Earnings Season Kicks Into Full Gear This Week...

Markets were relatively flat last week as investors gear up for third quarter earnings season (more on this below). Economic data were broadly positive and continue to point to healthy economic conditions. September retail sales grew at their fastest pace since March 2015, due in part to hurricane-related replacement activity for autos and automotive supplies. Of note in the report, building materials sales were strong, gaining 10.7% year-over-year, while online retailers (+9.2%) continued to take share from traditional “brick-and-mortar” stores. Inflation increased slightly as both the consumer price index (+2.2%) and producer price index (+2.6%) were higher compared to August; the data should enable the Federal Reserve to raise interest rates in December, as expected. Meanwhile, the U.S. dollar weakened for the first time in over a month; year-to-date, the dollar has declined roughly 9% against a basket of major trading currencies. Notably, the dollar is down nearly 11% against the euro as the European economy has strengthened and the European Central Bank prepares to curtail its bond-buying program. In this instance, the declining dollar is a function of improved economic growth overseas rather than an indication of a faltering domestic economy.

Earnings season kicked off last week with banks in focus. JPMorgan Chase, Bank of America, and Citigroup all exceeded analysts’ earnings expectations, while Wells Fargo fell short. For JPMorgan, core loans grew 7% year-over-year, while net interest margin (a measure of profitability) improved. At Bank of America, reduced provisions for loan losses and lower expenses more than offset soft fee income. Citigroup reported strong equity and fixed income trading revenues which were partially offset by higher credit card costs. And, results at Wells Fargo were impacted by litigation expenses; excluding these charges, though, performance would have exceeded analysts’ estimates. Despite the generally upbeat reports, shares of all four banks were down for the week, likely due to profit-taking; with the exception of Wells Fargo, the banks had produced solid returns thus far in 2017. Airlines gained on a better-than-expected earnings from Delta Air Lines, along with upbeat investor updates from United Continental and American Airlines, both of which report earnings later this month. Importantly, all three indicated that pricing competition has stabilized, which should aid industry profitability and assuage investor concerns heading into the busy holiday travel season.

This week, 52 companies in the S&P 500® Index report results. These include industry bellwethers such as: Johnson & Johnson, Goldman Sachs, International Business Machines, Verizon Communications, General Electric, Procter & Gamble, Schlumberger, and Honeywell International. Also, Netflix will provide its quarterly update; the stock, which has gained more than 60% year-to-date, is one of the popular FAANG companies that have led the market’s advance, and captivated investor interest, for much of the year. The broad swath of earnings reports will provide a comprehensive view of the economy and could contribute to increased trading volumes and market volatility over the near-term.

* Source: Pacific Global Investment Management Company

Chart of Market/Index as of 10/13

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

 

Last Week's Headlines

  1. Inflationary pressure may be gaining some traction, but only minimally. The Consumer Price Index rose 0.5% in September, largely due to a 13.1% increase in the gasoline index. Over the last 12 months, the CPI has risen 2.2%. Core prices, less food and energy, increased a slight 0.1% in September. For the 12 months ended in September, the core CPI is up 1.7%.
  2. Retail food and service sales increased 1.6% in September after falling 0.1% in August. Vehicle sales (3.6%) and gasoline sales (5.8%) contributed to the overall retail sales price increase. Retail prices, less auto and gas, increased 0.5% for the month. For the 12 months ended in September, retail sales have increased 4.4%.
  3. The prices producers receive for goods and services advanced 0.4% in September after moving up 0.2% in August. For the 12 months ended in September, producer prices have increased 2.6%, the largest rise since a 2.8% increase for the 12 months ended February 2012. Prices for services climbed 0.4% and prices for goods rose 0.7%. Over 80% of the September advance for goods prices can be traced to rising energy prices (particularly gas prices), which climbed 3.4%. Higher energy prices were likely the result of reduced refining capacity in the Gulf Coast area due to Hurricane Harvey. Adding some perspective, prices less foods, energy, and trade services increased 0.2% in September, the same as in August.
  4. According to the Bureau of Labor Statistics, the number of job openings decreased slightly in August, falling to 6.08 million from July's 6.14 million. Job openings increased in health care and social assistance (+71,000) and in durable goods manufacturing (+31,000), and dropped in other services (-95,000), educational services (-51,000), and nondurable goods manufacturing (-48,000). Total hires declined from 5.52 million in July to 5.43 million in August, while total separations fell to 5.23 million from July's total of 5.36 million. Over the 12 months ended in August, hires totaled 63.8 million and separations totaled 61.7 million, yielding a net employment gain of 2.1 million.
  5. In the week ended October 7, the advance figure for initial claims for unemployment insurance was 243,000, a decrease of 15,000 from the previous week's level, which was revised down by 2,000. The advance insured unemployment rate dropped slightly to 1.3%. The advance number of those receiving unemployment insurance during the week ended September 30 was 1,889,000, a decrease of 32,000 from the previous week's revised level. This is the lowest level for insured unemployment since December 29, 1973, when it was 1,805,000.

 

 

Eye on the Week Ahead

Trading volume should pick up following the Columbus Day week. Hurricane Harvey affected industrial production in August. September's report should reflect the impact, if any, of Hurricane Irma on industrial production in September. The latest report on existing home sales is available at the end of the week, followed by September's new home sales figures, which come out next week.

 


 

Fortem Financial 2017. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

October Market Commentary

As we approach the end of the ninth year of what may be the world's least loved economic recovery, we continue to hear one question repeated, "When do you think it will end?"  And with the media publishing articles like this:

  • "There's more than a 60% chance of a global recession within the next 18 months, economist says."1
  • "This market indicator has predicted the past 7 recessions.  Here's where it may be headed next."2
  • "Next recession will hit during Trump's first 2 years."3
  • "The Stock Market Has Been Magical. It Can't Last."4
  • "Any way you look at it, this stock market is overvalued, Goldman Sachs says."5

we completely understand why investors are so focused on this question.  Our hope is to answer this question with clarity, simplicity, and factually.
 
We first will address the question of whether or not the market is OVERVALUED.  Below is a list of a number of popular valuation metrics.  Don't worry about whether or not you know what they mean, but rather focus on the current measurement and its 20-year average. 

Valuation Metric (S&P 500)

* Source: Strategas Analyst Presentations – Tucker's Point
 
What you can clearly see is that by most metrics, the market is currently valued a LITTLE higher than it historically has been, but not by much.  A review of the data shows the market is actually much closer to what is traditionally accepted as a fair market value rather than what the headlines suggest. 
 
Further, in light of the current low interest rate environment, we would argue there is a very rational reason why the markets should be a little above their 20 year averages.  One of the primary reasons we think a slightly above average valuation is reasonable is because currently the S&P 500 pays a dividend of about 2%, whereas the 10-year Treasury pays an interest rate of about 2.3%.  What the S&P 500 has going for it is over the last 27 years, the S&P 500's average dividend growth rate is 5.87%6; the Treasury's interest growth rate is 0%.  Said differently, on a pure income play, the S&P 500 should provide more income over the next decade than the 10-year Treasury will.  We would also highlight that earnings have been growing, which should help the S&P 500 advance to higher highs.  Beyond these two issues, we also believe there is a chance tax reform may happen, and if it does, that will bring new life (and growth) to U.S. equities.  Then there is the issue of inflation; equities are naturally hedged to inflation, and bonds are NOT.  If inflation keeps moving along around 2%, we would expect to see a gradual rise in the price of equities due to the inflation.  The value of a bond is eroded by inflation.
 
When it comes to claims of the next recession being imminent, it also seems the pundits fail to recognize that most recessions are preceded by 1) growing inflation, 2) a policy error, 3) and an exogenous event.  Inflation has been stubbornly holding near 2% for some time (not growing).  Wage growth has also remained softer than many expected (close to 2% - typically, when we see wage growth reach 4%, we know we are nearing the end of an expansion).7   While by definition, the exogenous event tends to be somewhat of a surprise, the fact that we see accelerating and synchronous growth around the world leads us to believe the risk of an exogenous event is perhaps lower than many pundits might predict. 
 
Moving to the actual fundamentals of the U.S. economy, we continue to see many U.S. economic indicators indicating the bull market should continue:

  • The S&P 500 Trucking Index contuse to climb. 
  • Consumer Confidence also appears to hold at above trend levels.  
  • The Purchasing Managers Index (a manufacturing survey) is in an uptrend. 
  • The Baltic Dry Index continues to climb from its lows in 2016.
  • US Office Rents / Square Foot continue to climb from their lows in 2010.

* Source:  Thomson Datastream

The aggregation of all these data points lead us to our cautiously optimistic viewpoint that the markets should continue to advance and the economy should continue to expand.  Monitoring the economy's indicators may provide some insight into when the market's will turn; we believe that time is not yet upon us.
 
If you'd like to have a more detailed, personal portfolio review, please let us know.  Your monthly reports are also now posted to your client portal.  You can get their by going to www.fortemfin.com and clicking on client login button in the upper right of the webpage. 
 

  1. https://www.cnbc.com/2017/04/10/theres-more-than-60-chance-of-a-global-recession-within-the-next-18-months-economist-says.html
  2. https://www.cnbc.com/2017/06/05/inverted-yield-curve-predicting-coming-recession-commentary.html
  3. http://www.marketwatch.com/story/next-recession-will-hit-during-trumps-first-two-years-2017-05-01  
  4. https://www.nytimes.com/2017/08/19/business/the-stock-market-has-been-magical-it-cant-last.html
  5. https://www.cnbc.com/2017/07/24/any-way-you-look-at-it-this-stock-market-is-overvalued-goldman.html
  6. http://www.multpl.com/s-p-500-dividend-growth
  7. Strategas: Analysts Presentations at Tucker's Point

 


 

Fortem Financial 2017. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Categories: Monthly Market Commentary

Earnings season starts this week and we think earnings are on track to further advance the markets

If the current economic expansion lasts another year and a half, it will be the longest on record, even surpassing the expansion of the 1990s that ended in early 2001.

Notice how we didn't say it'll be the "best" expansion of all-time, just the longest; it's not the best by a long shot. From the recession bottom to the expansion peak, real GDP expanded 39% in the 1980s and 43% in the 1990s. So far, eight years in, this one is only up 19%. That's why we've been calling it the Plow Horse Economy.

Still, the length of the current expansion is pretty remarkable given how doubtful most were that it would even get started back in 2009, as well as all the predictions since then that it would end in spectacular fashion during the past eight years. We think the odds of going at least another 18 months are very high. Nowhere do we see the kinds of policy shifts or imbalances that could curtail economic growth enough to throw us back in recession.

In terms of policies, tight monetary policy, a major shift toward protectionism, or large tax hikes could all hurt growth. In the past, tight money has usually been the key factor behind recessions. But, for now, short-term interest rates are about 125 basis points below the yield on the 10-year Treasury, roughly 200 basis points below the growth trend in nominal GDP (real GDP growth plus inflation), and the banking system remains stuffed with excess reserves. As far as tax hikes go, recent tax proposals would cut key marginal tax rates, not raise them.

Will there be another recession? Certainly! It's just very unlikely to start any time before Spring 2019, which means the current expansion looks set to become the longest on record. And if Congress and the President get their acts together and find a way to pass tax cuts or tax reform (or both!), that should postpone the next recession even further into the future.

Markets advanced last week as favorable economic data supported the positive momentum for both large and small cap stocks. September employment declined by 33,000 jobs, largely due to the net effects of Hurricanes Harvey and Irma. The report, though, points to improved underlying labor market conditions: average hourly earnings rose 0.5%, well above August’s 0.2% gain; and, the unemployment rate fell to 4.2%, the lowest reading since 2001. Meanwhile, the September ISM Manufacturing Index rose to its highest level since 2004 while the Services Index rose to its highest level since 2005. Both reports cited a pickup in new orders and employment, despite hurricane-related disruptions.

Globally, economic conditions are improving as well: China’s Purchasing Managers Index (PMI) rose to its highest level since 2012; Japan’s PMI rose to its highest level in four months; and the Eurozone’s PMI, with notable strength in Germany and France, stood near its post-recession highs. The confluence of growth across all major world economies should benefit areas of the market, including Industrials and small caps, which tend to outperform in these conditions. Moreover, the broad-based expansion is conducive to the Federal Reserve’s path of gradual rate increases.

This week, earnings season begins with JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo announcing Q3 results. Investors will key in on commentary related to lending activity and credit performance. Delta Air Lines will also report earnings. Airline stocks have come under pressure due to concerns related to fare competition; yet, many analysts believe that recent industry consolidation will help promote rational competitive behavior that supports sustained profitability. And, Fastenal will provide an early look into the state of the industrial economy. Investors will look to the earnings release and conference call for confirmation of improved levels of manufacturing activity. Overall, the significant hurricane activity has dampened expectations for the reporting period; nevertheless, we anticipate that management outlooks will reflect strengthening global economic activity, and signal confidence for 2018.

Source: Pacific Global Investment Management Company and Brian Wesbury

Market/Index as of 10/6

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

 

Last Week's Headlines

  1. Hurricanes Harvey and Irma could have had a significant impact on the employment figures for September, according to the latest report from the Department of Labor Statistics. The unemployment rate declined to 4.2% — 0.2 percentage point below August's rate. Hourly earnings rose by $0.12 to $26.55 and are up $0.74, or 2.9%, over the last 12 months. For the first time in seven years, nonfarm employment fell by 33,000 in September from August. This information, which may be revised over the next few months, certainly indicates that employment is reaching capacity and wage inflation is spiking, making it more likely that the Fed will raise interest rates in October.
  2. Hurricane Harvey may have disrupted shipping along the Gulf Coast, impacting foreign trade in August. The goods and services deficit was $42.4 billion in August, down $1.2 billion from $43.6 billion in July, revised. August exports were $195.3 billion, $0.8 billion more than July exports. August imports were $237.7 billion, $0.4 billion less than July imports. Year-to-date, the goods and services deficit increased $29.1 billion, or 8.8%, from the same period in 2016. Exports increased $84.9 billion, or 5.8%. Imports increased $114.0 billion, or 6.4%. A relatively weak dollar has made U.S. goods and services cheaper to buy for foreign consumers, expanding exports. Moderate domestic economic growth has encouraged buyers to shop in less expensive foreign markets, pushing imports higher.
  3. Purchasing managers were optimistic about the manufacturing sector in September. The IHS Markit final U.S. Manufacturing Purchasing Managers' Index™ expanded to 53.1 from August's reading of 52.8. A similar survey, the Manufacturing ISM® Report On Business®, also grew from 58.8% in August to 60.8% in September. Both the Markit and ISM reports also showed growth in new orders, production, and employment.
  4. In the services sector, purchasing managers were optimistic as reflected in the September non-manufacturing index of 59.8%, which is an increase of 4.5 percentage points over August. A reading over 50.0% represents growth, so September's reading indicates continued growth in the non-manufacturing sector, but at a faster rate. This is the highest reading since August 2005, when the index registered 61.3%. Non-manufacturing industries reporting growth in September include retail trade; real estate, rental & leasing; finance & insurance; and accommodation & food services.
  5. In the week ended September 30, the advance figure for initial claims for unemployment insurance was 260,000, a decrease of 12,000 from the previous week's unrevised level. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended September 23 was 1,938,000, an increase of 2,000 from the previous week's revised level.

 

 

Eye on the Week Ahead

Trading during the Columbus Day week is expected to be slow. From an economic perspective, the first reports of inflationary indicators for September are out next week, including the Consumer Price Index and the Producer Price Index. Price growth has been weak for 2017 and is not expected to have changed much in September.

 


 

Fortem Financial 2017. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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