US equity markets had a good week last week as all three majors, and the Russell 2K gained ground. The Russell out-performed its piers on the week. The Russell gained 98.25 points or 6.38% while the Nasdaq gained 504 points or 4.56%. The S&P was up 3.84% and the Dow Industrials added 904 points or 3.27%. And as discussed last week, the 50 DMA ended up playing a pivotal role in how equity market performances unfolded for the week.
As all three charts below illustrate, and as we have discussed at length, I was looking for the 50 DMA to provide our next directional cue. And the fact that none of the major indices were able to trade through their respective 50 DMAs on expanding volume over the previous two weeks was an indication that institutions were not net sellers during the period. Was there net rotation out of large-cap tech and did that weigh on the major market indices over the past several weeks? You bet. On Friday however that rotation was not evident in the market and as a result, familiar names once again dominated the leader board. That can most easily be seen in ETF flows below.
All-in-all markets closed out the week with a solid performance allowing for the major indices to post their best week since July. Both the S&P 500 and Dow Industrials closed out the week 3% off their all-time high while the Nasdaq is only off 4%. The driver in this directional trade was and remains primarily the prospect of additional pandemic relief for consumers. Trump’s offer on Friday did provide a lift to markets. Pelosi’s outlook on Sunday threw a wet blanket on futures in the overnight. I expect a deal this Holiday shortened workweek. Secondarily, I expect earnings to also act as a driver of our directional trade – particularly now that we hear from financials this week.
Current Outlook: Confirmed Uptrend
This week alone we receive Q3 results from 103 listed companies – with a thematic focus on financials. For example today we hear from:
JNJ : Consensus EPS Forecast $1.98
JPM: Consensus EPS Forecast $2.26
C: Consensus EPS Forecast $0.97
BLK : Consensus EPS Forecast $7.46
And that is just 4 of the 16 companies reporting on Tuesday. Last earnings season provided US equity markets with a constructive underpinning as nearly 70% of the S&P 500 companies reporting provided either better than expected Q2 results and/or an improved outlook for coming quarters. Given the relatively cautious COVID-19 informed guidance held by many CEO’s at the moment, not to mention reduced earnings estimates by coverage in many cases, I would not be at all surprised to see a healthy percentage of companies beating consensus estimates again this season.
It is unlikely to be a repeat of last quarter’s results but enough of an upside surprise to provide a constructive underpinning for the market once again as we head into year-end.
Last week’s economic highlights:
The U.S. Goods and Services trade deficit once again expanded in August. The actual reading for the month was $-67.1B. Econoday consensus was $-66.5.B July’s reading was revised fractionally lower to $-63.4B. Federal Reserve Chairman Jerome Powell’s testimony on Capitol Hill last week did not provide the street with any surprises (that’s a good thing). He once again outlined the Fed’s primary concern of supporting the economy in the face of significant COVID-19 induced headwinds. He also outlined his reasoning for not being concerned about the inflationary implications of the aggressive fiscal policy being pursued by President Trump and Congress. Between the demographic trends that are in place in nearly all of the developed world and the impact of technology on productivity and efficiency, Chairman Powell sees little risk of inflation undermining the Fed’s aggressive monetary policy posture.
The FOMC minutes from the meeting three weeks ago were in-line with expectations and with themes consistently being underscored by Chairman Powell and by members of the Federal Reserve Open Market Committee (FOMC).
Weekly Jobless Claims fell flat and short of expectations on Thursday morning. The previous week’s claims were raised to 849K from 837K. Econoday consensus was 819K for the week ending 10/3. They were 840K. The 4-week moving average stands at 857K.
This week’s economic calendar highlights:
This morning we receive the Consumer Price Index (CPI) from the Bureau of Labor Statistics. For September, the CPI M/M reading is expected to tick down to 0.2% from 0.4%. The Y/Y reading is expected to stand at 1.4%.
On Wednesday, The Producer Price Index – Final Demand (PPI-FD) for September is released. Econoday consensus is 0.2%, on a M/M basis. The Y/Y the reading is expected to swing to a positive reading (+0.2%) from August’s Y/Y reading of -0.2%.
On Thursday, the Weekly Jobless Claims data is released at 8:30 am. For the week ending 10/10, initial claims are expected to be 833K – in-line with the previous week’s reading of 840K. The 4-week Moving Average is 857K. Also on Thursday, we receive both the Philadelphia Fed Manufacturing Index and the Empire State Manufacturing Index. The Philadelphia Index is expected to match September’s reading of 15.0.
On Friday, retail sales data for September is released. On a M/M basis, retail sales are expected to have risen by a healthy 07%. Ex-autos the reading is expected to be 0.4%. The Industrial Production release, on Friday, by the Federal Reserve has three verticals. Topline Industrial Production, manufacturing output, and capacity utilization. The topline reading is expected to tick up to 0.6% from 0.4% Manufacturing (+0.8%) and capacity utilization (+71.9) are both expected to be in line with August.