GGFS Commentary

Market Recap

Equities inched higher last week as the S&P and other major indexes gained about 1% and the Dow Jones Industrial Average crossed the psychologically important 20,000 mark. Treasury Yields remained relatively steady, and the U.S. dollar lost a little bit of ground against other major currencies as some of President Trump’s policies came into focus. On the economic front, data was mixed with Durable Goods orders and GDP disappointing slightly, while existing home sales and trade data came in line with expectations. On the earnings front, so far 170 of the S&P 500 constituents have reported. Of these, 52% have reported positive revenue (sales) surprises, while 74% have reported positive earnings surprises – following the trend of recent quarters.

Looking ahead

After President Trump’s executive order banning travel from seven middle-eastern countries, which was announced on Friday, expect the media to focus on this topic and the potential impact on businesses. In our view, it is unlikely that this will have a deep or lasting economic effect, however there could be a long-lasting impact on international relations. From a market perspective, earnings will continue to matter most, followed by economic data releases relating to home prices, inflation and consumer confidence. Wednesday’s FOMC meeting could bring the second consecutive interest rate hike, however given some of the more benign inflation and growth data released last week there is an equal chance of no moves.

As the year draws to an end, investors are wondering if the ‘Trump Rally’, which has propelled stocks some 6% higher since election-day, can last into the first quarter and beyond. Recent economic news has been encouraging, and market participants will be watching the slew of data being released this Thursday to gauge the probability of a continuation of the rally. One immediate headwind stocks may face are corporate earnings, through last Friday, 77 of the S&P 500 constituents have issued negative EPS guidance (according to FactSet). And, with an expected EPS growth rate of 2.2% the current rally seems to be pricing in a good amount of upside surprises. None-the-less, markets have a long history of swinging to extremes before correcting to a more normalized valuation, so bears may be disappointed in the early parts of the New-Year.

This Weeks Market Moving Events:

• Monday: PMI Services, Janet Yellen Speaks
• Tuesday: U.S. Redbook report
• Wednesday: Mortgage Applications, Existing Home Sales
• Thursday: U.S. GDP (Q3), Jobless Claims, Chicago Fed National Activity Index, Corporate Profits, Home Prices, Personal Income, Leading Indicators, Kansas City Fed Manufacturing Index
• Friday: New Home Sales, Consumer Sentiment

On the heels of a strong November jobs report and the lowest unemployment rate in a decade, U.S. equity markets look to continue their rally this week. Markets are once again defying conventional wisdom and proving many ‘talking-heads’ wrong, as futures point to a higher open in spite of Sunday’s referendum vote by Italians to stick with their current political structure. President elect Trump’s spat with China over the weekend doesn’t appear to unhinge investors either, as consensus that the Fed will raise rate next week is almost unanimous. The real question for market participants is ‘how many dominos can fall before markets react negatively?’

Looking Ahead:

Economic data and corporate earnings will be the ultimate drivers of market performance, and in the short-term these appear to be sufficiently healthy to support a continuation of the rally. However, February’s German elections and the possibility of a cyclical slow-down in Q1 will likely be a bit much for market participants, as such investors are wise not to become overly exuberant.

This Week’s Market Moving Events:

Monday: Consumer Spending, PMI Services, ISM non-Manufacturing, Labor Market Conditions

Tuesday: International Trade, Productivity & Cost Index, Redbook report, Factory Orders

Wednesday: Mortgage Applications, JOLTS Report

Thursday: Jobless Claims, Chinese Data

Friday: Consumer Sentiment, Wholesale Trade

Market Recap:

With a week to go before the Presidential Elections investors are fretting over the outcome and what it might mean for markets. Putting aside the possibility that the results might be contested and therefore unknown for several weeks (think back to Bush / Gore in 2000), the real focus for investors should be on economic data, the Fed and the congressional races that might impact fiscal policy over the next two years.

As far as rising interest rates go, while conventional wisdom states that rising interest rates have a drag-down effect on the economy and is generally viewed as a poor environment for stocks and bonds, evidence suggests the opposite holds true. Central Banks raise interest rates in response to an ‘over-heating’ of the economy or concerns of rapidly rising inflation. While many would argue that this environment does not exist today, there is a solid case to be made for raising rates at this juncture. The impact of declining energy prices is likely behind us, meaning that this will no longer put downward pressure on inflation, while continued employment growth should translate into higher wages – early signs of which can already be seen in the monthly JOLTS (Job Openings and Labor Turnover Statistics) report. From a historical perspective, the U.S. economy, corporate earnings and stock market returns have all fared well in the early stages of a rising rate environment.

For those worried about a deep or prolonged correction, keep in mind that since 1980, the market (as measured by the S&P 500) has been in negative territory at some point in each year – with an average intra-year drop of just over 14%, all the while ending in positive territory for the year 75% of the time.

This Week’s Market Moving Events:

• Monday: Personal Income & Spending, Chicago PMI, Dallas Fed Manufacturing Survey, Japanese and Chinese economic data (after the close).
• Tuesday: Motor Vehicle Sales, Redbook Report, PMI & ISM Manufacturing, Construction Spending.
• Wednesday: FOMC Statement
• Thursday: Chain Store Sales, Jobless Claims, PMI Services, Factory Orders, ISM Non-Manufacturing data.
• Friday: October Employment Report, International Trade.

Market Recap:

Stocks climbed slightly last week on the back of better than forecast earnings data – roughly ¼ of S&P 500 constituents have reported so far and of these 81% have shown a positive earnings surprise. Low inflation data coupled with continued positive economic data also helped investors overcome their anxiety over the eventual interest rate hike. The upcoming week will provide plenty for investors to fret over, including a deluge of earnings reports as well as some key economic data that could tip some of the remaining ‘Doves’ on the FOMC to agree to a December tightening.

This Week’s Market Moving Events:

• Monday: Chicago Fed National Activity Index, PMI Manufacturing Index. Kimberly Clark (S: KMB), Visa (S: V) report earnings.
• Tuesday: Redbook Report, Consumer Confidence, Richmond Fed Manufacturing Index, Investor Conference. 3M (S: MMM), Apple (S: AAPL), Caterpillar (S: CAT), Elli Lilly (S: LLY), General Motors (S: GM), Merck (S: MRK), Proctor & Gamble (S: PG), Under Armour (S: UA) report.
• Wednesday: Mortgage Applications, International Trade, PMI Services, New Home Sales. Boeing (S: BA), Coca Cola Co. (S: KO), Waste Management (S: WM) report.
• Thursday: Durable Goods Orders, Pending Home Sales, Kansas City Fed Manufacturing Index. Alphabet (S: GOOG), Philip Morris (S: MO), Amazon (S: AMZN), Bristol Meyer (S: BMY), Colgate Palmolive (S: CL), Ford Motor Co. (S: F), Raytheon (S: RTN) report.
• Friday: Q3 GDP, Employment Cost Index, Consumer Sentiment. Auto Nation (S: AN), Chevron (S: CSX), Exxon Mobil (S: XOM), MasterCard (S: MA), Xerox (S: XRX) report.