(Wednesday Market Open) The day dawns with the Dow Jones Industrial Average ($DJI) at 50. That is, 50 record highs so far this year. The latest came yesterday, and positive spirits appeared to flow into pre-market trading as earnings from key companies continued to surpass expectations.
The latest major company to deliver stronger than expected earnings was tech giant IBM (IBM), which posted Q3 adjusted earnings of $3.30 a share on revenue of $19.2 billion. Those results easily beat Wall Street analysts’ estimates, helping send the stock up about 5% in pre-market trading early Wednesday. The company’s software business performed well during the quarter. The less positive side of the equation was that IBM's revenue has now fallen for 22 consecutive quarters.
Earnings season is off to a pretty good start. Most of the big banks beat Wall Street analysts’ expectations, and as of Tuesday 82% of companies had topped Wall Street’s earnings estimates while 76% had come in above revenue estimates, according to Thomson Reuters.
While nearly all the banks saw declines in trading activity, that wasn’t too surprising considering the market’s long-term lack of volatility. On the other hand, Morgan Stanley (MS) and Goldman Sachs (GS) each reported strong investment banking results as the two companies found ways to prosper outside of the flagging trading sector. Additionally, as we saw with some of the other big bank results last week, there was solid loan activity at GS. Strong commercial lending can often indicate a positive business environment.
Major earnings reports to focus on in the coming hours include American Express (AXP) and eBay (EBAY) after today’s session and Verizon (VZ) and Philip Morris (PM) before tomorrow’s opening bell.
This afternoon’s earnings from American Express (AXP) and EBAY, along with PM tomorrow morning, might provide further insight into consumer health. Remember to check for any executive comments about whether the hurricanes in August and September had any impact on sales for these consumer-oriented companies.
Overseas, strength continued in Japan earlier Wednesday, where the Nikkei index has been up 12 consecutive days. Emerging market stocks are also performing strongly, and South Korean and Philippine stock indices hit record highs this week. The CSI 300 index of major Chinese stocks is at a 26-month high.
Looking back at Tuesday, the Dow Jones Industrial Average ($DJI) hit 23,000 for the first time, just a little more than two months after first punching through 22,000. If it seems like the thousand milestones have been coming hot and heavy lately, that’s no illusion. We’ve had four in the last year. While these events can be interesting to watch, keep in mind that first of all, the DJIA is only 30 stocks, and also that as it goes higher, it becomes less of a percentage leap to get to that next benchmark. The S&P 500 (SPX) is probably the better index to watch for a more comprehensive view of the market.
The SPX has also set new highs this week, and as the records fall we’ve heard some warnings from a few analysts who point toward possible over-bought conditions. It is something to keep an eye on when the market continues to climb like this with no corresponding dips, though that’s not necessarily a sign of anything to come.
Also, the fundamentals continue to look pretty solid on the data and earnings side and a rate hike by the end of the year appears to be basically built in. If earnings start to flag or if more geopolitical tension emerges, then we could have a different kind of story. Still, the market has been remarkably resilient this year even in the face of bad news. Volatility — as measured by VIX — climbed a little on Tuesday but remains just above 10, a historically low level, despite North Korea’s latest language.
A drill-down into Tuesday’s sector performance revealed some weakness in financials, consumer staples, industrials, and materials. Some of these are sectors that recently carried the market to new highs. One day is only one day, not a trend, but it’s worth monitoring Wednesday to see if some of these sectors can bounce back. Also, watch the healthcare sector today to see if there’s a ripple effect from news that senators had reached a bi-partisan agreement to continue funding the Affordable Care Act. Though a deal is far from assured, this could be seen as a sign of progress in addressing the situation.
Crude oil rose slightly early Wednesday, and has been up all week amid tensions in Iraq. This morning brings the U.S. government’s weekly stockpiles data.
Flashback To 2008: In November 2008, Barack Obama beat John McCain in the presidential election. That’s also the last time two-year U.S. Treasury yields traded as high as they did on Tuesday, when they reached 1.55%. They climbed to 1.57% by early Wednesday. You might recall that it was only a little over a year ago when the 10-year yield — now near 2.33% — traded where the two-year yield is now. Climbing yields often signal investor faith in the economy, and recent data and hawkish Fed speeches could be playing a role. While a rising tide supposedly lifts all boats, the shorter end of the yield curve seems to be getting a bigger benefit at the moment, causing more flattening in the curve. The gap between two-year and 10-year yields was 81 basis points last week, but down to about 76 points by Wednesday. This flattening could be a response to strong expectations of another Fed rate hike by the end of the year, which would tend to have more of an effect on shorter-yielding bonds.
House Hunt: The housing market theme lately is rising prices and thinning supply. September existing home sales are around the corner Friday morning, and the question is whether there was any sign of a price slowdown that might make first-time buyers — a closely watched category — more likely to make a down-payment. Wall Street analysts see September existing home sales about steady month-over-month at 5.29 million on a seasonally adjusted basis, according to Briefing.com. In August, median existing home prices rose 5.6% to $253,500, the 66th-straight month of year-over-year gains. Meanwhile, inventories fell 6.5% from a year earlier and have been down for 27 consecutive months. The percentage of buyers who were stepping into the home market for the first time fell to its lowest level in a year. Check September’s metrics Friday morning to see how they compare, and also watch home-improvement company stocks like Home Depot (HD) and Lowe’s (LOW) for any potential reaction.
Small Guys Bring Up Rear: While all the focus seems to be on Dow 23,000, it’s interesting to see that small stocks — notably the Russell 2000 Index (RUT) of smaller names — a little lower since the start of the month. After hitting an all-time intraday high of 1514 on Oct. 5, the RUT has tracked backward, falling below 1500 by Tuesday afternoon. This might represent a little rotation as investors seem inclined to place bets on some of the bigger names now headlining earnings season. We can see signs of that looking at the DJIA, where 22 of 30 stocks are up double digits since last year’s U.S. election and only three names have fallen. A relatively flat dollar over the last two weeks could also be holding back the RUT, which had appeared to benefit from a slight bounce in the dollar between early September and early October. The RUT remains near all-time highs, so this could just be a near-term blip. Still, the index trails its bigger rivals year to date.
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