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Market Update

Early Feast: Stocks Approach Holiday At Fresh Highs As Oil, Earnings Strong

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November 22, 2017

(Wednesday Market Open) The market barrels toward Thanksgiving and Black Friday with all the major indices hitting new highs yesterday and still charging along early Wednesday in pre-market trading action. The last pieces of earnings season are coming together nicely, and a fresh rally in crude oil injected some new vigor.

Today’s calendar includes Fed minutes (see below) and durable goods, but tomorrow is a blank with all U.S. markets closed for the holiday. Despite that, today is a full trading day. Friday is the shortened session, and focus then could turn back to retailers as people go out and shop.

Oil regained some traction this week and prices are up nearly 2% this morning, flirting with two-year highs after a report late Tuesday showed a draw in U.S. supplies. The market sputtered last week amid rising stockpiles and production, and the next official U.S. stockpiles data are due later today. This oil rally comes as investors await next week’s OPEC meeting, where many analysts expect OPEC members to extend their production caps. The spike in oil seemed to help give energy sector stocks a boost in pre-market trading.

Another stock getting a boost was Deere (DE), whose shares climbed 3% in pre-market trading after beating Wall Street analysts’ estimates for earnings and revenue. The company cited improvement in both its farm and construction equipment business. Though earnings season is pretty much over, the last stragglers keep coming in with red-hot results.

One new data point early Wednesday was durable goods, which fell 1.2% in October, the government said. That contrasted with analysts’ expectations for a slight rise.

The market was a sea of green Tuesday, with gains for every sector except telecom. Info tech, however, was the only sector to post better than 1% gains. Another batch of healthy earnings appeared to give the market an initial positive injection, and soon all the major indices were posting new all-time highs. Looking at tech, it’s not too surprising to see why the sector is up 5% over the last month and nearly 38% year-to-date. Tech companies are seeing better earnings, better sales, and better growth. It's difficult to argue with that.

It’s not just big tech stocks picking up ground, however. The Russell 2000 (RUT) index of small cap stocks executed a big turn-around in recent days after hiding in the shadows while the other indices rallied the last couple of months. Now the RUT is back to posting new highs, and some of this could be linked to hopes for tax reform. One school of thought proposes that repatriation of foreign profits, part of the proposed tax legislation, could put more money into the pockets of large corporations, perhaps putting them into better position to potentially snap up smaller companies. We shall see.

Speaking of tax reform, here’s something to consider. Usually investors might sell some of their holdings toward the end of a strong year like this one. Now, though, no one knows what their taxes might look like in 2018, so it’s possible fewer will take profits aggressively in coming weeks. This is just speculation for now, but it’s intriguing to consider and, if it proves true, could help underpin stocks in coming weeks.

If it seemed like a while since Wall Street posted back-to-back gains like it did Monday and Tuesday, that’s correct. It was the first time since Nov. 6. Does this little hop mean we’re out of the woods after the recent choppiness that at one point had the S&P 500 Index (SPX) down more than 1% from recent highs? It’s too early to say, and it’s never smart to predict. However, some analysts pointed out that from a historical perspective, the period around Thanksgiving tends to be positive for the market, so maybe some seasonal strength is showing up.

Despite the rally in stocks, bonds continue to hold in there, with the benchmark 10-year yield huddling in the mid-2.3% range. Investors seem inclined, at least for now, to hold onto some vestige of possible safety by purchasing bonds as well as stocks. Or this could continue to reflect that pattern of foreign investors reaching into the U.S. bond market for better yield, a recurring theme all year.

Last week when volatility surged, we pointed out that like clockwork, every time VIX climbed this year it quickly slid back. Well, the same pattern held true this time. VIX, the most closely watched indicator of volatility, took a big dive Tuesday to dip back below 10 for the first time since Nov. 8. There’s still a chance that thin holiday markets over the next days could put life back into VIX, so it could be wise to pay attention. However, anyone who predicted a long-term volatility rise this year has come up empty so far.

That said, today could see thin trading, especially this afternoon, and keep in mind that Friday is a shortened trading day. A lot of people are likely to be away Friday, leading to potential low volume. Anyone who wants to get a sense of what Friday’s action might be like can check overseas markets Thursday, assuming they want to take a break from turkey and football. Sometimes the overseas action can roll over into the next U.S. trading day, and with no U.S. markets open tomorrow, trading in Europe and Asia could be more of an influence than it might normally be.

Russell 2000

FIGURE 1: OUT OF A RUT.

The Russell 2000 Index (RUT) shook off recent weakness in a major way over the last few days, partly in response to hopes for U.S. tax reform. The Nasdaq (COMP, represented by the purple line), is shown for comparison in this three-month chart. Both had been steadily rising between late August and early October before RUT began a long hiatus that appears to possibly be over. Data sources: Nasdaq, FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Watching the P/E’s: Though it was another strong earnings season — with Q3 S&P 500 earnings expected to rise nearly 7% according to research firm CFRA — the stock market also scampered higher over the last month since earnings began. This means the price-to-earnings ratio remains elevated as the holiday season approaches. Recently the P/E ratio for S&P 500 stocks, based on CFRA’s forecast for the next 12 months of earnings, stood at 19. That’s a 16% premium to the 16.3 average P/E since 2000. One mitigating factor for high P/E’s, however, could be low interest rates.

With stocks still delivering decent yields and returns compared with fixed income, the higher P/E ratios may not be as big a barrier toward attracting investor money. Still, it pays to be cognizant of P/E’s, as some analysts think more catalysts might be needed for the market to climb much further when valuations remain high.

Going Home Early? Keep Fed In Mind: Many people like to get out of work early the day before Thanksgiving, but doing so today could mean missing a chance to take in a host of data that the government seems to be trying to get out of the way before the holiday. Besides durable goods, there’s Michigan Sentiment at 10 a.m. ET and Fed minutes at 2 p.m. ET. Now that Fed Chair Janet Yellen made it official she plans to leave the Fed when her term expires early next year, this will be one of the last Fed minutes with her in charge.

The usual topics should be in play, including the Fed’s perspective on inflation and any hint of rate policy. Another thing to watch is anything the Fed might have talked about from the fiscal side of the equation, considering the November meeting took place as Congress debated tax policy. It’s possible the Fed didn’t discuss this at all, but if it did, look to see if any concern arose about aspects of the Republicans’ embryonic plans and their potential impact on economic growth.

Some Things Never Change: On the day before Thanksgiving a year ago, we made the following observation in this column: “A balanced approach could be important now, with the stock market at record highs. It’s easy to get caught up in the excitement, but it’s actually a better time to step back, look at the portfolio, and make sure allocations are appropriate. Markets don’t move in a straight line, and rallies can get over-extended. That’s not necessarily the case now, but those who don’t plan for it may feel regrets of their own down the road.”  Instead of re-writing something that applies equally now as it did then, it seemed today might be a good day to kick back and watch a rerun. Enjoy your holiday.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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