Oct 16, 2017 - The stocks of many healthcare insurers fell sharply on these news items. ... Based on the current 2018 es
‘Tis the Season -- Again October 16, 2017 Gregory M. Drahuschak Many major equity market indices last week extended their run to new highs, but the pace slowed relative to prior weeks. Throughout the week market narratives included references to prospects for a tax bill, but this was not the only reference to news from Washington D.C. that could impact the market. The White House said it would end subsidies to health insurance companies that help pay out-of-pocket costs for certain Affordable Care Act (ACA) participants. This change came shortly after an executive order made it easier for individuals and small businesses to buy alternative types of health insurance with lower prices, fewer benefits, and weaker government protections. The stocks of many healthcare insurers fell sharply on these news items. Minutes from the most recent Federal Reserve Open Market Committee (FOMC) meeting indicated that members of the policy-making body felt that interest rate increases are coming but there was disagreement about the timing. The general conclusion, however was that there would be one more rate boost this year at the December FOMC meeting. Friday’s report of the core Consumer Price Index (CPI), however, cast doubt on this as it rose only 0.1%. With Janet Yellen’s term as Fed chairperson ending in February, the potential appointment of a new Federal Reserve chairperson also was a widely-discussed issue last week. Three items highlighted last week’s economic news flow. Retail sales ex-autos increased 1.0%, which was more than anticipated. Initial unemployment benefit claims fell 15,000, but the more important issue was that continuing clams were the lowest in 44 years. All of these data reaffirmed that the U.S. consumer should continue to be a major contributor to GDP growth. This was reinforced by Friday’s report that the preliminary University of Michigan Consumer Sentiment Index at 101.1 was six points higher than where it was at the end of the previous month and at its highest level since January 2004. The Index was 17.9 percent above the average reading and 19.3 percent above the mean. The Michigan Index average since its inception is 85.6. During non-recessionary years the average is 87.8. The average during the five recessions is 69.3. The latest sentiment number was 31.8 points above the average recession level and 13.2 points above the non-recession average.
GREGORY M. DRAHUSCHAK, VICE PRESIDENT
[email protected] 412.561.0497
WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC
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The earnings report barrage begins this week. By the time it ends in mid-November, the market should have a strong indication of what full-year 2017 corporate results could be. Expectations for third quarter earnings have slipped in recent weeks, partly due to weather-related events. This was most evident in estimates for the property-casualty insurance stocks. The market, however, could overlook this and instead focus on earnings from technology and the economicallysensitive companies. The S&P Capital IQ consensus estimate points to a 2.1% third quarter earnings gain, down from the 3.0% increase expected on September 30. Year-over-year gains for earnings are expected in seven of 11 sectors, led by energy (+131.5%), information technology (+10.2%) and consumer staples (+5.3%). The weakest changes are expected for the financials (-11.2%), materials (-4.8%), and consumer discretionary (2.3%) sectors. Full-year earnings presently are projected to increase 9.8% in 2017 and 11.3% in 2018. Hurricanes have been cited by the highest number companies in the S&P 500 to date as a factor that either had a negative impact on earnings or revenues in the third quarter or is expected to have a negative impact on earnings and revenues in future quarters. Of the 28 companies that have reported results for the quarter, 13 mentioned a negative impact from this factor. Foreign exchange rates have been cited by the second highest number of companies in the index to date as a factor that either had a negative impact on earnings or revenues in the third quarter or are expected to have a negative impact on earnings and revenues in future quarters. 39% of those who have reported have discussed a negative impact from this factor. Despite lacking precise details on a possible tax bill, several firms last week speculated on the potential impact of a cut in the corporate tax rate that some firms suggest could add as much as $17 to 2018 earnings for the S&P 500. Based on the current 2018 estimate, this could lift the 2018 total to approximately $160, roughly 23% above the projected 2017 earnings total. Along with the onslaught of corporate earnings results, this week has a busy slate of economic items. This week began with a strongly positive surprise when the Empire State index came in at 30.2, 9.2 points better than anticipated and 5.8 points higher than the prior month. The 30.2 was the highest reading since September 2014 and only three points below the October 2009 high. The new orders index fell seven points, but at 18.0, it pointed to solid gains in orders. The shipments index rose eleven points to 27.5; its highest level in several years. The index for number of employees rose five points to 15.6, suggesting that employment expanded more strongly through the month. The Philadelphia Index will draw attention to see if it can maintain its lofty level. Four housing-related reports could sway trading, but as usual the Fed beige Book report could be the focal point to see if data assembled by the Fed staff offer more insight into what the FOMC might do with credit policy and potentially what effect this could have on the dollar. In addition to this week’s economic and earnings news flow, the price of oil, the dollar and tax reform progress could be drives of market action. After running into technical resistance at 94, the Dollar Index has pulled back. We still think the dollar has the potential to rally more than it did, but much of the dollar movement could hinge on interest rates.
GREGORY M. DRAHUSCHAK, VICE PRESIDENT
[email protected] 412.561.0497
WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC
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The price of West Texas Intermediate (WTI) crude oil jumped this morning on reports of tension between Iraqi and Kurdish troops near the city of Kirkuk. Thirty minutes into the session, WTI was $52.35 a barrel. There is a band of resistance in WTI in the 54-55 range. Topping this range could propel the price quickly higher. The intense focus on tax reform promises to make it one of the week’s focal points. The debate over who gets the most benefit from the proposal will continue but the biggest issue might be that regardless of what form the final bill takes, getting it through both houses of Congress will be a formidable task that likely will require significant compromise and potential change. We continue to hold the view that the market will not be bothered if passage of a tax bill does not happen this year, but the market will need assurance that it will happen early in 2018 with all of the provisions retroactive to January 1. China is holding a once-every-five-years Chinese Communist Party Congress this Wednesday. In addition to this meeting possibly establishing President Xi Jinping’s role going forward, the meeting could outline China’s economic policies. With China now representing roughly a third of global GDP growth and more than 15% of total world GDP, decisions about China’s economic policy could have worldwide impact. This week marks the 30th anniversary of the infamous October 19, 1987 market event when the S&P 500 dropped 20.5% to set the still standing record for the worst one-day drop. The chart on the left illustrates why this anniversary is getting attention as some investors fear that the current market is closely tracking the pattern of the pre-October 19, 1987 period and might be poised for a similar drop. Dissecting the two periods finds some similarities, but there is a major difference. In 1987, the Federal Reserve initiated a rate-tightening cycle earlier in the year and pushed up the funds rate, by 1.375 percentage points to 71/4% through early September. Today, interest rates are substantially below the 1987 level and even the most aggressive rate assumptions by members of the Federal Reserve Open Market Committee suggest that interest rates will remain significantly below the 1987 level. The length of time that the current market has not incurred a substantive correction leaves it vulnerable to a pullback but even the precedent-setting 1987 market event offers solace. After the 1987 event, the S&P 500 took only 101 calendar days to go through the entire peak-to-trough decline of 33.5%. Prospects for 2018 earnings remain very good. The most recent estimate for 2018 increased 17 cents $143.93, which if achieved would represent an 11.3% increase above the expect 2017 earnings level, which is not the type of earnings progression that would spawn a deep and long-lasting market drop. A tax bill could substantially improve the 2018 earnings outlook. 170 companies are slated to report earnings this week, but the next two weeks have heaviest flow of earnings releases. By the end of the week of October 30, the market should have a solid indication of overall corporate results for the third quarter. Keep in mind that some sectors could produce less than expected earnings due to the impact of the two hurricanes, but the market should be able to look beyond this short-term factor. From a technical standpoint, market breadth as gauged by the NYSE cumulative advance-decline line is positive and has posted new all-time highs alongside new highs in key market indices like the S&P 500; however, the percentage of NYSE stocks closing above their 200-day moving average has actually been posting lower highs since 2016. As our technician pointed out today, the last few times divergences like this were present preceded corrections in 2013-2015 and 2009-2011, as well as the significant market peak in 2007. We do not anticipate that the market will repeat its performance when the 2007 divergence occurred, but a pullback of moderate proportions could evolve.
GREGORY M. DRAHUSCHAK, VICE PRESIDENT
[email protected] 412.561.0497
WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC
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As we have suggested in recent weeks, the answers to two questions - is the U.S economy on track for a recession in the next 12 months and will the Federal Reserve aggressively raise interest rates - provide the proper guidance to the market. We believe that the answer to both questions is ”no”. As long as the answers remain as we think they are now, any market pullback should be viewed as a time to increase equity exposure. Have a great week
Last week’s market tally – major indices and sectors
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GREGORY M. DRAHUSCHAK, VICE PRESIDENT
[email protected] 412.561.0497
WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC
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