US equity markets, fueled by better than expected Q3 results from the financial sector and outperformance by the real estate, utility, and home builder sector, posted mixed results last week. Friday’s solidly negative performance took a degree of the luster off the attempted weekly move higher. However, despite the Friday sell-off, the Nasdaq composite managed to post a third consecutive weekly gain last week.
Q3 earnings have provided a degree of lift thus far this earnings season but that lift has been uneven and it has felt disjointed. Financials have outperformed the broader market but that has not led to much follow-through for the Dow Industrials. That lack of follow-through, evident in Friday’s trade, was largely due to the selloffs posted by J&J and Boeing.
Software firms and other recent cloud-based growth issues have delivered mixed to negative results and cautious guidance. That has triggered some rotation out of the previously hot sector. That said, the Nasdaq has continued to rally.
Friday was the definition of a distribution day. The Nasdaq Composite shed 67.31 points or 0.83%. The S&P 500 lost 0.39% and the Dow Industrials gave back 255.68 points or 0.95%. Volume rose 17.88% on the New York Stock exchange and 9.23% on the Nasdaq. The outlook for US equities remains “Confirmed Uptrend.”
Earnings releases will continue to dominate the headlines this week. Today we hear from SAP, Halliburton, and Celanese. On Tuesday; Proctor and Gamble, Novartis, McDonald’s, Texas Instruments, United Technologies, UPS, and Lockheed Martin will release Q3 results. The week only gets busier from there.
Earnings aside, investors are clearly pricing in a move by the Federal Reserve next week.
That expectation is providing a degree of lift to our recent dysfunctional trading. It has also provided a soft floor for the near-term downside.
According to Investors Business Daily,
… the likelihood that the Federal Reserve will cut interest rates for a third time this year increased to 89%, according to CME Group. This means that the fed funds rate will likely go down a quarter point to a 1.5%-1.75% range at the end of the Oct. 29-30 meeting of the U.S. central bank.
Between a busy earnings calendar and a relatively tame economic calendar, there will be room for disruptive influences to negatively impact any traction the bulls intend to gain this week. Those influences will be largely focused on geopolitical themes: US/China trade, Brexit, and a slowing Chinese economy. Of those three significant themes, the one that seems least topical for investors here in the US is the last and it is potentially the most significant.
James Bianco, the founder of Bianco Research LLC, posted a note over the weekend with the accompanying graph. It speaks volumes. As Jim points out, “China has not had negative growth (contraction) in over 40 years.” Additionally, the last time China’s growth was this lackluster was 30 years ago (April-June 1989).
Last Week’s Economic Calendar Highlights:
- September Retail Sales M/M were weaker than Econoday consensus coming in at -0.3%. The control group was flat.
- September Housing Starts – Level – SAAR were weaker than Econoday consensus coming in at 1,256 M versus 1,300 M.
- Weekly Jobless Claims for the week ending 10/12 were 214 k – up slightly from the previous week’s reading of 210 k.
- September’s Industrial Production data delivered a mixed message for investors. September was actually -0.4% but the previous month’s reading was revised higher from the initial reading of 0.6% to 0.8%.
This Week’s Economic Calendar Highlights:
- Existing Home Sales – Level – SAAR figures for September are released at 10:00 am. August’s reading of 5.490 M reflected a M/M gain of 1.3% and a Y/Y gain of 2.6%. September’s reading is expected to moderate with Econoday consensus calling for a reading of 5.450 M.
- EIA Petroleum Status Report is released at 10:30 am. Last week’s 9.3 M bbl inventory build was partially offset by the 2.6 M bbl and 3.8 M bbl draws in gasoline and distillates.
- September’s Durable Goods Orders figures are released at 8:30 am. Econoday consensus for new orders M/M is -0.7%. Ex-transportation and core capital goods are both expected to reflect a 0.1% slip.
- Weekly Jobless Claims have continued to reflect job market tightness. This week’s data is expected to match last week’s results at 214 k.
- New Home Sales for September are due out at 10:00 am. Econoday consensus is 699 k versus last month’s 713 k.
Flickr photo: by martinbull
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