Published October 28, 2016
While earnings have been generally better than expected so far in this earnings season, stocks have continued to struggle finding enough buyers to push higher. Indeed, small and midcap stocks have broken downward as investors pull back on taking risk. Of the companies that have reported through October 26, 67% have beaten analyst consensus estimates. Since 1999, the historical earnings “beat rate” is 62%.
- Per a recent missive from Delta Wealth Management stocks are running into three headwinds.
The U.S. dollar has appreciated strongly against many of the world’s major currencies putting pressure on the outlook for export-oriented companies such as Procter and Gamble (PG) which reported earnings this week. PG is a multi-national company and serves as an excellent example of how a rising dollar hurts sales. A year ago, PG earned $16.5 billion in sales in the third quarter. A year later, they reported $16.5 billion (no growth) mostly because of the impact of currency changes. If you remove the effects of currency and brand divestments, sales would have been up 3%. A rising dollar increases the difficulty of creating sales growth for U.S. multi-national companies. This challenge is particularly difficult in a global economy growing at about 1%.
- The market has begun truly reflecting a rising interest rate future. Broadly speaking, rates rising from extreme lows may be more of a perception issue than a significant economic consideration at the moment. The rapid acceleration in rates has clearly raised uncertainty and caused some dislocation in the capital markets. Directly tied to interest rates are the home-building and real-estate sectors. Since the 10-year treasury rate broke up above about 1.5% in early September, the REIT ETF (VNQ) is down about -12% and the home-builders ETF (XHB) has lost nearly 14% of its value.
- Any major federal election brings with it regulatory uncertainty. As Clinton’s popularity has been rising in the polls, the healthcare sector measured by the ETF (XLV) has lost about -7.6% of its value. The fear is healthcare will become increasingly government controlled. This is especially a concern with regard to drug pricing. The biotech sector (IBB) is down almost -12% in the past three weeks.
With a backdrop of struggling global economic growth and stocks not being particularly cheap, we see markets continuing to just sit there with risk being reduced in advance of the election. Of course, the U.S. just posted its best economic growth numbers in a couple of years. So maybe economic growth will be stronger than expected going forward? We certainly don’t know any more than anyone else. We simply follow the direction of price – which has been no direction since July.
S&P awaits …
This is a good chart of the current broad market situation from Cam Hui of the blog: Humble Student of the Markets.
Chart 1: S&P sits and waits
Ryan Detrick, financial blogger and purveyor of data analysis for LPL Financial noted the following:
“What has happened the past four months is truly historic, in that nothing has happened. For equities to trade in this tight of a range near all-time highs is extremely rare and we probably have the election to thank for it, as big money would rather wait until the results before making any moves.”
Stock investors looked to a flurry of earnings from top consumer tech companies this week to support a Nasdaq index that continues to flirt with new highs. A couple of years ago or so we found ourselves using the term “Merger Monday” as deals were often announced Monday morning. A return to that phenomenon kicked off this week with a full menu of deals highlighted by AT&T’s (T) purchase of Time Warner (TWX). There were several other deals, however, including Rockwell Collins (COL) buying BE Aerospace (BEAV) in the aerospace/defense sector. The flurry of deals kicked stocks into a higher gear with the Nasdaq adding a full +1% in Monday’s trade. Mixed earnings Tuesday offered little reason for investors to add to Monday’s gains.
Stocks reporting earnings were treated poorly almost regardless of whether they beat earnings expectations or not. Paintmaker Sherwin-Williams (SHW) saw -10% lopped off their share price while Under Armour (UA) slide -13% as examples of the hits companies with sour guidance were experiencing. The broad market was down -0.4% on the day. Another round of earnings-related beatings ensued Wednesday with momentum darling Edwards Lifesciences (EW) tumbling -17% while market heavy Apple (AAPL) dipped -2% on its earnings report. The S&P 500 was only down a fraction on the day while the Nasdaq felt the weight of Apple’s slump to a -0.6% return. Comments from the Bank of Japan and Bank of England left investors feeling that the days of easing monetary posture might be over. That sentiment pushed bond yields sharply higher Thursday which put pressure on stocks despite a deal in the semiconductor arena where Qualcomm (QCOM) bought NXPI (NXP, which came from Motorola’s semiconductor unit originally). Another losing day for stocks with the Nasdaq off another -0.6%. An overnight earnings report from market darling Amazon (AMZN) failed to excite investors as that stock fell -5% Friday. Healthcare stocks were the bigger story Friday with comments from pharma distributor McKesson (MCK) destroying that stock (-23%) while Amgen’s (AMGN) weak report also hurt the sector. It wasn’t all bad news in earnings as a string of industrial companies posted good results Friday. GE’s rumored partnership with Baker Hughes (BHI) helped that group to a positive week.
Warm wishes and until next week.