Market Strategy Radar Screen Weekly July 18, 2016

Break on Through to the Other Side

We quote Jim Morrison as the broad US market posted new record highs last week

Last week’s record highs on the S&P 500 were reached via modest respective daily gains of 0.34%, 0.7%, 0.01% and 0.53% from Monday through Thursday. Friday’s give-back was slight with the S&P 500 slipping just 0.09%.

We were reminded last week that sometimes historical moves to the upside are not accompanied by nearly as much drama and fanfare as one might expect.

The week ahead could see some testing of the new levels reached last week as 140 of the S&P 500 companies report results in this second week of Q2 earnings season and as the markets sort out the effects of rising geopolitical tensions, national security risks, as well as the start of the Republican National Convention in Cleveland on Monday.

Q2 Earnings Season Score Card

With some 7% or 35 of the companies in the S&P 500 having thus far reported earnings to date for Q2, FactSet data shows that 66% have reported earnings above the mean estimate and 51% have reported sales above the mean estimate.

For Q2 2016, the blended (actual reported and the estimate for those yet reported) expected earnings decline stands at -5.5%. If the index earnings decline for Q2, it will be the first time the index has recorded five consecutive quarters of year-overyear declines in earnings since Q3 2008 through Q3 2009.

Per FactSet, four S&P 500 sectors are reporting or are expected to report year-over-year earnings growth this season, led by Information Technology, Telecom Services and Consumer Discretionary.

Six sectors are reporting or are expected to report a year-over-year decline in earnings, led by Energy, Materials and Information Technology.

For yet another quarter the Energy sector is expected to be the biggest drag on earnings for the S&P 500 with analysts surveyed by FactSet looking for the sector to show the largest year-overyear decline in earnings (-77.7%) of all ten sectors. Of the sector’s six sub-industries five are projected to report a year-over-year decrease in earnings.

If the Energy sector’s results were to be excluded, it’s expected that the estimated earnings decline for the S&P 500 would -2.0% instead of -5.5%.

S&P 500 revenues are expected to decline with the blended sales decline for Q2 2016 at -0.6%, somewhat less than the estimated sales decline of -0.8% at the end of the second quarter.

Six sectors are reporting or are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors.

Four sectors are reporting or are predicted to report a year-over-year decline in revenues, led by the Energy sector and the Materials sector.

Among the pressing issues of the day one would expect to be mentioned in corporate conference calls this reporting season (including Brexit, oil prices, currency, interest rates, monetary policy, terrorism and the US presidential election) foreign exchange (currency) ranks highest so far (mentioned in 21 of some 35 calls tracked by FactSet).

“Brexit” (or “UK referendum”) was specified by ten of the S&P 500 companies (nearly a third) during earnings conference calls so far. As of last week neither “zika” nor “terrorism” were mentioned during the calls.

Other macro items highlighted in this Q2 earnings season in S&P 500 conference calls so far have been “interest rates,” “wages” and “Brazil.”

Fund flows contributed to notable market action last week:

Since the start of the year emerging markets have garnered favor with investors seeking diversification from developed markets whose valuations have moved substantially higher from their lows this year.

Investors moved $1.3 billion into an exchangetraded fund that tracks the MSCI Emerging Markets Index in last week’s risk-on rally. The move on July 14th was the biggest single-day inflow into the ETF traded in the US since April 7, 2014, according to Bloomberg.

GOLD

The precious metal came off its recent highs last week, slipping 2.1% on the week as economic data pointed to a sustainable economic recovery in the US and investors’ consideration of the possibility that the Federal Reserve could find justification to lift rates this year.

Holdings in ETFs backed by bullion showed their first weekly loss since the end of May as hedge funds and speculators cut their exposure to the shiny stuff as bond prices moved lower and yields rose with the 10-year Treasury note yield at 1.55% from a historical low of 1.36% on the prior Friday (see figure below).

As the process of rate normalization lumbers ahead and the world turns:

Global and domestic risks on the horizon tied to monetary policy, to election risk and a host of other day-to-day digital and analog headline risks suggest to us that gold will continue to serve a purpose for investors and traders who favor the metal as a hedge against these factors. Such favor could keep the metal trading in a range from $1,100 to as high as $1,450 for the foreseeable future.

For the complete report, please contact your Oppenheimer Financial Advisor.

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