Ricochet Markets

Ricochet markets.  Equity markets stabilized and put in a solid session of gains on Friday after 2 difficult sessions mid week.  Though the gains were welcomed, equity indices were still down on the week.  Friday’s bounce was led initially by some positive earnings from big banks prior to the opening bell which soon faded not before Netflix took the reigns and led a tech rally.  There was much speculation on the causes and effects of last weeks selloff and now that the week has closed and we have had the weekend papers, news shows, and our Sunday Sauce, the verdict is… nobody still has a definitive answer (sorry).  What we do know is: 1) trade tensions still exist between the US and China and that there are some very real financial implications starting to appear 2) the Federal Reserve is raising short term interest rates and are expected to continue 3) investors, who control longer maturity yields, believe that inflation is coming and have raised long term rates which will cause borrowing costs to go up.  Anecdotally, we are in the fourth quarter and some investors who have been holding on to large capital gains will start to take some of those gains on dips to minimize the tax bill.  You heard me right… some investors will take profits on the dips if they believe the market will bounce.  In effect, the selling may be a little more extreme. Sprinkle all of this with a bit of buyer exhaust and we get a correction.  Now, there are also many prolific investors / television personalities that believe that the move was just temporary and that last week’s selloff is a buying opportunity.  Most of those folks can only make a living when the market goes up so one would expect them to try and rally the troops in their television appearances.  Their basic premise is that corporate profits remain strong and that the economy couldn’t be doing any better.  One must remember that the markets don’t reflect what is happening today, buy rather what is expected to happen in the future.  Historically that future was much longer term but its length has been receding.  Though tariff-related costs are not so evident today, they will start to show up in next quarter’s earnings releases, if not in this one.

Remember last week’s release by PPG industries?  If you don’t I will remind you that they were weaker due to rising costs associated with trade and logistics.  Interest rates are not just a thing that academics discuss – they impact a major expense for corporations and as they go up so do expenses and we are sure to hear about those soon in earnings releases.  Finally, the labor market is doing really well, which means that it is tight.  A tight labor market is usually not followed by a tighter labor market but rather rises in wages, or wage costs, depending on how you look at it.  Wage expenses have a large influence on corporate profitability.  So while all of these potential drags on the earnings aren’t there yet they will be at some point in the future.  When, of course, is the hardest part to predict which is precisely why the market has such volatile reactions at the slight hint of any of the above appearing.  Where does that leave us as we start the new week?  The S&P 500, the Dow Jones Industrials, and the NASDAQ 100 all managed to bounce back above their critical 200 day moving averages on Friday.  Though that is a good start, they will all need to stay above them in the upcoming sessions in order to have a chance at a near term recovery.  Additionally, the small cap Russell 2000 still remains far below its 200 day moving average and it will have to regain its footing before we can expect things to return to normal.  By normal, I mean second and third quarter.  All of the S&P, Dow Jones, NASDAQ, and Russell remain in risk off territory and will seek to re-trend in the sessions ahead.  Crude oil had a rough past week as well.  Increased supply and an OPEC projection for weak 2019 demand helped push the commodity and its sector down to its critical support levels.  Crude will likely get a lift, if not a lot of action in the week ahead as a result of emerging tensions with Saudi Arabia related to the mysterious disappearance of a Saudi reporter.  Bonds remained relatively calm last week after retreating from their recent high yields and traded relatively flat through the second half of the week.  Ten year yields will start today’s session slightly lower at 3.15% right in the middle of their range of 3.05% to 3.25%.

This week is loaded with economic releases which range from retail sales today (expected to have grown at +0.6%) to a whole host of housing related numbers, to an early employment indicator, to the leading economic indicators.  The housing numbers are starting to be more important as rising rates begin to be a factor, so keep an eye on those for early warning signs.  What will really dominate this week’s release schedule will be corporate earnings.  No fewer than 50 S&P500 companies will release their earnings and they will include more financials, consumer staples, industrials, and the first few techs.  There are some really big ones coming up this week and they will surely have an impact on trading.  Attached, please find the week’s economic and earnings release calendars for reference.  Though Friday was a welcomed refuge, the debate is still on and the VIX index is still in the 20’s so the week ahead will be another volatile one.

daily chartbook 2018-10-15

earnings releases 10_15

econ numbers 10_15