Highlight Reel Looks Light: Alphabet Reporting Later, But Early Action A Bit Slow

We seem to be getting off to a dull start this week. And unless you think the most exciting part of a football game is the punt, you might say the dullness began at about 7 p.m. last night, Atlanta time.

The highlight reel today could consist of earnings from Google parent company Alphabet Inc GOOG and December auto sales, but otherwise there just doesn’t seem to be much of anything new to get the indices rolling early on. Kind of like three runs up the middle followed by a kick. Over across the water, Asian stocks performed pretty well Monday, but European indices looked just as flat as pre-market trading here in the U.S.

For that matter, GOOG doesn’t report until after the closing bell, so anyone watching earnings this morning didn’t have a whole lot to talk about. The only real earnings news of note early on was Clorox Co CLX beating analysts’ expectations, with shares rising nearly 5% in pre-market trading.

Six For Six

Monday starts with the Dow Jones Industrial Average ($DJI) riding a six-week winning streak and all the major indices up solidly so far this year. Friday’s gains followed a January that was quite a month for the entire U.S. stock market, with every S&P 500 sector rising. Energy, industrials, and real estate topped the sector leaderboard, followed by consumer discretionary, communication services, and a really strong showing by financials (up 8.7% in January). 

It’s interesting that many of those top performers were cyclical sectors that tend to do better when the economy is booming. The revival of financials—which spent much of 2018 licking their wounds—could be a significant development. Over the years, we’ve seldom seen a really strong rally without financial sector participation.

Another positive is that two indices often seen as “canaries in the coal mine” for economic strength—the Russell 2000 Index (RUT) of small-cap companies and the Dow Jones Transportation Average ($DJT)—are both up double digits year-to-date, outpacing the broader market.

From a big picture standpoint, the SPX rose nearly 8% for the month. Investors might now be hearing that old adage about the “January effect” and how a strong January can sometimes set the tone for more gains later in the year, but it’s probably best to take that sort of “wisdom” in context. If anyone needs a reminder, consider the strong January performance last year. As you might remember, that didn’t end up meaning much, as the SPX ended 2018 in the red.

Q4 Earnings Exceeding Estimates, But Not By a Lot

The big gains so far this year come as Q4 earnings to date look good but not spectacular. So far, 70% of reporting S&P 500 companies have beaten third-party consensus estimates, down from the five-year average of 71%, according to FactSet. You can’t get much closer to average than that. Average earnings per share has beaten analysts’ estimates by 3.5%, down from the 4.8% average, FactSet said, while 62% of firms have beaten analysts’ sales estimates, compared with the 60% five-year average.

Meanwhile, average Q4 earnings per share growth has been 12.4%, according to FactSet, closely in line with analyst projections heading into earnings season. Double-digit earnings growth is never a bad thing, but it does represent a step back from the better than 20% EPS growth seen through most of late 2018. Still, comparisons are likely to be tougher this year. 

On the positive side, average S&P 500 company revenues are up more than 6% in Q4. It can often be helpful to watch revenue growth because companies can’t disguise if that’s weakening. Also, revenue gains often point to a healthy economic picture. That contrasts with earnings per share, which can spike for internal company reasons like lower spending.

Earnings Season Far From Over With Alphabet, Twitter, Disney

Key earnings on tap for the coming days include Alphabet, Twitter Inc TWTR and Walt Disney Co DIS.

Alphabet’s results come as technology stocks have been experiencing a bit of a rebound, but it remains to be seen whether the search engine giant will continue that trend. With TWTR, consider paying attention to their numbers on international and domestic users. Meanwhile, DIS could offer a peak into the mind of the consumer at a time when recent data has shown the U.S. consumer has become less confident.

As we continue to move though earnings season, consider paying close attention to retail earnings. One thing to consider watching for is what signals retailers may give on the health of the consumer this year. 

One thing CEOs generally haven’t been talking about this earnings season is capital spending, likely because of uncertainty surrounding the tariff situation with China. That could be concerning if it continues.

Factory Orders, Auto Sales In Store This Week

The coming days look relatively light on economic reports. But it could be interesting to take a look at factory orders on Monday, especially given the concerns surrounding global economic growth and the United States’ role in it. Factory activity can be an important part of overall gross domestic product, and industrial activity in the United States can affect the economies of other nations that export commodities or other goods for use in the domestic manufacturing sector. The market is also scheduled to get readings on monthly car and truck sales.

Data on Q4 labor costs are due out on Wednesday. Such costs form an important look at inflationary pressures. Labor costs are expected to show a rise of 1.7% for the quarter, according to a Briefing.com consensus. That would be up from Q3’s 0.9% rise.

The inflation data come at a time when the Fed has signaled it can afford to take a break from rate hikes because inflation is muted. But the pendulum could swing the other way if data come in showing inflationary pressures are stronger than previously thought.

While earnings and data continue to roll out, geopolitics haven’t retreated. Brexit remains confusing, while U.S. and China trade negotiations are on the front burner and there’s less than two weeks until the deadline for another possible government shutdown. 

U.S. market volatility eased quite a bit last week as the Fed indicated a dovish stance, but that doesn’t mean all the fireworks are necessarily over. Some upbeat talk from China late last week followed by positive comments from President Trump over the weekend seemed to boost optimism about the trade picture, but as we’ve seen, things can change quickly on that front. Investors might want to consider keeping that in mind before getting too sanguine.

Energy Led Friday Gains

The old week ended with enthusiasm about a strong January jobs reading tempered a bit by the government cutting back its estimate for December job growth. Also, considering the impact of the government shutdown in January, it wouldn’t necessarily be a big surprise if we ultimately end up seeing revisions to January’s payrolls number as well, though we’ll have to just wait.

The energy sector was by far the best performer of the day Friday, helped in part by gains in oil prices and corporate earnings. Shares of Exxon Mobil Corporation XOM and Chevron Corporation CVX both gained ground after the companies reported earnings that beat Wall Street estimates. 

Meanwhile, oil prices also rose Friday as the bumper jobs data apparently raised demand among some investors for riskier assets and at the same time boosted sentiment about demand for oil. A stronger economy tends to help increase the use of oil products. 

A report from Baker Hughes also proved bullish, as it showed a decline in the number of U.S. oil rigs, adding to a tightening supply picture after Washington imposed sanctions on the Venezuelan state-owned oil and natural gas company last week.

Crude dialed back slightly to start the new week. Volatility is slightly higher but VIX remains below 17, near recent lows.

Figure 1: VIX on the Decline: Investors appear to be less worried than they were at the end of last year. As stocks have been gaining ground, investor fear, as measured by the Cboe Volatility Index (VIX) has been on the decline. Data Source: CBOE Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Shutdown Complications Continue: While the total number of people employed in nonfarm work in January surpassed expectations, the total unemployment rate also came in higher than forecast. With all the news in recent weeks surrounding the partial government shutdown, you might be wondering how the funding gap affected the jobs report. The answer, in short, is that it’s complicated. For the headline payrolls number, the government counted furloughed federal employees as employed because they worked or received pay (or will) for the pay period including Jan. 12. But federal contractors that didn’t work or receive pay during the shutdown weren’t counted among the employed. Overall, “there were no discernible impacts of the partial federal government shutdown on the estimates of employment, hours, and earnings from the establishment survey,” the Bureau of Labor Statistics said.

However, the government said the partial shutdown contributed to the rise in the unemployment rate (to 4%) and the number of unemployed people (to 6.5 million people). The number of people employed part time for economic reasons, or involuntary part-time workers, rose by around 500,000, perhaps reflecting impact from the shutdown. There was also an increase of federal workers classified as unemployed on temporary layoff as well as a rise in those classified as employed but absent from work. That last group included people affected by the shutdown who should have been classified as unemployed on temporary layoff, according to the government. Had they been correctly classified, the employment rate would have been slightly higher, the government said. (Misclassification can happen when survey respondents misunderstand questions or interviewers record answers incorrectly.)

Construction Jobs Surge: Drilling down into the employment report, one interesting note is that construction employment rose by 52,000 jobs in January, another indicator of strength in the economy. That’s a substantial jump from December’s 28,000 and included gains in residential building construction as well as jobs for residential specialty trade contractors. The gains in residential construction could indicate stronger times for the housing market—which has been a thorn in the side of the economy for some time amid affordability issues for homes—as the spring buying and selling season approaches. “Despite ongoing supply and affordability constraints, the healthy job market and underlying demographic fundamentals both point to gradual purchase growth in the coming months,” said Joel Kan, of the Mortgage Bankers Association, in a press release accompanying the group’s latest mortgage applications report. 

Move Over Payrolls: The jobs report was the big news about the economy on Friday, but a lesser report also brought some encouraging news about the economy. The Institute for Supply Management’s manufacturing index rose unexpectedly in January, providing a counterpoint to some of the doom-and-gloom about the global economic growth situation. The measure was expected to fall from above 54% to 53.6% but ended up coming in three points higher at 56.6%. Anything above 50% represents expansion. Based on the past relationship between the index and the overall economy, the ISM said the latest report indicates the January reading corresponds to a 4% growth in annualized real gross domestic product. According to Briefing.com: “The January increase was driven by solid growth in new orders and production, which suggests the U.S. manufacturing sector is holding up well despite concerns about the pace of global growth.”

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