Market Overview

Defensive Unit On Field: Concerns Over Turkey's Currency Put Risk Back At Play


Geopolitical turbulence appears to be generating a flight toward “defensive” investments like the dollar and Treasuries amid general weakness in stocks early Friday.

Volatility, which had barely been visible lately as the dog days of summer deepen, came back to life Friday as the VIX jumped 7 percent to above 12. Just a few days ago it was under 11, back down toward levels last seen seven months ago.

Turkey Trot

The sudden defensive trading and return of apparent geopolitical fears reflects a stew of developments, most recently a plunge in Turkey’s currency. The Turkish lira is down 13 percent over the last week amid concerns the country might have difficulty paying debts. This in turn has some investors worried about the possible exposure of some European banks to Turkey’s economy, MarketWatch reports.

The Dollar Index climbed above 96 to new highs for the year early Friday and the euro turned lower against the dollar. The British pound had already been on a lower track vs. the dollar recently (see chart below), and that trend continued Friday. Other geopolitical factors at work include continued sparring over trade between the U.S. and China, tension surrounding Iran, and now some growing stress on the relationship between the U.S. and Russia as the U.S. imposed new sanctions and Russia threatened counter-measures. 

Up until now, strong earnings headlines had been helping push trade and other geopolitical worries to the second page, but investors should keep in mind that earnings don’t last forever. At times when international economic and political turbulence flare, it’s not surprising to see strength in the dollar, yen and Treasuries, as we saw this morning. Surprisingly, gold—another supposed “safety play,”  remained lower. Meanwhile, the 10-year U.S. Treasury yield dipped below 2.9 percent early Friday after hitting 3 percent just a few days ago. It seems like it’s difficult for yields to hold gains up near the 3 percent mark, at least for now.

From a stock market perspective, international stress in recent months seems to be hitting the Dow Jones Industrial Average ($DJI) and its collection of multinationals harder than some other neighborhoods on Wall Street. However, all the major indices turned moderately lower in pre-market trading Friday.

How About Those Earnings?

The week grinds toward a close with 2Q earnings season more than 85 percent complete. To date, the average operating earnings gain for S&P 500 companies is 24.7 percent, according to research firm CFRA. That’s up from CFRA’s estimate of 19.5 percent before the season began. The firm expects all 11 S&P sectors to post earnings gains, led by energy, materials, technology, and financials. Nine of the 11 sectors are expected to show double-digit earnings growth, with real estate and utilities the only exceptions.

Those are the raw numbers, but when you do a deeper dive it becomes clear that these strong results are eating into the market’s price-to-earnings (P/E) ratio, meaning some investors might see stocks starting to appear a bit less pricey compared with where they were not too long ago. While the S&P 500’s forward P/E (which measures prices vs. analysts’ predictions for the next 12 months of earnings) is still historically high at just above 17, it’s down from 19 at the start of the year. By comparison, the median forward P/E since 2000 is 15.9.

Retail Results Up Next

Next week is the unofficial start of retail earnings, so we’re not out of the season yet. Retail results could still say a lot about whether stronger economic growth and rising wages in Q2 resulted in more trips to U.S. malls and big-box stores, as well as to the online portals of these companies.

Overall, Thursday’s action was pretty dull as far as price movement. Once again, the Nasdaq (COMP) managed light gains, extending its winning streak to eight sessions. However, the SPX and Dow Jones Industrial Average ($DJI) both lost ground. Some of the more traditionally “defensive” sectors put in the biggest gains, including utilities and telecom. Treasury prices also rose, so it appears that at least some investors might be taking a more cautious approach.

From a data perspective, the U.S. consumer price index (CPI) for July bowed Friday morning without too much drama. Both headline and core CPI rose 0.2 percent, as Wall Street analysts had expected. Still, core CPI (which strips out volatile food and energy) is up 2.4 percent year-over-year, the biggest gain since 2008 and potentially a sign that price pressure is working its way into the economy. 

pound-dollar-8-10-18.jpg FIGURE 1: Pound Loses Ground. The British pound (candlestick) is down vs. the U.S. dollar over the past month (see the U.S. Dollar Index - purple line) despite the Bank of England raising rates for just the second time in 10 years. Pressures might include Brexit concerns, a sense that the U.S. economy is outperforming that of the U.K., and more aggressive fiscal and monetary policy coming out of Washington, analysts say. Data source: ICE, CME Group.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Batten Down the Hatches

We’re deep in the summer doldrums. Kids are mostly still on break, and football training camps are just starting to get more intense. What does this have to do with the stock market? Hurricane season. Yes, it’s the time of year when investors might want to consider watching weather forecasts to see if any major storms are developing in the Atlantic and potentially targeting the U.S. coasts. Last year, two major hurricanes whirled in, with Hurricane Harvey hitting Texas on Aug. 26 and Hurricane Irma tearing into Florida not long after. In all, hurricanes caused nearly $300 billion in damage last year, and the 2017 hurricane season was the fifth-most active on record.

The hurricanes—particularly Harvey— blew some confusion into the U.S. job market. The September jobs report, which came out about a month after the storms, initially showed an unexpected loss of 33,000 jobs for the month. Though the government eventually updated that figure to a slight gain, it underscores that a significant hurricane can sometimes do more than damage buildings. It can also upend local economies enough to have a nationwide impact on job growth and economic activity, and cause disruptions in Gulf of Mexico oil output that can affect crude prices. It’s unlikely there’d be two hurricane seasons in a row as catastrophic as last year’s, and some forecasters predict a quieter season this year. Still, it’s not necessarily a bad idea to start paying more attention in coming weeks and consider how a storm might affect the market.

Peak Peak?

Not too many years ago, investors faced worries about so-called “peak oil,” a theory that oil supplies had reached an all-time high and could only go downhill. Since then, U.S. crude production has doubled and world output keeps growing steadily. Then earlier this year there were concerns that the market was potentially dealing with “peak earnings,” meaning 2018 earnings might not be topped. However, many analysts now predict earnings growth next year, so it seems not everyone is buying into that “peak” theory, either. Another “peak” got some attention this week when financial media started debating “peak social media” after weak earnings from Facebook (FB) and other companies in the space. Could we really be at that point? It’s debatable, but given the history of “peak” forecasting, investors might want to be skeptical about anyone predicting “peak” anything.

Inch By Inch

Remember back when the Dow Jones Industrial Average ($DJI) approached 20,000 for the first time? Or when the S&P 500 (SPX) was knocking at the door of 2500? Sometimes those big round numbers pose a challenge, as some investors shy away from buying as the market nears new highs. The same thing could be happening now as the SPX sits less than 1 percent from its all-time peak of just over 2872, a mark it reached on Jan. 26 before correcting more than 10 percent. For the last few days, the SPX has inched a little higher and then a little lower, coming within range but not quite reaching the old high.

Sometimes it takes a fundamental news headline or two to kick the market into higher gear at such times, and at this point the news aside from geopolitics is kind of bland with earnings season in its dying embers. That said, next week could get more interesting on the earnings front as some of the big retailers start to report. The S&P 500 retail index has advanced 14.1 percent since the end of April, while the SPX is up only 7.9%, and economic data suggests Q2 was a solid one for retailers, CFRA noted.

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