Stocks were higher last week as strong corporate earnings supported the markets’ continued momentum. The Dow Jones Industrial Average, aided in large part by a 10% rise in shares of International Business Machines (IBM), surpassed 23,000 for the first time; the technology giant’s second quarter results exceeded analysts’ estimates. Signs of progress on tax reform also provided some optimism; the Senate’s adoption of a budget resolution could enable tax legislation to withstand a filibuster in the Senate. Still, significant challenges, and unresolved differences in the House and Senate versions remain. U.S. economic data, which captured the early impact of September hurricane activity, were mixed. Conditions overseas, though, remain encouraging: China reported economic expansion of 6.8% in the third quarter, and month-over-month increases in industrial production (+6.6%) and retail sales (+10.3%). On Wednesday, the country opened its National Congress, a once-every-five year gathering of Communist Party officials; President Xi’s speech outlined his plans to position the country to “stand proudly among the nations of the world” and “become a leading global power” by 2050. His priorities include structural reforms, innovation in aerospace, transportation and climate technology, increasing the role of markets, and encouraging foreign investments. China’s continued development should provide a tailwind of economic growth over the next several decades.
* Source: Pacific Global Investment Management Company
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.
Earnings season continues: to date, 87 companies in the S&P 500® Index have reported results; of these, 70% have exceeded analysts’ sales estimates while 75% have exceeded analysts’ earnings per share (EPS) estimates. The quarter’s blended sales growth rate (which includes actual and estimated results) stands at 4.9%, while the EPS forecast, which reflects the impact of hurricanes during the period, is just 1.7%. The Energy services industry is on track for a 52.6% projected growth in sales and 273.5% growth in EPS; these figures reflect both depressed activity levels last year as well as a recovery in drilling and production work this year. On earnings conference calls, management teams across a variety of industries discussed the favorable impact tax reform could have on their businesses and the economy as a whole. Still, companies seem to acknowledge the long road ahead while nevertheless revealing a growing sense of optimism for tax reform. This week, earnings activity peaks with 180 companies in the S&P 500® Index providing updates. The results should establish the tone for the reporting period and enable investors to begin shifting attention from earnings to broader economic developments.
Source: Pacific Global Investment Management Company
Last Week's Headlines
- Following three consecutive months of declining activity, the number of existing home sales increased by 0.7% in September. Nevertheless, continuing supply shortages and recent hurricanes muted overall activity for the year. October's sales pace is 1.5% below a year ago. The median existing-home price for all housing types in September was $245,100, up 4.2% from September 2016 ($235,200). September's price increase marks the 67th straight month of year-over-year gains. Total housing inventory at the end of September rose 1.6% to 1.90 million existing homes available for sale, which is 6.4% lower than a year ago (2.03 million) and has fallen year-over-year for 28 consecutive months.
- The end of the fiscal year saw the federal deficit sit at $665,712 billion, up $80,066 billion, or almost 14%, over the 2016 fiscal year deficit. September saw a small surplus of $8,000 billion for the month. For the fiscal year, total receipts increased by $48,120 billion to $3,314,894 trillion, while total government expenditures were $3,980,605 trillion — $128,185 billion ahead of last fiscal year.
- New home construction took a hit in September, somewhat impacted by Hurricanes Harvey and Irma. Building permits fell 4.5% from August (although permits for single-family homes rose 2.4%) and housing starts dropped 4.7%. On the plus side, new home completions increased 1.1% in September over August.
- Industrial production rose 0.3% in September. The continued effects of Hurricane Harvey and, to a lesser degree, the effects of Hurricane Irma combined to hold down the growth in total production in September by 0.25 percentage point. For the third quarter as a whole, industrial production fell 1.5% at an annual rate; excluding the effects of the hurricanes, the index would have risen at least 0.50%. Manufacturing output edged up 0.1% in September but fell 2.2% at an annual rate in the third quarter. The indexes for mining and utilities in September rose 0.4% and 1.5%, respectively.
- U.S. import prices increased 0.7% in September after advancing 0.6% in August. This is the largest monthly rise in import prices since an increase of 0.7% in June 2016. Import prices have risen 2.7% over the past 12 months. The price index for U.S. exports rose 0.8% in September after increasing 0.7% the previous month. This is also the largest price increase for exports since a comparable increase in June 2016. Export prices have risen 2.9% over the past year.
- In the week ended October 14, the advance figure for initial claims for unemployment insurance was 222,000, a decrease of 22,000 from the previous week's level, which was revised up by 1,000. This is the lowest level for initial claims since March 31, 1973, when it was 222,000. The advance insured unemployment rate remained 1.3%. The advance number of those receiving unemployment insurance during the week ended October 7 was 1,888,000, a decrease of 16,000 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
The first report on the third-quarter gross domestic product is out at the end of the week. The second quarter saw the economy grow at a rate of 3.1%, although prices expanded at a more moderate 1.0%. Other important economic reports out this week include the September figures on orders for durable goods and international trade in goods.