Market Overview

Big Banks Fire First Salvos Of Earnings Season, And Most Results Look Good


Stocks remain on an impressive run, up eight times in the first nine sessions of the year as big financial firms got earnings season off to a pretty strong start. European stocks ticked a little higher and U.S. pre-market stock futures trading moved the major indices toward new all-time records.

The spotlight shines squarely on the financial sector today as several companies reported Q4 results, and for the most part, things looked solid.

The key story with JPMorgan Chase & Co. (NYSE: JPM) is that the company beat Wall Street analysts’ revenue expectations, coming in at $25.45 billion in Q4. That’s the big takeaway. JPM also beat expectations on the bottom line, coming in at $1.76 a share. However, that figure doesn’t include a negative EPS impact of 69 cents related to write-downs JPM took due to the passage of tax legislation, the company said. The tax legislation hit was expected, and probably won’t be a factor in coming quarters.

Though JPM’s fixed income trading fell 34% during Q4 as the industry continued to struggle with low volatility in the bond market, the company noted strength in its Commercial Banking and Asset and Wealth Management divisions. There was “healthy growth” in other divisions as well, including Investment Banking, the firm said in a press release, and CEO Jamie Dimon said the tax reform passage last month will help grow the U.S. economy and make U.S. companies “more competitive globally.”

Another major hitter early Friday was asset manager BlackRock inc. (NYSE: BLK), which is arguably the superstar of the morning. The company beat on revenue and earnings, and also raised its dividend 15%. BLK appears to be hitting on all cylinders. It’s not a surprise they did well, but few probably expected them to do that well and raise the dividend, too.

The other major player early Friday was Wells Fargo & Co (NYSE: WFC), whose earnings per share of $1.16 also topped Wall Street analysts’ projections. Revenue, however, came in just shy of analysts’ expectations at $22.05 billion, and that’s concerning. Another major concern is WFC’s net interest margin falling two basis points. That was a little surprising to some investors and might explain why shares fell in pre-market trading. WFC took a charge for litigation and benefited from the tax bill in Q4, but investors might focus on the net interest margin being down.

In a press release, WFC touted higher deposits, commercial loan growth, increased debit and credit card transactions, and record client assets under management in Wealth and Investment Management.

Earnings topped the news, but data are also front and center with today’s release of the December consumer price index (CPI) and retail sales. The CPI showed signs of coming back to life with a 0.3% rise in the core reading, which strips out food and energy prices. That was the best showing in 11 months, and core CPI is now up 1.8% year-over-year, from 1.7% the previous month. While one month of data isn’t enough to be a trend, this could be the type of news that the Fed has been looking for as it seeks signs of inflation in the economy. Vehicle and health care prices were among those that increased in December.

Retail sales came in as analysts had expected at 0.4% in December, but the November reading got revised higher to 0.9%, from the previous 0.8%.

Thursday brought more record highs as the Dow Jones Industrial Average ($DJI) rose more than 200 points and the S&P 500 (SPX) climbed 0.7%. The Nasdaq (COMP) also set a new all-time high. Major industrial stocks like Boeing Co (NYSE: BA) and Caterpillar Inc. (NYSE: CAT) led the charge amid general investor optimism about economic growth.

Easily outpacing the other indices was the Russell 2000 (RUT) index of small-cap stocks, which climbed a pretty astonishing 1.73% on the day to a new all-time high and is nipping at the heels of the SPX for year-to-date gains after trailing the large-stock index in 2017. A lot of the gains in small caps could be related to the tax cut, which many analysts think might help smaller companies more than larger ones since more of their sales tend to be domestic.

From a sector standpoint, cyclicals continue to dominate. Energy stocks rose more than 2% Thursday amid rallying crude oil, while industrials, consumer discretionary, and materials also had good days. Consumer staples, telecom, real estate, and utilities continued to struggle. This kind of sector division isn’t too unusual at a time when many investors believe the economy is firing on almost all cylinders.

Transport stocks, which also typically do well in stellar economic times, climbed 2.3% as Delta Airlines, Inc. (NYSE: DAL) enjoyed a strong rally after reporting excellent Q4 earnings. Other airlines followed suit, and delivery companies FedEx Corporation (NYSE: FDX) and United Parcel Service, Inc. (NYSE: UPS) also shined.

Across the Atlantic, the European Central Bank (ECB) released an account of minutes from last month’s meeting on Thursday, and analysts interpreted the language as more hawkish. It sounds like the ECB could soon start discussing ways to end its bond purchase program. The German bund yield is now above 0.5% for the first time since late October, and the euro is above $1.21, a three-year high. Both appeared to be initially bolstered by the ECB minutes, though the bund yield finished the day a little lower.

Nerves that sent U.S. bond yields shooting higher earlier this week seemed to ease a bit, with the U.S. 10-year yield falling back to around 2.55% by early Friday after coming within a whisker of 2.6% Wednesday. The 2.6% level, which is near last year’s high of 2.63%, remains a point of technical resistance that investors might want to continue monitoring. Wednesday’s decline in stocks amid a bond market sell-off could serve as a warning that stocks are a bit sensitive to rising rates at the moment.

Crude oil remains near three-year highs, but backtracked a bit by early Friday. U.S. crude supplies have fallen eight weeks in a row, and production also moved a bit lower last week. However, supplies are near the five-year average for this date. It’s just that the market got used to having much larger than normal supplies over the period between 2015 and 2017. It looks like OPEC’s strategy to cut production is having an impact, but the question is whether all the OPEC members can hold the agreement together when oil is fetching such premium prices. Sellers might be tempted in this environment.

The new record stock market highs Thursday came despite a shot across the bow by New York Fed President William Dudley. Plenty of what Dudley said in his speech was actually pretty positive. For example, he believes prospects for continued economic expansion in 2018 “look reasonably bright,” and that the economy is likely to grow at an “above-trend pace.” He added that he’s not overly concerned about the recent flattening of the yield curve.

What he is concerned about is the risk of “economic overheating” that could force the Fed to “press harder on the brakes at some point over the next few years,” as well as the long-term fiscal outlook. The speech is available online and worth reading for more detail, but basically Dudley repeated some of the same warnings that Fed Chair Janet Yellen made a couple of months ago about rising U.S. debt and the costs to service it. He noted that the recent tax cut could cost $1.1 trillion over the next 10 years, and warned of possible “storm clouds” over the longer term.

FIGURE 1: TRANSPORTS FLYING HIGH. The Dow Jones Transportation Average (candlestick chart), is up pretty robustly over the last month and climbed sharply on Thursday amid airline and delivery company strength. The Russell 2000 index (RUT) of small stocks (purple line) also made a big upward move Thursday. Data source: Dow Jones & Co., FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Buying the Dip

Some investors might take comfort in the fact that there seems to be a “buy the dip” mentality at play right now. That means small drops in stock prices — say 1% to 2% — have frequently attracted buyers over the last few months. It appeared to happen again Wednesday, when the $DJI quickly recovered from early 100-point losses. One question, however, is whether these “buy the dippers” would have the stamina to stand their ground if the market undergoes a longer, steeper retreat, like the one we saw in early 2016. It’s possible they wouldn’t. If stocks fall more than a percentage point or two and dip buyers scamper toward the doors, selling momentum could accelerate. There’s no way to predict the future, but this does bear watching in the case of a pull back.

Earnings Potpourri

With earnings season getting underway today, S&P Capital IQ consensus estimates S&P 500 earnings per share growth for Q4 at 10.5%, down from 10.6% a couple of weeks ago. The firm still sees 10 of 11 sectors growing their earnings, led by energy, financials, materials, and tech. Health care, industrials, telecom, and real estate might bring up the rear, the firm said. For the full year, the firm sees EPS rising 13.6%.

The 10.5% prediction for Q4 EPS is the one to keep an eye on in the near-term, because in recent quarters, earnings estimates have often been outpaced by actual results. If that turns out to be the case again, it could potentially start putting a little bit more pressure on the S&P 500 price-to-earnings (P/E) ratio, which remains high at around 19 times forward earnings estimates.

Looking for Work

Weekly unemployment claims have ticked up a little over the last few weeks, and reached 261,000 in Thursday’s government report. That was well above Wall Street analysts’ expectations and brought the four-week moving average up to 250,000, from the previous 241,000. However, weekly claims have stayed under 300,000 for 149 straight weeks, meaning labor market conditions remain “favorable,” said.

On another note, producer prices actually fell 0.1% in December, dropping for the first time in nearly a year and a half. It was another in a series of reports showing tepid inflation pressure, and producer inflation has fallen in China, as well. According to one school of thought, weak producer prices mean companies could be under less pressure to raise prices for consumers, keeping inflation muted throughout the economy and perhaps lessening pressure on the Fed to hike rates. On the other hand, falling producer prices sometimes signal economic weakness. One monthly report isn’t enough to make any sweeping conclusions, so let’s see what the next PPI brings.

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: Earnings News Bonds Eurozone Commodities Treasuries Econ #s Markets


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