Proceed with Caution: Elections Ahead

Investor caution and apprehension was evident in last week’s trading as equity market indices slipped further while volume contracted. In fact the month of October, thus far, has not been a good month for equities as all three majors have lost ground. All three majors are now below their respective 50 DMA.

Two news events, away from earnings, took top billing last week and are likely to inform this week’s trading landscape as well. From an economics standpoint, the release of the third quarter GDP figure on Friday morning was dominant. Bloomberg consensus was calling for 2.5%, it came in at a more robust 2.9%, much to the surprise of many on the street. The GDP price index – Q/Q change – SAAR hit Bloomberg consensus on the nose coming in at 1.5%. The Q3 GDP data suggests that consumer spending and exports both performed better than expected in the period. One factor however that may have skewed the top line number was the unexpectedly large jump in durables. The export component of the data was heavily influenced by agricultural products, specifically soybeans, which helped the component post a 10% jump in the quarter. Another bright spot in the report came in the form of business investment, considered a very important gauge of outlook.

Being that we are in the closing days of the US Presidential election it should not surprise investors to see “October Surprises” emerge. That was certainly the case last week. I wrote a piece about the implications of the elections for Yahoo Finance (see below).

This week’s economic calendar will be dominated by the FOMC meeting on Tuesday and announcement on Wednesday. There is no press conference this month. The next FOMC press conference is after the December meeting. Few are expecting anything new in FOMC announcement this week and even fewer are expecting the Fed to do anything on rates. Some might suggest that given the better than expected Q3 GDP report we received last week, coupled with steady employment growth, that the Fed may surprise markets by raising rates 25 bps. I don’t see it.

There are other consequential releases this week other than the FOMC meeting and announcement. Personal Income and Outlays for September, released today, are expected to reflect an incremental uptick over August (Income +0.4%, Spending +0.5%). More closely watched will be the Core PCE Index. Last month it was 1.7%. Tuesday’s ISM Mfg Index is expected to come in at 51.6 versus last month’s 51.5 according to Bloomberg. The ADP Report on Wednesday is expected to reflect continued though increasingly more modest employment growth (+170k). Friday’s October Employment Report will be hugely important for investors. The street is calling for a monthly gain of 178k and an official unemployment rate of 4.9%. Any meaningful surprise to the upside will fuel heightened speculation that the Fed may ultimately move on rates in December.

Q3 corporate earnings will continue to roll in this week. Investors are certain to focus on Facebook (FB), Starbucks (SBUX) and Activision (ATVI). Post Q3 results, market mega-cap Apple, Alphabet and Netflix have picked up significant investor interest. The large cap tech theme that has delivered outperformance for the Nasdaq in recent months appears to be continuing.

Flickr photo: DorkyMum