Month: August 2016

The U.S. markets opened in record territory following Friday’s better-than-expected monthly employment report, though the advance paused by midday as investors assessed weaker Chinese trade data.

This week’s earnings will illuminate consumer trends as the retail sector kicks off two weeks of heavy reporting. Kohl’s (KSS), Nordstrom’s (JWN), Macy’s (M), Coach (COH), Michael Kors (KORS) and online retailer Alibaba (BABA) are all scheduled to report. Most department stores are down considerably from March levels, despite the rise in consumer spending, due to competition from e-commerce.   Disney (DIS) will also report quarterly earnings this week and is expected to deliver encouraging numbers after three hit blockbuster movies during the quarter, though the ESPN division could potentially drag on profits.

Monthly retail sales figures for July are due out Friday. The average forecast calls for a 0.4 percent increase from June (0.2 percent ex-autos). The latest University of Michigan Consumer Confidence Survey and the U.S. producer price index (PPI) are also scheduled to be released on Friday. Consumer confidence is expected to rise, while the PPI is expected to slow considerably from June’s 0.5 percent increase to 0.1 percent.

China will release a number of economic reports for the month of July this week. On Sunday night, the country revealed a spike in the trade surplus due to an uptick in exports and a drop in imports. Later this week, new loan and inflation data will be out. Investors are closely watching credit growth following a recent bounce in real estate, which has prevented GDP from slowing, driven by an unprecedented rise in mortgage lending.

Oil prices rallied on Monday after hedge funds loaded up on short positions in anticipation of a move into the $30 range. This short-term rally should peak in the $43 to $45 per barrel range. In addition to rising gasoline inventory, there is still a large amount of “floating storage,” oil tankers filled to the brim and parked offshore at major oil ports around the world.

Investors adopted a wait-and-see attitude to start the week, but positive earnings and strength in the consumer sector will reinforce the bullish implications of the strong July jobs report. The Atlanta Fed raised its GDPNow target for the second quarter to 3.8 percent based on the recent slate of positive economic reports and further upside surprises could push estimates past 4 percent. Foreign central banks are accommodative as well, providing a bullish backdrop for the markets. New Zealand’s central bank meets Wednesday and is expected to cut interest rates. It is the last major central bank policy meeting this month.

A superb jobs report rallied the market to end the week on a high note. 255,000 new jobs were created in July, far surpassing the 185,000 predicted. Unemployment held steady at 4.9 percent and wages also increased 0.3 percent from the month earlier, faster than expectations. Strong employment data increased the Atlanta Federal Reserve’s GDP Now model its third quarter GDP growth forecast to 3.8 percent. Economists are conservatively forecasting around 2.4 percent growth.

Friday’s labor reports pushed stocks out of their three-week trading range and on to new all-time highs, despite subdued trading earlier in the week.  For the week, the S&P 500 gained 0.4 percent and the Nasdaq rallied 1.1 percent. The Nasdaq returned 0.6 percent.

Pharmaceutical giants dominated this week’s earnings reports. Shares of Pfizer (PFE) fell as the company reported a 23 percent drop in profits, citing lower demand for some of its older prescription medications. The world’s largest generic drug manufacturer Teva Pharmaceutical (TEVA) beat market expectations in earnings per share (EPS) and revenues. Shares rallied on the news, but pulled back when Teva announced its purchase of Anda, the generic drug distribution division of Allergan (AGN) for $500 million. Bristol-Myers (BMY) has yet to report, though shares plunged double-digits following news that its Opdivo cancer drug, used to treat several different forms of cancer, failed in a lung cancer trial. BMY’s loss was Merck’s (MRK) gain as its competing drug Keytruda targets the same market. Shares of MRK were up as much as 8 percent during the day.

The record-shattering release of the “Overwatch” video game helped Activision Blizzard (ATVI) handily beat expectations. 3D Systems (DDD) also easily beat analysts’ forecasts as demand for its software and medical solutions far outpaced estimates. Chesapeake Energy (CHK) fell 3 percent following poor earnings and a planned $800 million increase in asset sales. Proctor & Gamble (PG) reported EPS of $0.74, beating expectations. Shares saw a small gain on the week.

Chinese and U.S. manufacturing Purchasing Managers Index (PMI) for July came in less than forecast. Light vehicle sales for July rose 6.5 percent over the previous month, to an annualized sales pace of 17.9 million. If this pace can hold, it could be a record year for auto sales. The weekly mortgage application index showed a 3.5 percent decline as interest rates moved higher. On Thursday, the weekly unemployment claims number was slightly higher than expectations at 269,000. Consumer spending was up 0.4 percent in June, in line with expectations and matching the prior month’s growth. Oil prices fell below $40 early in the week and rebounded late. A surprise decline in inventory caused a spike in prices, but some oil market analysts claim this was due to inventory shipping to a new storage facility.

Overseas, India enacted a new Goods and Services Tax (GST) designed to replace the incongruent mix of local and state taxes. It is a major step forward for Prime Minister Modi’s reform agenda both economically and politically, as it required a constitutional amendment to pass. Estimates vary, but one HSBC report believes the new law will boost long-term GDP growth by 0.80 percentage points each year. In Japan, the government approved another stimulus plan totaling $73 billion in hopes of jump-starting that nation’s sluggish economy. The program includes infrastructure projects, asset purchases and direct payments to low-income families. A new cabinet member also proposed wage targeting as a way to generate inflation, sparking concern from investors.

The Royal Bank of Australia cut its key interest rate to a record low 1.5 percent. As anticipated, the Bank of England (BoE) also cut interest rates to help the UK economy and allay uncertainty over Brexit. In addition to lowering rates to 0.25 percent, the BoE restarted its quantitative easing program with a plan to purchase corporate bonds.

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
iShares Core High Dividend (HDV)
Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)
iShares MSCI Edge Minimum Volatility USA (USMV)
iShares 20+ Year Treasury (TLT)
iShares iBoxx $ Investment Grade Bonds (LQD)

August tends to reflect low trading volume, which could potentially lead to less liquidity in the market and increased volatility, as it did last year. Thus far, however, the market remains relatively calm. Most equities spent a third week in a holding pattern following new highs, though the Nasdaq pushed higher on strong earnings reports from Alphabet (GOOG), Apple (AAPL) and Amazon (AMZN).

Many shale oil producers funded expansion with high-yield debt, growing the energy sector’s share of the high-yield debt market and high-yield index funds. When oil prices tumbled, investors repriced these energy bonds, dragging down the broader indexes. When oil began its plunge from $100 a barrel to below $30, default levels were under continuous revision. Today, investors don’t see much trouble above $40 a barrel, hence the divergence between oil prices and high-yield debt. If oil continues to slide into the $30s, however, it is likely to experience a pullback.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
Fidelity High Income (SPHIX)

Unlike stocks, bonds are seeing some movement. FFRHX and THOPX, bond funds that aim at higher yielding credit continue to push higher. In contrast, corporate, investment-grade and pure high-yield bond funds traded lower. The divergence in high-yield and oil should be closely monitored this month.

Sector Performance

The calm market benefited consumer staples and utilities last week, which ended a period of underperformance, while energy and materials were hit by the pullback in oil prices.

Healthcare subsectors also performed well. Biotechnology continues to rebound; in the past weeks, IBB and XBI broke out of its sideways trading range. Biotech now has a clear path ahead and could rally as much as 10 percent before meeting resistance again. FSPHX broke out in a similar manner as biotechnology, as reflected in the chart above. As biotech rallies and medical devices continue to achieve new all-time highs, the sector is well positioned for leadership in the last third of the year.

The Nasdaq fueled the outperformance of growth shares. Energy also weighed on value, as did financials following the slide in interest rates from late June to early July. Nevertheless, value remains in a relative uptrend since taking the lead in late January.

Housing faded after making a new post-2006 high a week ago, but still trades higher than it has for most of the past year. There is no major housing data in the next week.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Gold Miners (GDX)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

The wide gap between oil, natural gas and energy equities has closed, as illustrated in the YTD performance charts.  The extremely volatile natural gas price is still a bit of an outlier, but crude oil, XLE and FCG are all within 4 percentage points in 2016.

Gasoline inventories remain the chief concern for the oil market. Saudi Arabia slashed oil prices for Asian customers over the weekend, pulling West Texas Intermediate Crude to a $39 handle before a small rebound on Wednesday.