Bottom Falling Out?

What a week! Fear, driven by multiple themes, once again drove US equity markets sharply lower across the board and the volatility index higher – though an attempt at a recovery did take shape on Friday. Fear over monetary policy tightening and the impact it would have on the rate of economic expansion, anxiety over the potential impact of escalating trade and tariff tensions, concern over rising energy prices, and a generally shared mistrust of our economic expansion remaining intact in coming quarters, all combined to rattle markets. In the process, US equity markets suffered their worst collective rout since February of this year. The anxiety that has driven the narrative over the past two weeks is more anticipatory in nature than it is rooted in fact.

As I indicated would likely be the case several weeks ago here, the seasonal weakness for US equities, in-between earnings season, coupled with a number of other variables including the upcoming Mid-year elections, all gave investors the opportunity to briefly take their eye off the ball.

 

Earnings and economic data are what ultimately drive equity prices.

Q3 earnings season officially kicked off last week and picks up steam this week. In the quarterly results reported thus far, there are signs that corporate America’s Q3 results may provide a counterbalance to the panic-driven trade that has heightened fear and exhausted traders and investors in recent trading sessions. That said, and as I outlined on Yahoo Finance last week, there are undeniable signs that equity market leadership rotation has taken root.

Last week, Delta (DAL) reported Q3 results. The consensus was $1.71/share. Results came in at 1.80/share – providing a comfortable beat. Additionally, commentary following the results was upbeat. Walgreens Boots Alliance (WBA) beat as well, coming in at $1.48/share versus consensus of $1.44/share. Financials/banks normally dominate the first week of earnings season. Citigroup (C) reported Q3 results of $1.74/share versus consensus of $1.66/share. JP Morgan Chase (JPM) beat as well ($2.34 versus $2.24). Additionally, comments following the call by CEO Jamie Dimon were constructive. PNC Financial (PNC) beat ($2.82/share versus $2.73/share). Though Wells Fargo did miss by .04, investors have largely looked at Well’s results through the lenses of regulatory headwind. From the perspective of Q3 earnings and guidance, investors have not been provided a context for a sharp pullback in equity prices – broadly speaking.

Our most recent economic data, not unlike corporate results thus far, remain constructive. The PPI-FD M/M change reported last week for September, met consensus at 0.2%. on a Y/Y basis it stands at 2.6%. The CPI reading for September was a modest 0.1% versus August’s 0.2%. Y/Y, less food and energy, the reading stands at 2.2%. The EIA Petroleum Status Report continues to reflect a build. Given that the Baker-Hughes Rig count totals for North America continue to climb, a build is not entirely unexpected. The count, released last Friday for the week ending 10/12, rose 24 to 1258. For the week ending 10/5, crude oil inventories rose 6.0M barrels. Coupling that data with other sentiment/confidence readings provides further support for encouragement. For the month of October (preliminarily) Consumer Sentiment, as measured by the University of Michigan, was 99.0 – close to cycle highs. The NFIB Small business Optimism Index for September was 107.9 – close to cycle highs.
Though our economic expansion should, by the law of averages, be getting a bit long in the tooth, the evidence is not there to confirm that is the case. Earnings and economic data continue to reflect growth while inflation continues to remain largely at or near Fed targets.

Bank of America (BAC) reports today. Consensus is $0.62/share. Pinnacle Financial (PNFP), Netflix (NFLX), Morgan Stanley (MS), Johnson & Johnson (JNJ), IBM, BlackRock (BLK), and CSX report Monday and Tuesday. Look for them to set the tone for investors this week. Given an interruption of our recent fear-driven headlines, and better-than-expected results, the reversal that materialized on Friday may well have some legs.

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Flickr photo: Nicholas Erwin