After a new North American trade agreement gave investors a break Monday from last week’s intense interest rate focus, attention could zero back in on the central bank today as Fed Chairman Jerome Powell delivers a lunchtime speech.
Meanwhile, stocks appear to face some pressure after Europe and Asia saw red overnight. Focus could be turning back toward U.S./China trade relations, where things don’t seem to be going so well. European markets fell amid more worries about Italy and its budget, with banking shares taking a hit.
There’s also a stray earnings report to check this morning, as PepsiCo, Inc. PEP beat the average analyst estimate on earnings and revenue, but cut full-year earnings guidance on what it said is the impact of a stronger dollar. We’ll see if this becomes a theme as earnings season gets underway late next week.
Aside from Powell and PEP, there isn’t a lot of fresh news out there today. The market might be coming back to earth after a couple of really good days.
Powell to Address Employment, Inflation Outlook
Based on the title of Powell’s talk, “The Outlook for Employment and Inflation,” this one looks like it might be worth watching as investors try to get a better sense of Powell’s views. Sometimes a Fed speech title sounds confusing or even dull, but this 12:45 p.m. ET talk doesn’t look like one of those occasions.
On the other hand, it’s hard to imagine Powell coming out less than a week after the last Federal Open Market Committee (FOMC) meeting and outlining a major change in view. Powell and other Fed officials have arguably signalled a “wait and see” view on both inflation and employment over the last few months, promising that gradual rate hikes will continue and removing the Fed’s “accommodative” language from last week’s press release.
The Fed seems to be in a tough place, because you could argue it’s achieved what it wanted on both employment and inflation and now has to find a way to keep them where they are. There’s not much mystery in the markets about the Fed’s next move, with futures prices predicting a better than 80 percent chance of another hike by the end of the year.
Anyway, since we’re talking about rates, Treasury note yields rattled around early this week but really didn’t go very far in either direction. The 10-year yield wasn’t able to scoot above the May high of 3.12 percent last week, but still remains in striking distance at just under 3.07 percent. The new trade deal appeared to give yields slight support Monday, while the yield curve narrowed slightly as two-year yields gained on 10-year yields. That gap hasn’t changed much recently, but remains a focus for some analysts who worry that continued flattening could signal economic trouble.
Late-Day Pullback In SPX Monday Continues Recent Pattern
After stocks jumped out to big early gains Tuesday, the S&P 500 (SPX) and Nasdaq (COMP) spent much of the day walking slowly back from their session highs. This has been a pattern lately, particularly in the SPX, where stocks haven’t been able to maintain early enthusiasm on a bunch of recent days (see Fig. 1 below). Sometimes when you see this happen frequently, it’s a potential sign of some weariness in the markets and possibly a lack of much buying interest at new peaks. We’ll have to wait and see if this pattern continues.
Some of the standouts early this week include multinational firms that conceivably could benefit from trade progress—for instance Boeing Co. BA, Lockheed Martin Corporation LMT, and General Motors Company GM. In fact, the U.S. auto industry generally had a good day Monday as the new trade agreement between the U.S., Canada, and Mexico seemed to help soothe tensions about autos and auto parts and signaled a possible return of more production to the U.S. as well as a cap on Canadian imports.
The multinational strength helped the Dow Jones Industrial Average ($DJI) reel in the biggest gains of the day. The SPX finished Monday down more than 10 points from its morning high, though still up 10 points on the day.
Meanwhile, the COMP and the Russell 2000 (RUT) small-cap index actually lost ground Monday. It’s possible the RUT took it on the chin from some investors reversing trades that had put bullish bets on small caps in case of more trade concerns. Remember that earlier in the year, the trend appeared to be in favor of small caps over large caps as many investors looked for possible protection from trade wars, since smaller companies do less of their business abroad. It’s unclear if Monday’s small-cap weakness was a one-day affair or perhaps the start of something larger, but keep in mind that nothing has been solved with China and there wasn’t much progress there over the last few days, according to the Trump administration.
About the North American trade agreement, by the way: It’s not a done deal. Congress still has to approve it. That might explain in part why the SPX retreated after those sharp early gains. The need for a congressional vote could be another factor that raises the profile of next month’s election for investors, as it might be the next Congress that ultimately determines where this goes.
Embattled GE Seems Boosted By CEO Replacement
On the corporate front, General Electric Company GE beaten-down shares jumped by double-digits at the open Monday after the company announced the dismissal of its CEO. By the end of the day, the stock had pulled back slightly, but was still up 7 percent.
It’s debatable how much a personnel change can necessarily help a company, especially an embattled one like GE. The CEO who was let go had been on the job just 13 months, arguably not long enough to really put his full imprint on the business. Considerations for investors include whether the new leadership team plans to move ahead with initiatives already in place or perhaps depart in a big way from the current strategy. Focus certainly could intensify heading into the GE earnings call later this month, and investors might want to see if they can glean more at that point rather than jumping in or out without enough information on a news event.
Over a Barrel?
Don’t discount the potential negative impact of crude oil in coming days and weeks. Prices reached nearly a four-year high above $75 a barrel Monday. There’s growing concern that rising energy expenses could start hitting company earnings. In addition, there could be an impact on consumer spending.
Though fuel prices might be a negative for some stocks, including potentially the transports, the rally in crude could help underpin the energy sector in days to come. Energy led all sectors Monday with gains of nearly 1.5 percent to a nearly two-month peak. Speaking of transports, today brings September auto sales data from the major car companies.
Companies Coming Under Microscope
Long-term investors might want to listen closely to major company earnings calls this month to hear what’s going on in the trenches. While trade is likely to grab lots of attention, earnings calls are also a chance to find out what CEOs have to say about the dollar’s impact on business, how they plan to deal with rising energy costs, and whether they’ve felt the full impact of the recent tax reform. Are companies plowing more money into their businesses for research and development, or are they giving money back in the form of buybacks and dividend increases? Sometimes, you can get a sense of corporate optimism or pessimism from hearing about those plans. Share buybacks in the first half of 2018 rose nearly 50 percent from the same period a year earlier, with the tech sector leading the way, research firm CFRA reported.
Earnings Seen Up More Than 20%—Again
All of the above is big picture stuff. The market is likely to react more quickly to the actual numbers, and so far there’s little indication of earnings tailing off from the last two quarters of strong growth. CFRA predicts S&P 500 earnings growth of 21.4 percent in Q3, down just a bit from the 25.2 percent recorded in Q2. It sees the biggest gains coming from energy, materials, and financials. Interestingly, tech earnings are seen as fourth on the leaderboard, perhaps in part because the sector is starting to face some tough comparisons. Watch The Ticker Tape in coming weeks for sector and company earnings previews. The financial sector earnings preview is already live.
Sector View
Aside from the energy sector, the materials and financial sectors are pegged to gain the most in Q3 earnings per share, according to CFRA. With that in mind, it’s interesting to note that those two sectors were by far the worst-performing ones in the week ended last Friday, with financials falling 4.05 percent and materials down 4.48 percent. The financial slide might have reflected dovish investor sentiment after the Fed meeting, in which long-term Fed views on rates didn’t show much of an upward move. Bank stocks often benefit from higher rates.
Meanwhile, materials might have taken a hit from trade issues, though the weekend announcement of an agreement between the U.S., Mexico, and Canada might ease some of those concerns. For these sectors and others, remember going into earnings that quarterly performance is a backward indicator. It’s arguably more important to focus on what executives say about the future. As the late, great baseball player and philosopher Dan Quisenberry once said: “The future is much like the present, only longer.”
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