Variables at Play

This week’s economic calendar is relatively light. The primary focus for investors will be on the FOMC Meeting, which begins on Wednesday and concludes with the FOMC Meeting Announcement on Thursday at 2:00 pm. Other releases sure to generate heightened interest include the EIA Petroleum Status Report on Wednesday, Weekly Jobless Claims on Thursday morning, and the PPI-FD release on Friday morning at 8:30 am.

Given that there is not a scheduled press conference following this week’s FOMC Meeting, there is no expectation that the FOMC will announce any move on rates. Instead, this week’s FOMC Announcement will be gleaned by interest rate watchers and investors for clues on policy moving forward. In particular, investors will be looking to gauge the rate at which the Fed will be pursuing its tightening monetary policy in coming quarters.

The most recent economic data releases we have received have indicated that the US economy continues to expand at a healthy rate. Last week’s Employment Report, for October, is a good case in point. Non-Farm Payrolls grew 250K versus Econoday consensus of 190K. September’s results were revised lower – from an initial 134k to 118k.The official unemployment rate remained 3.7% while manufacturing payrolls in the month rose by 32k and the Labor Force Participation Rate (LFPR) ticked higher to 62.9% from 62.7%. A significant takeaway from the report and one that appears to have garnered the most attention, given the election cycle, was the average hourly earnings data. For the first time in over a decade, average hourly earnings on a year-over-year basis came in at 3.1%. October’s Employment Report was about as constructive and balanced a report as investors could have been hoped.

There were other data releases last week that provided additional evidence of a healthy, expanding economy. The preliminary Productivity and Costs data for Q3 is a case in point. Nonfarm productivity Q/Q was a healthy 2.2% while unit labor costs Q/Q were 1.2%. PMI Manufacturing Index for October was 55.7 versus September’s 55.6. Weekly Jobless Claims came in at 214K – close to a multi-decade low.

With last week’s solid economic data as a backstop, and with this week’s economic calendar relatively light, away from the FOMC, investors will be focused on Q3 corporate results with renewed vigor.

That myopic focus was on display on Friday of last week in the case of Apple’s (AAPL) quarterly results and guidance. Though Apple’s results topped analysts expectations for the quarter, management provided two hurdles for investors–hurdles that were decidedly unwelcome based on the price action of AAPL on Friday. Management gave weaker-than-expected holiday sales guidance and coupled that with a shift in its reporting of unit sales – a gauge widely used to measure growth. The company will no longer be providing unit sales of iPhones.

The drubbing that AAPL took on Friday did bleed through to the broader Nasdaq Composite as well as the overall market, but only to a degree.

On the day, the Nasdaq Composite lost 77.06 points, or 1.04%. Apple’s swoon less negatively impacted the S&P 500 (-17.31 pts, 0.63%) and Dow Industrials (109.91 pts, 0.43%). APPL’s share volume traded on Friday was a stunning 91 million shares. Volume on the Nasdaq rose 6.79% while volume on the NYSE slipped 9.72%.

Last week’s price action across the US equity market landscape provided investors an opportunity to take a cleansing breath – a sigh of relief of sorts. The sharp compression in valuations that has marked equity trading since October 3rd has taken its toll on investors psychology and outlook. Last week saw US equity markets stabilize to a large degree – fueled by economic data and earnings. We managed to post three consecutive days of gains (Tuesday – Thursday) and even on Friday, when we were positioned to capitulate again as a result of investors disappointment over AAPL’s guidance, markets held their footing, losing only marginal ground. In some respects, Friday’s equity market price action was the most important of the week.

US equity markets need to find traction for this attempt at a rebound higher that took shape last week. Three variables that could well play a hand in that this week are: corporate earnings, the FOMC, and midterm elections. There are plenty of variables. However, I remain constructive.

The relative price stability that materialized last week in US equity markets was not entirely unexpected. That said, technical damage has been inflicted on all three US equity market indices over the past month. As the S&P 500 chart above illustrates, Friday’s closing price was below both its 50 DMA and 200 DMA. The S&P 500 closed 7% off its all-time closing high. The Dow industrials have fared better in the period. On Friday the Dow industrials closed at 25,270.83 – above its 200 DMA, but below its 50 DMA. The Nasdaq has fared worst: 10% off its all-time closing high, and below its 50 DMA and 200 DMA.

As discussed, this week’s economic calendar – away from the FOMC – is light but that doesn’t mean there won’t be plenty of equity-centric news to focus on. Disney (DIS), Square (SQ), Loews (L), and Marriot (MAR) all report this week. We also hear from Zebra (ZBRA), Genomic Health (GHDX), Tableau Software (DATA), and many other industry leaders.

Flickr photo: i.hoffman

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