The earnings season is in full swing and so is price volatility. Earlier in the week, notable names such as Mattel, Celgene, Chipotle, Trivago, Baidu, Advance Micro Devices and Expedia all experienced 10%+ declines in their stock prices due to weak earnings and/or a haircut to their expected 2018 growth. These are large moves in an environment of unusually low price volatility. Investors are being extremely fickle in their holdings as they sell at any sign of disappointment (even if their Q3 earnings were better than expected).
However, there was a significant turnaround on Thursday and into Friday as good earnings from Amazon and Google sparked a rally in technology which carried over to several other sectors. Given the sluggish price action over the last few months this is potentially a significant turning point for 2017. The leaders in the tech sector made new highs over the summer and hit a wall.
Without new leaders, the markets would likely correct unless the leaders made a new charge. We got that from Amazon and Google on Friday as they both made new interim highs and now we have Facebook and Apple earnings this week. If all four of these stocks can sync-up and regain their uptrends, the stock market is likely to resume its uptrend despite its lofty valuations.
Keep in mind that Facebook, Apple, Google and Amazon comprise 42.25% of the NASDAQ and 10.28% of the S&P 500. Its tough to get the indices to move much higher without their leadership.
We may also see the stock market continue to narrow in terms of sector leadership which is a sign of an aging bull market so its not a “set-it and forget-it” type of market but it is ok to be long stocks if you understand that active rotation may be required. A few sectors that have likely topped are energy, consumer staples and retail. A move higher in these sectors would likely set-up a good selling opportunity.
For the near future, let’s also keep in mind that we had a better than expected GDP print on Friday, the potential for increased economic activity in Q4 due to hurricane rebuilding, a budget that passed through Congress, a potential tax bill for 2017 and the potential announcement of a new Federal Reserve Chair in the coming weeks.
Economic & Central Banking Snippets
- The European Central Bank (ECB) has unveiled plans for its mass bond-buying program next year, announcing that it will buy €270B over the course of 2018. (FT)
- The US economy continued to grow at a steady clip during the third quarter, exceeding expectations despite the disruptions caused by hurricanes Harvey and Irma. Gross domestic product grew at a 3% which was above economists’ estimates for growth of 2.5%, according a survey of economists by Thomson Reuters.
- A strong report on durable goods orders in September pointed to upside in growth in business investment in Q3. Overall durable goods orders rose 2.2% in September, boosted by expected gains in volatile civilian aircraft and parts (+31.5%). Core capital goods orders are now up 16.5% annualized over the past three months, and 10.1% annualized over the past six months, the strongest rate since January 2013. Ian Shepherdson, economist at Pantheon Macroeconomics, said of the core capital goods figures. “If this continues, business capex will make a much bigger contribution to GDP growth through mid-2018 at least, making sustained 3% growth a real possibility.”
- Sales of newly built homes unexpectedly jumped by the most since 1992 in September, data on Wednesday showed. Sales of newly built single-family homes rose 18.9% per cent from the previous month to an annualized pace of 667,000 homes, the US Census Bureau said. Strong gains in the US job market and improving wages have helped lift demand for homes, however, a tight inventory has curbed housing activity.
Politics! Politics! Politics!
- Tens of thousands of US companies will soon face penalties for failing to comply with an obligation to provide health insurance for staff, after the Treasury told the White House there was no way to delay enforcement of a measure in Obamacare. The Internal Revenue Service will soon start informing companies which have not complied with the Affordable Care Act (ACA) how much they must pay. One White House official said that more than 100,000 companies could be affected by the penalties, which are likely to start hitting them within weeks, blindsiding bosses at a politically sensitive moment. (FT)
- Japanese Prime Minister Shinzo Abe’s gamble on calling an early election has paid off. Mr Abe’s ruling Liberal Democratic party-led coalition secured a two-thirds parliamentary “super majority”. If he continues until the Tokyo Olympics of 2020, Mr Abe will become the longest serving Japanese leader of the modern era. (FT)
- The ruling Chinese Communist party has failed to designate a clear potential successor to its sitting general secretary for the first time in a quarter-century, raising the possibility that Xi Jinping will attempt to remain in power well into the next decade.
S&P 500 (SPY)
NASDAQ – QQQ ETF
Russell 2000 – Small Caps (IWM ETF)
10 Year Treasury Yields – TNX
- In the wake of the Russia fake news debacle, Facebook COO Sheryl Sandberg has been running around Washington issuing apologies. Indeed, she’s admitted that the company owes the American people an apology, and that it regrets Russian meddling in the 2016 presidential election via its platform.
- Electric-car maker Tesla Inc. (TSLA) has reached an agreement to set up its own manufacturing facility in Shanghai, according to people briefed on the plan, a move that could help the company gain traction in China’s fast-growing EV market. (WSJ)
- Bitcoin blasted past $6,000 for the first time! Initial coin offerings (ICOs) are also setting a record, much as penny Internet stocks were the rage in 1999 but more akin to when new stock offerings were de rigueur in the final weeks of the South Sea Bubble in 1720. Most new coins are merely copies of others. Some ICOs are suspected frauds. There are now over a thousand crypto-coins, and all of them are being bid up to astronomical levels as investors look around for any related way to invest in this new asset class. This situation is akin to that in the stock market, where methods of investing have expanded so greatly that there are now more funds than stocks and more money committed to ETFs than to the underlying investments. The mania in crypto-currencies reflects the same extreme social optimism we see in the stock market. (WSJ/Elliott Wave International)
- The yield spread on junk vs. Treasury bonds in the U.S. has returned to below 4 percentage points, an area that in 2007 and 2014 marked extremes of optimism. But this narrow spread is downright conservative compared to the yield spread between European junk bonds and U.S. Treasuries. Since 2008, that difference has steadily fallen from a record high of 25% to a record low of 0.00% in October 2017. This means that bond buyers are just as content buying European junk bonds at a 2.85% yield than bonds backed by the full faith and credit of the United States at the very same interest rate. This represents an all-time extreme in debt-default complacency. Debt investors simply do not care about the integrity of the borrowers. (EWI)
- Growth in US business loans remain tepid.
- Collateralized loan obligations are regaining popularity as investors seek yield. Refinancing and almost $100 billion in new deals have driven CLO volumes to a record $247 billion through September, outstripping their 2014 full-year record of $151 billion and the 2006 pre-crisis high of $136 billion, according to JPMorgan Chase data.