Market Strategy Radar Screen Weekly July 03, 2017

 Can’t Ya Feel the Heat

Independence Day, a national heat wave and key economic data are all on tap this week.

We’ll look for economic data and signals from the Federal Reserve to vie for investors’ attention this week with the July 4th Independence Day Holiday celebrated on Tuesday.

The week starts off with US manufacturing data, construction spending and monthly auto sales today followed after the holiday by durable goods, ADP jobs numbers, last month’s Federal Reserve meeting minutes and some “Fedspeak” (speeches by Fed officials) leading up to the main event—the Labor Department’s non-farm payroll number and unemployment data on Friday.

Traders, investors and observers will likely pay particular attention to the non-farm payroll number this week as it has come in under economist survey expectations twice in the past three months. With economic data overall having softened some in the latter part of the second quarter bulls, bears and skeptics “with skin in the game” will have particular interest in where the non-farm payroll number lands—at, above or below expectations, which are for a 177,000 gain in payrolls.

With the first half of the year in the rearview mirror and stocks stateside and globally having delivered strong performance thus far and with a fair number of new record highs posted by a number of the major indices supported by improving if not robust economic fundamentals and improved corporate results in the last three quarters, we’d expect the stock market and the bond market to test the waters via price discovery as rotation and repositioning of portfolios takes place on the back of economic news.

With only 22 companies of the S&P 500 having reported thus far, revenues are up a little over 7% with earnings growth up around 26% for Q2. As that’s too small a sample to judge the outcome of the new earnings season, investors will have to look to next week when the big banks including J.P. Morgan, Citigroup and Wells Fargo report results on July 11th.

The month of June treated equity investors well with stocks showing resilience even as key sectors including information technology experienced profit taking on valuation and concerns about near-term prospects.

Banks rallied on the results of the latest “stress tests” and prospects for higher dividend payouts and buy backs boosted shares higher. News that billionaire investor Warren Buffet was likely to exercise options tied to his participation in the rescue of one of the big banks during the financial crisis of 2008 added to the positive momentum in the space.

The broad market posted its best first half in four years gaining 8.2% in the first six months of this year.

The tech-heavy Nasdaq Composite surged 14% notwithstanding periods of profit taking and rotation in the first half of the year as investors favored tech stocks with widely acknowledged consensus favored growth trajectories.

Bonds, which had rallied through a large part of the first half of the year, came under pressure last week even as economic data softened somewhat as investors sensed that the Fed remains committed to the process of interest rate normalization on expectations that the recent economic slowing will be short lived.

Wage growth remains modest, oil prices have fallen for a large part of the year thus far, yet overall the data point to the sustainability of the current economic expansion if at too moderate a pace for the impatient.

With signs that inflation remains at levels below the Fed’s target rate of around 2% and with earnings improving, the Fed might just be able to continue normalizing at a pace less disruptive than if the economy was showing robust growth. Should this occur, it might allow the bond market to better digest interest rates moving higher and in the process prove less disruptive to stocks as skeptics and bears may think.

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