Market Overview

Calm Before The Storm: Market Action Slows As Earnings Season Looms

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Earnings season is almost here, and stocks appear to be in a holding pattern as investors await the first Q4 salvos from major companies. The bond market calmed down a little early Thursday after yesterday’s sell-off, and overseas stock indices shied away from any big moves.

Thursday looks kind of light from an earnings and data perspective, though Delta Airlines (DAL) became one of the first big companies to report and investors also got a look at December producer prices. That metric actually fell 0.1% in December compared with Wall Street analysts’ expectations for a 0.2% gain, and could be another sign that inflation remains muted. More data and earnings action are on the way Friday, with results before the bell from two of the biggest banks, along with inflation and retail sales data for December. Get ready for a busy morning.

Bank earnings are spread over several days this quarter, in part because markets are closed next Monday for the Dr. Martin Luther King, Jr. holiday. Things get started tomorrow with JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC) before the bell. Additional big bank results roll in next Tuesday and Wednesday, so it could take a bit longer than usual to assess the state of the industry. That said, Wall Street analysts forecast double-digit earnings gains for the financial sector in Q4, with insurance and consumer finance companies expected to report the highest earnings growth. Consumers still appear to feel good about the economy, and that can play into decisions such as home- and car buying that tend to help financial companies.

As always, investors should consider listening closely to CEOs of some of the biggest banks and investment firms to hear their take on economic trends and the executives’ 2018 outlook. These company leaders tend to have a front-row seat, and it wouldn’t be surprising to hear them sound optimistic considering recent economic data and tax reform passage. Sometimes these observations can help move the markets.

Delta got the earnings season off to a good start early Thursday, easily beating Wall Street analysts' top- and bottom-line estimates and raising guidance 20% for 2018 as the company cited benefits from the new tax law. If this is a sign of things to come, with companies delivering better forecasts thanks to tax savings, it might be a pretty interesting quarter. In a somewhat related development, Wal-Mart Stores Inc (NYSE: WMT) said in a press release early Thursday that it’s lifting its starting wage to $11 an hour and giving some employees bonuses of up to $1,000 following the tax bill passage. That makes WMT one of a bunch of companies to share tax savings with workers.

Stocks took a breather Wednesday, but it was far from the rout some might have feared after futures tumbled in pre-market trading. The day’s action arguably offers a lesson for investors never to get too panicked about one piece of news, which in Wednesday’s case was a Bloomberg article hinting that China might pull back on U.S. bond purchases. That would be bearish if true, but the swift downward move in futures might have been a slight over-reaction considering there’s no proof it’s going to happen. It’s important to notice these things, but also to place them into the context of the broader market picture. As a follow-up, officials in China disputed the article on Thursday, according to media reports.

The jittery bond market is definitely something to watch, but not the only one, and the Dow Jones Industrial Average ($DJI) actually found itself in the green at one point later Wednesday. That single article didn’t change the fact that Wall Street analysts look for positive earnings growth as the new season gets underway, data have generally impressed both here and overseas, and there’s still momentum from last month’s tax cut.

The news media speculation about China and the bond market is a bearish reminder that China is among the largest holders of U.S. Treasury debt, and if China decides to taper or halt its purchases, interest rates could rise here and make borrowing more difficult for corporations and consumers. Those fears probably are one reason behind the jump in U.S. 10-year bond yields to around 2.6% this week, near 10-month highs. Yields drew back slightly to 2.56% by Thursday morning. While higher borrowing costs have their downside, the bond yield rally could be seen as positive for the financial sector, one of just two sectors that ended with gains Wednesday. In fact, things might have looked a bit more ugly Wednesday if not for financials.

Another concern popped up Wednesday — again due to a news article — this one a Reuters report that Canada believes the U.S. might pull out of the North American Free Trade Agreement (NAFTA). This appeared to hit shares of General Motors (GM) pretty hard, and car companies are already wrestling with rising gas prices, a drop in 2017 sales, and reports that U.S. light vehicle sales might fall in 2018 for the second year in a row (see below).

The Oracle of Omaha, Warren Buffett, spoke on CNBC Wednesday and offered language that sounded calming. He might have even played a part in bringing stocks back from their lows, some market professionals said. Buffett said he doesn’t see a “bubble” in the stock market, citing low interest rates and the possible impact of tax reform.

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FIGURE 1: FAANG FLING. Though the Nasdaq index (candlestick chart) is up moderately over the last month, it’s the so-called “FAANG” stocks that continue to lead the way for the tech-heavy index. Four of the five FAANGs (Facebook, Amazon, Alphabet, and Netflix, all shown in this monthly chart), have easily out-performed the Nasdaq over that period. Only Apple is up less than the index. Data source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.   

Volatility Back? Kind of Maybe

After failing to put in an appearance the first week of the New Year, our old friend volatility took stage again Wednesday as the VIX climbed above 10 for a while thanks in part to those rising bond yields. Saying volatility is back just because it went over 10, however, is kind of like saying the Chicago Bears are back because they hired a new coach. The proof, as they say, is in the pudding, and 10 remains historically low as far as VIX is concerned. Not only that, VIX fell back below 10 by the end of the day. One major development that could conceivably put more excitement into the market and reinforce volatility is next Friday’s deadline for Congress to agree on a budget in order to avoid a government shutdown.

That New Car Smell is Fading

The car-buying frenzy of 2015 and 2016 took a breather in 2017. You might have seen the news last week that after seven straight years of growth in domestic new-vehicle sales, manufacturers reported a decline of about 1.8% in 2017, to 17.2 million cars and light trucks. The downturn is likely continue, said Edmunds.com, an auto-information website, calling the current situation “a declining market” due in part to rising payments, loan terms, and interest rates. It predicts sales of 16.8 million new cars this year, which would be the lowest since 2014.

Edmunds also noted that the average sales price of a new car reached an all-time high of $36,495 in December, up 3% from a year earlier. There might be fewer buyers, it said, but the people buying want “all the bells and whistles.” In one sense, the auto industry might be a victim of its own success, as vehicle quality keeps improving. That means people tend to keep their cars longer. Think about it: A stalled vehicle at the side of the road was a common sight 40 years ago, but when was the last time you saw one? It’s probably been a while.

Late-Week Data Crunch

The week closes with a series of key data markers, including this morning’s Producer Price Index (PPI), and tomorrow’s consumer price index (CPI) and retail sales for December. The data looked pretty good earlier this week, with wholesale inventories rising 0.8% in November. The key takeaway from that report is that the sales increase outpaced the inventory increase by a sizable margin, which is a step in the right direction for wholesalers trying to regain some pricing power, Briefing.com said.

CPI is a big one early Friday. Wall Street analysts expect a tepid 0.2% CPI gain in December after a 0.4% gain in November. Core CPI has been rising less rapidly, because it’s not affected by rising gas prices, so that’s really the metric to check. The consensus for core is also 0.2%. Also keep an eye on year-over-year core CPI, which was up just 1.7% in November from a year earlier. The Fed is likely to be watching that one closely as it looks for any signs of inflation that might justify further rate increases. Analysts expect retail sales to rise a brisk 0.4% in December, Briefing.com said, but that would be down from 0.8% in November.

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Posted-In: JJ Kinahan TD Ameritrade The Ticker TapeNews Bonds Commodities Econ #s Markets

 

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