(Monday Pre-Market) It seems hard to believe, but a quieter week might be on tap.
Earnings season is about 75% complete and the Fed meeting is over. Economic data are rather light, and Washington, D.C., might be less of a factor now that the tax plan is unveiled and the president has left for Asia. The big story over the next few days could be department store earnings, but those are weighted toward Thursday and Friday.
A little R&R might come as a relief to investors weary of trying to keep tabs on an extremely heavy news flow. It’s not often that earnings season coincides with both the introduction of a major tax plan and the announcement of a new Fed chair. There was also a steady churn of data punctuated by Friday’s October payrolls report, which failed to meet very bullish expectations but still looked pretty good when you step back and consider everything, including recent hurricanes.
The coming week brings only a little data and a less hectic earnings calendar. Major economic reports include the September Job Openings and Labor Turnover (JOLTS) numbers on Tuesday morning, consumer credit on Tuesday afternoon, and wholesale inventories on Thursday morning. Friday wraps up the week with Michigan sentiment. These numbers aren’t likely to make or break the markets, though JOLTs is always a report worth monitoring. August JOLTs topped 6 million job openings, so we’ll see if that strength continued in September.
From a company-reporting standpoint, it’s a big drop-off after several frenetic weeks that composed the heart of the Q3 earnings season. Major retail and media companies take the spotlight with Macy’s (M) reporting Thursday before the bell and Disney (DIS) reporting after the bell Thursday. Others of note include Kohl’s (KSS) on Thursday morning, Nordstrom (JWN) late Thursday, and J.C. Penney (JCP) early Friday. As always, these calls could be interesting as retail executives conceivably could discuss how they’re planning to fend off online competition and whether strong consumer sentiment is playing into sales.
About 72% of the S&P 500 companies reporting Q3 earnings to date have surpassed Wall Street analysts’ bottom-line expectations, while 64% came in above analysts’ revenue projections, according to research firm CFRA. Both figures are above the long-term averages, and CFRA expects overall Q3 earnings to rise 6%. That’s down from double-digit earnings gains in Q2, but CFRA sees Q4 earnings growth rising 10.6%, and overall earnings growth for the full year of 10.5%. It doesn’t slow down in 2018, with the firm forecasting 11.1% earnings growth. As we know, earnings drive the market more than any other factor, and companies continue to do well for the most part as the economy improves.
Speaking of the economy, consider that despite two major hurricanes hitting the U.S. mainland late in the summer, jobs growth still averaged more than 160,000 the last three months, according to the Department of Labor. That’s not too shabby. There was a lot of hand-wringing Friday about the overall 261,000 payrolls gain in October, which was about 40,000 under Wall Street expectations, but it’s really nothing to sneeze at.
Generally, the October jobs report was good overall. There are still a few numbers that need to be normalized because of the hurricanes, but the overall trend remains on the right track. One number that might see some adjustment in the next report is hourly wages, which basically were flat in October. This could be hurricane-related, as the big jump in what tend to be lower-salaried food and beverage jobs after the hurricane cleanup could have weighed on overall salaries.
The report showed wages up just 2.4% year-over-year, and that could be playing into the relatively tame Treasury yields Friday. Ten-year yields remained around 2.35% as the day advanced, and haven’t really made much of a move back toward that psychological 2.4% mark. That said, odds are 96.7% for a rate hike by the end of the year, according to Fed funds futures. Chances for an additional hike climb above 40% by the time of the Fed’s March meeting — its first with Jerome Powell as chair — and don’t rise above 50% until next June. However, anyone who’s followed these projections and the markets likely knows how fast things can change.
One other development to watch this coming week is President Trump’s visit to Asia. While geopolitics around the still volatile North Korea situation are likely to be a centerpiece, there’s a lot of economics to consider, too, as the president visits key trading partners like China, Japan, and South Korea. Any headlines related to U.S./China trading relations could draw special attention. When China and the U.S. sling it out over trade, the market tends to shudder.
The major stock indices stayed near recent record highs as the old week drew to a close, but the S&P 500’s (SPX) price-to-earnings ratio remained around 18.7 — relatively high historically but not far above where it’s been over the last few months. So while some might make the argument that stocks look over-valued, that’s debatable. With bond yields still below 2.4% and little inflation in the picture either in the U.S. or abroad, it appears stocks face little competition from bonds for investors seeking yield, at least for now.
Another story line in the coming days could be oil, which climbed back over $55 a barrel in the futures market by midday Friday. Whether crude can keep above this psychological level is something to track.
Digging Into Payrolls: The headline jobs number is far from the full story, as data lower down in the report highlighted some interesting trends. For instance, the October report showed that on a seasonally adjusted basis, the number of people unemployed for 27 weeks or more fell to 1.621 million from 1.964 million a year earlier. There was also a significant drop in the number of people unemployed 15 weeks or longer compared with a year ago, and people listed as “involuntary part-time workers” fell 1.1 million over the last 12 months. All these data appear to reflect an economy that’s finally shaking off the leftover drag from the huge recession of 2007-2009. On a less positive note, labor force participation, which has been near 40-year lows over the last few years, fell to 62.7% in October, about the same as a year ago. However, before October it had been moving higher and October’s reading may reflect the hurricanes. Check back in a month.
Jobs Weren’t All: Though the jobs report got the bulk of the market’s attention, a couple other numbers got released early Friday and both looked positive for the economy. October ISM services and September factory orders both were above expectations, adding to the list of strong economic data over the last week. Don’t forget that consumer sentiment is at long-time highs and personal income rose 0.4% in September while personal consumption expenditures prices finally showed signs of life with a 0.4% September climb. All of this would appear to reflect economic vigor, but the question is whether continued robust data might have the Fed getting more hawkish about rates, especially with unemployment at 17-year lows.
Where Powell Might Differ: While it seems likely that Jerome Powell — who takes the Fed chairmanship early next year — could continue the rate policies of current Fed Chair Janet Yellen, there’s some thought that Powell might have different ideas about regulating banks, according to published reports. The government took a tougher approach on banking regulation after the last recession, and Yellen has generally expressed her belief that this was a good thing. The chance for looser regulations on banks under Powell, while still just conjecture at this point, could help explain in part why financial stocks moved higher after President Trump announced Powell’s appointment. That said, bond yields and the dollar fell after the Powell announcement, perhaps partly due to ideas that Powell might continue Yellen’s mostly dovish and cautious rate approach.
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