gears again after a relatively healthy run to the upside in sessions earlier this month. Bonds rallied yesterday, pushing the yield on the 10-year note lower to 2.37% and that 2.50% resistance level we were watching last week further away. In the early going, the yield was flat.

VIX and SPX

FIGURE 1: AND THE VIX YAWNS.

The VIX, which moves in an opposite direction than the SPX (shown in purple), hasn’t seen a lot of action amid the market bull ride. It rose about 7% Monday, but is still sitting in historical no-man’s land.Data source: CMEChart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

More Hurricane Impact: Consumers threw open their wallets in September, pushing every category of Personal Consumption Expenditures (PCE) higher, but apparently had to dip into savings to do so, according to the Commerce Department. Consumer spending, which accounts for more than two-thirds of economic activity and is a leading indicator of inflation, jumped 1% in September—the largest since August 2009.

The Commerce Department said the data reflected the effects of Hurricanes Harvey and Irma but couldn’t fully quantify them because the outlays do not separately identify storm impacts. Many analysts speculated that a 3.2% surge in new auto purchases, the biggest driver of the push forward, could have been tied to car replacements in hard-hit Texas and Florida. Savings fell to $441.9 billion, the lowest level since August 2008, while the rate of savings slipped to 3.1%, its trough since December 2007. You might remember that savings rates right ahead of the Recession and the housing bust had moved into negative territory. This report is expected to be closely watched by the Federal Reserve, as is the wage rate when Friday’s jobs numbers are reported, according to published reports.

And the Fed Chief Winner Is… Still a mystery, though the Wall Street Journal, the New York Times and the Washington Post have all reported that Fed Gov. Jerome Powell is likely to be the Chosen One when President Trump makes the announcement, which the White House has slated for Thursday. Of course, the news outlets note, Trump could still change his mind between now and then. And the Journal reminds investors that history suggests it’s tough to make money gambling on a new chairman’s direction, even if you know who it is.

Meanwhile, the Fed’s policy-making group, the Federal Open Markets Committee, has an announcement on interest rates on the agenda for tomorrow. As the countdown clock to the decision ticks, the probability meter of no movement stands relatively still at 98%. Funny how things change over the course of a year. Last year at this time, investors were preoccupied with Fed rate news and this week it appears that the only question of interest might be the wording around what might or might not happen in December. Stay tuned.

The Anti-Halloween: We typically go into October preparing to be spooked, considering that four of the five stock market’s scariest percentage declines happened in October. Remember Black Monday in 1987? And the May to October period isn’t typically a treat either, Sam Stovall, CFRA’s chief investment strategist reminds us.

Not this year. As of yesterday’s close the SPX is up nearly 8% and edging higher early today. Could that masquerade as the market equivalent of a candy overload on Halloween considering the more traditional advance is a rise of 1.4%?

Happy Halloween,

JJ
@TDAJJKinahan

economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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