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Market Update: Monday, October 31, 2016

Market Update

  • U.S. equities begin week positive, bucking global trend. Boosted by continued mergers and acquisitions activity, domestic markets are slightly higher this morning; this in contrast to foreign markets that pulled back as developments over the weekend spurred renewed U.S. election uncertainty. Looking back, the S&P 500 shed 0.3% on Friday, bringing its weekly decline to 0.7%, as the healthcare sector plunged 2.2% on renewed fears surrounding drug pricing regulation; industrials (+0.7%) and consumer staples (+0.5%) were the outperformers. The Dow closed near flat while the Nasdaq lost over 1% for the week. In overnight trading, the Nikkei, Hang Seng, and Shanghai Composite all lost 0.1%, while European indexes are lower across the board in afternoon trade despite Eurozone Q3 gross domestic product (GDP) data that was in line with estimates. Elsewhere, WTI crude oil ($47.90/barrel) is down over 1.3% as talks between OPEC and non-OPEC countries over the weekend resulted in little progress toward a production cut agreement, COMEX gold ($1275/oz.) is modestly lower, and the yield on the 10-year Treasury note has slipped two basis points to 1.83%

Macro View

  • Another big week of earnings on tap. With about 60% of S&P 500 companies having reported, third quarter 2016 S&P 500 earnings are tracking to a 3% year-over-year increase, solidly above the 0.7% decline expected when earnings season began and marking the end of the earnings recession. Financials and technology remain the standouts with the most upside above prior estimates. Estimates one year out continue to hold up well with just a 0.5% decline in consensus S&P 500 estimates since October 1. This week (October 31-November 4) is another very busy earnings week with 134 S&P 500 companies reporting third quarter results.
  • Wow, what a week. Any week that has the jobs report (Friday, November 4) and ISM (Tuesday, November 1) is important. But add in the Federal Open Market Committee (FOMC) meeting (Wednesday, November 2) key data in China (Purchasing Managers’ Indexes (PMI)) for October as well as rate decisions from the Bank of Japan and Bank of England, and you have the makings of a critical week for markets ahead of the November 8, 2016 elections in the U.S. Add in 134 earnings announcements from S&P 500 companies just for fun.
  • Personal income, spending and inflation data for September keep the Fed on track to tighten in December. The September personal income and spending report was already baked into the Q3 GDP report released on Friday, October 28. While personal income (+0.3%) rose less than expected (+0.4%) in September, the 0.5% gain in personal spending exceeded expectations (0.4%). The Fed’s preferred measure of inflation-the personal consumption deflator excluding food and energy-posted a 1.7% year-over-year increase in September, matching the August increase.  Both personal income and personal spending are running about 3-3.5% ahead of their year-ago level, a sign that consumers are not overborrowing to fund consumption. Today’s data does little to change our view that the Fed remains on track to raise rates by 25 basis points in December.
  • Eurozone data as expected. Two key pieces of data for the Eurozone came in as expected early this morning. Core consumer prices are rising at 0.8% annually. GDP was 1.6% for the past twelve months, and 0.3% for the latest quarter. Neither data point suggests moving the European Central Bank from its anticipated course of extending its quantitative easing program scheduled to end in March 2017, but doing so in a way that tapers its bond buying on a monthly basis.
  • This week’s Weekly Market Commentary: Market concerns. In the spirit of Halloween, we discuss what might scare markets. We know from the financial media, measures of investor sentiment, and mutual fund outflows out of equities and into bonds that investor nervousness is widespread. Some concerns are related to the presidential election, now just eight days away. Other concerns are related to the age of the bull market, central bank activities, Brexit, and China’s debt problem, and there are certainly others. We discuss these in our latest Weekly Market Commentary due out later today.
  • This week’s Weekly Economic Commentary: The Chinese yuan. We look at the inclusion of the Chinese yuan in the International Monetary Fund’s Special Drawing Rights (SDR) program. This inclusion was important to the Chinese government for public relations purposes, but has minimal real impact. Though the Chinese government has been actively promoting the use of the yuan in global trade, its use has actually been decreasing due to the yuan’s weakness against other global currencies.

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