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Market Update: Monday, August 8, 2016

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Market Update

  • Equity advance continues, oil gets OPEC boost. U.S. stocks are set to build on a strong finish to last week, with modest gains this morning that will likely push theS&P 500 to another record high, at least on an intraday basis. The major indexes advanced nearly 1% on Friday following the strong jobs report, led by financials (+1.9%), while countercyclical utilities (-1.4%) and telecom were the only two sectors to end in the red. Investors will be looking ahead to retail earnings this week. Overseas, the Shanghai Composite rose nearly 1% even amid gloomy Chinese trade data as investors anticipate fresh stimulus from the Bank of China, while Japan’s Nikkei advanced 2.4% on the strong U.S. job news. Elsewhere, WTI crude oil is enjoying a 2% bounce on renewed talk of a production freeze by some OPEC members, COMEX gold is soft to start the week, and the 10-year Treasury yield is up to 1.61%.


Macro View


  • Second quarter earnings season has been okay but we were hoping for more. With about 85% of S&P 500 companies having reported second quarter results, S&P 500 earnings are tracking to a 2.6% year-over-year decline, which means the earnings recession is poised to continue. Although the numbers for the quarter were not great, there have been some encouraging signs, including solid results from the technology sector and resilient forward estimates overall. In this week’s Weekly Market Commentary, due out later today, we provide an overview of the earnings season and discuss prospects for a second half earnings rebound. Later this month we will update our Corporate Beige Book barometer, an analysis of the topics covered in companies’ earnings conference calls.
  • Tech has been the clear highlight of earnings season. Technology has produced the biggest upside surprise of any sector in the second quarter, while second half estimates have been revised higher—the only sector besides utilities that can make that claim. The sector has benefited from powerful shifts toward mobile and cloud computing, as well as the continued strength in ecommerce. With each passing day, these growth areas become a bigger share of sector revenue and, with their better profit margins, improve the profitability and growth profile of the sector, which remains one of our favorites.
  • Chinese trade disappoints. Both Chinese imports and exports came in less than expected. Exports, which say more about the rest of the world than China itself, fell -4.4%, versus expectations of a -3.5% decline. Imports, which are more a function of Chinese domestic consumption, fell -12.5%, versus expectations of a -7% decline. All numbers are annual declines. Some of the weakness is due to lower commodity prices over the past year. Still, these are not good numbers from China as it seeks to rebalance its economy.
  • The low, and in many cases negative, interest rate environment in Europe has been highly detrimental to bank profitability and health. In this week’s Weekly Economic Commentary, due out later today, we note that although banks everywhere are important to a country’s economic system, in Europe, banks are even more important to the system. Europe’s capital markets are underdeveloped compared to the U.S., and European banks shoulder a greater role in distributing credit to the economy. We also note that recently there has been an increase in bank lending, after nearly three years of declines. Importantly, European bank stocks typically appreciate in value approximately one year after lending increases.
  • Week ahead. This week, the summer doldrums kick in, as it’s a quiet week for the Federal Reserve Bank (Fed) and the only economic reports of note are the June Job Openings and Labor Turnover Survey (JOLTS) report and the July retail sales data. It’s equally quiet in Europe this week; but it’s a busy week in China, as it begins to report its July activity and inflation data. There are a few second tier central bank meetings next week (Mexico, South Korea, Philippines) but the most important one is likely to be the Reserve Bank of India’s meeting on Tuesday.
  • Over the last month, the LPL Financial Current Conditions Index (CCI) rose 33 points to 212. TheCCI has now rebounded well off of its January lows and remains in the range it has held for most of the current expansion. The sizable move higher is largely due to a sharp decline in the VIX (a measure of market volatility) as concerns over the market impact of the U.K.’s referendum vote to leave the EU declined. Shipping traffic and falling credit spreads also made meaningful contributions to the increase, while slower retail sales was a modest detractor. View the CCI.
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