As I mentioned last week, markets looked to be consolidating for a move higher and we got that this week. There are still some laggards in the subsectors as consumer staples, biotechnology, energy and some of the leading names in the NASDAQ closed lower on the week. Notable outperforming sectors were financials and healthcare stocks which may look to continue higher based on their charts.
Historically, late October is good for stocks as late September is a seasonally weak part of the calendar – the following weeks into October result in a recovery into the holiday season. This year was unusual as this September marked a recovery in the small caps (Russell 2000) and the NASDAQ to re-sync all the major indices for a continued move higher.
According to Zack’s research, total earnings for the 52 S&P 500 members that have reported are up +13.3% from the same period last year on +6.9% higher revenues, with 76.9% beating EPS estimates and 73.1% beating revenue estimates. Not bad but we still have the other 90% to contend with in the coming weeks. Some companies will benefit from the rebuilding of Puerto Rico, Florida and Texas from the hurricanes over the summer.
Tax policy and regulatory changes are also back in focus. Congress passed a budget this week so it will now be a race to vote in a new tax policy. Will a passage coincide with a top in stocks? Good question. Despite the good price action since late September, we are still late in the business cycle so let’s watch reported earnings and new legislation as cues for changes in market sentiment.
Economic & Central Banking Snippets
- A gauge of manufacturing in New York jumped to its highest level in three years this month, a reading that should bolster the Federal Reserve’s case for another rate increase this year. The Empire State Manufacturing Survey rose to 30.2 in October, up from the 24.4 recorded the previous month, the New York Federal Reserve said on Monday. That handily beat economists’ expectations for a drop to 22 and is the strongest reading since September 2014.
- The eurozone’s trade surplus in goods with the rest of the world fell €1.4B (YOY) in August as demand for imports outstripped increases in export sales. The euro area recorded a €16.1B surplus this August compared to a €17.5B surplus a year earlier. Exports rose 6.8% on the year to €171.5B, but growth in imports was stronger, increasing 8.6% to €155.4B. While the rise in imports shows consumer demand remains strong, the rate of growth is lower than the increase for the year-to-date from the same period last year. (FT)
- UK annual inflation has hit 3% in September for the first time since 2012, the Office for National Statistics reported on Tuesday. This compares to 2.9% in August. The CPIH measure, which also includes housing, was up 2.8% in September, a level not exceeded since March 2012. Both rates are comfortably above the pace of wage growth, which stood at just 2.1% in the three months to July. (FT)
- Nationally, home prices are up 6% over the past year. Home prices in Seattle have appreciated 13% while Chicago has only benefitted from 3% home price appreciation (HPA). Since the national housing market bottomed in February 2012, aggregate home prices have climbed a healthy 42%. However, some MSAs have seen much more rapid HPA, with San Francisco, Las Vegas and Seattle all appreciating in excess of 75% while others have lagged, in particular New York City and Cleveland. (Morgan Stanley)
S&P 500 (SPY)
NASDAQ – QQQ ETF
Russell 2000 – Small Caps (IWM ETF)
- The U.S. Internal Revenue Service has temporarily suspended a contract worth more than $7 million it recently awarded to Equifax Inc following a security issue with the beleaguered credit reporting agency’s website on Thursday.
- General Motors Co. (GM) plans to become the first company to test self-driving cars in New York City, a move aimed at asserting leadership in the race to develop autonomous cars and a potentially important step toward commercializing the technology. (WSJ)
- The U.S. Housing stock (from John Burns RE Consulting):
- Five former employees have disclosed that Microsoft’s secret internal database for tracking its software bugs was broken into by a highly sophisticated hacking group in 2013. It marks the second only known breach of such a corporate database. Spies for governments around the globe and other hackers are said to covet such information because it shows them how to create tools for electronic break-ins.
- A big chunk of global consumption is funded with debt. It’s either consumer credit or government (transfer) payments (such as gov. pensions, unemployment benefits, disability, etc.).
- US lumber prices continue to soar in response to the NAFTA negotiations woes.
- Chinese automobile company Chongqing Changan said it would stop selling combustion-engine cars in 2025 and would instead invest some 100 billion yuan ($15.1 billion) to advance a new energy strategy. In an effort to combat air pollution, China set a goal to have electric and plug-in hybrid cars comprise 20% of auto sales by 2025. (Reuters)
- Kobe Steel faked product quality data for decades at some Kobe Steel plants in Japan, well beyond the roughly 10-year timeframe given by the steelmaker, according to a report. How far up the chain of command had knowledge of the fraud extending further in the past remains an open question. (NAR)
- Just like in the US, European retailers are struggling.
- China’s 10yr government bond yield hit the highest level since late 2014. Will Beijing allow yields to rise much further?
- Saudi Arabia’s economy is in recession due to weak oil prices.
- Venezuela’s longer-dated bond yield is approaching 35% due to hyperinflation and lack of growth.
Here is the effective yield on a European HY bond index (from Merrill Lynch). This is not a typo – European junk bonds are yielding 2.2%.
- Qatar’s sovereign wealth fund has brought more than $20B back onshore to cushion the impact of a regional embargo imposed on the Gulf state. Ali Shareef al-Emadi, Qatar’s finance minister, told the FT that Qatar Investment Authority deposits were being used to create a “buffer” and provide liquidity in the banking system after the gas-rich state suffered capital outflows of more than $30B. (FT)