Market Strategy Radar Screen Weekly October 30, 2017

Trick or Treat?

A data and decision jammed week presents a degree of uncertainty for investors

This week’s looking like a trick or treat week for investors as a veritable traffic jam of economic data, earnings, and big decision making in Washington lie ahead, each with the potential to worry markets. Whether these will move the markets up or down or by how much and even how soon is yet to seen.

Consider the short list of what lies ahead—along with ongoing Q3 earnings season this week—and a smattering of housing and manufacturing data:

• Today the Fed’s preferred inflation gauge (the core PCE) comes out;
• A House committee is expected to release a tax bill later this week;
• The US Treasury will likely outline its plans for debt issuance to make up for funding gaps expected as the Fed continues with its process of rate normalization and moves forward with its plans to reduce its balance sheet;
• On Wednesday the ADP payroll report comes out (considered by many investors a worthy indication of the health of the jobs market ahead of the release of the government’s number later in the week);
• The FED’s FOMC meeting concludes midweek with its interest rate decision scheduled for Wednesday at 2pm. While no rate hike is expected to come from this meeting any comments by the Fed will garner attention;
• Friday morning the Labor Department releases the non-farm payroll number and the headline unemployment number along with year-over-year hourly wage data. Expectations are that the jobs number will rise above 300,000 after having declined over 30,000 last month (due to the hurricanes);
• President Donald Trump said he’ll announce his nominee to lead the Fed on Friday before he departs on a trip to Asia;

All in all there will be plenty of opportunity over the course of the next few days for investors and the market to consider which direction to take next.

Last week saw the three major equity indexes in the US post new highs on the back of positive earnings results even as some stocks took nose dives on disappointing results, company transitional concerns, as well as some negative projections of what might lie ahead for others (tied to competitive and other issues) along with some likely normal, healthy profit-taking in other names that surprised positively but drifted lower in price after reporting.

With the Dow, the S&P 500 and the NASDAQ closing last Friday on a year-to-date basis up 18.6%, 15.3% and 24.5% respectively, their gains for the week through last Friday of 0.45%, 0.23% and 1.09% pale somewhat in comparison.

Consider that those same three indices have respectively moved up 29.03%, 21.4% and 29.12% in the latest 12-month period ending last Friday. It’s no wonder that some folks are asking “How long can this keep going on?”

If it weren’t for what we see as decidedly improved fundamentals (economic and corporate, both stateside and in the international realm) we’d think that investors might have good reason to be concerned.

Stocks after all have beaten the expectations of most investors—and even the expectations of many bullish investors.

We find it interesting (and healthy) that even as long-term skeptics and at least some bears now appear to be capitulating of late as stocks moved higher, that investors who “got the upward drift of the stock market” much earlier tend to be concerned rather than ebullient or exuberant about the recent price performance of stocks stateside and abroad.

It’s only when investors consider the improved fundamentals (both economic and corporate) that we believe are underpinning the markets’ moves that their worry dissipates.

Ironic as it may seem to some, the concern and worry investors have shown about the markets’ recent gains as well as over most of the past eight and a half years since the market hit a crisis low on March 9, 2009, gives us reason to believe that “what’s going on” may have a good chance to “go on” for some time into the visible future.

Last week’s earnings from a number of both “old economy” and “new economy” stocks surprised to the upside. Curiously, several technology names whose detractors had questioned their (and their sector’s) ability to deliver the goods in Q3 earnings season surprised in outsized fashion causing the sector to move sharply higher (up 2.9%) on the week.

While technology soared a few biotechnology names gave back some of their recent gains as several widely followed stocks in the sector delivered disappointing news, results, or guidance. The ETFs (exchange traded funds) that track the performance of the NASDAQ Biotech (ticker IBB) and SPDRs S&P Biotech (ticker XBI) indices were respectively off on the week 4.7% and 2.1%.

The declines in those ETFs taken in context of their substantial respective year to date performances of 19.12% and 41.6% appeared in our opinion to acknowledge nearterm disappointment rather than reflect great concern or a change in conviction about the space by investors (see figure below).

Notwithstanding the potential speed bumps or supports the market might get in the week ahead of us, we continue to expect stocks to rise through the end of the year on expectations for further improvements at the economic and corporate levels.

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