Market Overview

Market Sentiment Upbeat After Largely Positive Bank Stress Test Results

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Today marks the last trading day of the first half of 2018, and what a half-year it's been. A January that saw new all-time highs in the major indices on multiple occasions. A February market shock that knocked 10 percent off the stock market in a matter of days. A rebound that led two of the major indices—the Nasdaq (COMP) and Russell 2000 (RUT)—to even higher highs, and then a lot of choppiness as it seems the positives—moderate growth and solid earnings—have been doing battle with potential headwinds such as tariffs and other trade-related disputes.

What will this market do for an encore? 

A Bank Health Checkup

This morning, Wall Street might end the quarter on a positive note as the financial sector was getting a lift in pre-market trading from largely positive results from the second part of the Federal Reserve’s stress tests. This part of the tests was looking at whether the banks are healthy enough to implement capital plans, such as dividends and buybacks, in the event of adverse economic conditions.

Nike Inc. (NYSE: NKE) also seems to be helping sentiment. Shares of the shoe and apparel giant were up around 10 percent in premarket trading after the company reported stronger-than-expected earnings and revenue and said it had returned to sales gains in North America. Earnings came in at $0.69 a share versus consensus estimates from Wall Street analysts of $0.64. The company also announced a $15 billion stock buyback plan, to be completed within its fiscal 2019, according to the company statement.

Some of the market gains could be coming as traders seek to flatten out risk by buying back short positions ahead of the end of Q2 and a U.S. holiday next week. And while unease about international trade issues continues to linger, the market seems to be cheering a European Union deal on migration, which helped lift European shares.

On Thursday, telecom, tech and financial stocks helped Wall Street shake off some of the trade-related malaise, although trade tensions between the U.S and key trading partners continued to simmer.

Telecom services led the S&P 500 sectors higher with a jump of more than 2 percent. That was followed by information technology, which gained more than 1 percent.

Financials Snap Losing Streak

The financial sector was also in the green, helped by shares of big banks ahead of the second round of results from the Federal Reserve stress tests—an annual review of big banks to determine their ability to withstand adverse capital shocks. The results, released after U.S. markets closed, were largely positive and several banks announced plans to raise dividends and buy back shares. With the stress tests behind them, bank investors can now look toward the latest round of earnings, where it remains to be seen how trading revenues and net interest margins may have affected banks’ financials.

Thursday’s financial sector gains came on the heels of a 13-day losing streak that left the sector down over 6 percent tip-to-tip (see figure 1 below). Part of the weakness in financials over the two-week period apparently came from a narrowing of the yield curve. The spread between 2-year and 10-year treasuries has fallen to 32 basis points. For a frame of reference, at the midyear point last year, the spread between the 2-year and 10-year was 93 basis points, according the St. Louis Fed's FRED® database.

Meanwhile, brick-and-mortar pharmacy chains came under pressure after Amazon.com, Inc. (NASDAQ: AMZN) said it would buy online pharmacy PillPack. It’s yet another reminder of disruptive power that internet commerce can have on traditional businesses. 

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Looking Toward Earnings

Will this earnings season shape up to be like the last one when we saw mostly stellar earnings reports met with mutedly positive or even negative market reaction? Investment research firm CFRA thinks so. “While we expect the second-quarter numbers to be as impressive as the first quarter and guidance to be decent, we think the response from stocks will more likely resemble the reaction received after first-quarter results,” the research firm said. “At that time, stellar reports were viewed as a ‘sell the news’ type of event.” S&P 500 companies that beat on revenue and profit only gained an average of 0.1 percent on the day they reported, and many fell sharply, the firm said. Leaving the potential reaction from Wall Street aside, the firm expects companies to show strong second quarter performance. It expects this could be the second quarter in a row with earnings growth of greater than 20 percent. That hasn’t happened since 2010, when earnings were rebounding from recessionary declines. This time around, the firm expects strong sales growth and reduced tax rates to be the driving force behind robust earnings growth.

GDP and Personal Spending

The third time wasn’t a charm for Q1 gross domestic product. Government figures for the third GDP estimate showed a downward revision to 2 percent growth when economists had been expecting the reading to be unchanged from the second estimate at 2.2 percent. Either way, the numbers represent a slowdown from Q4’s reading of 2.9 percent growth. But there may be positive numbers to look forward to. One reason for Q1’s weaker-than-expected revised reading could be that personal consumption expenditures were revised downward. But there may be reason to be optimistic. As Briefing.com put it, “this is a dated number, and a pickup in personal spending is a key reason why many Q2 GDP forecasts have a four-handle on them.”

Jobs Market Remains Tight

A tight jobs market appears to be continuing, along with its implications for potentially higher inflation. Initial unemployment claims data released Thursday showed claims for the week ending June 23 increased to 227,000, a more-than-expected jump of 9,000. Still, the overall level, according to Briefing.com, marks the 173 straight week that initial claims have been under 300,000. Meanwhile, continuing claims for the week ended June 16 decreased by 21,000 to 1.705 million. But these are only snapshots, and it can be helpful to view things over a longer time frame. The four-week moving average for initial claims rose by just 1,000. And the four-week moving average for continuing claims decreased to the lowest level since December 1973. The tight labor market hasn’t yet resulted in outsized inflation, but it is something to consider watching as wages can be a key driver of rising prices. In one week, an updated employment report is set to be released, including a fresh reading on hourly earnings.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Posted-In: TD AmeritradeNews Commodities Federal Reserve Markets General

 

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