Month: September 2016

The Federal Reserve left rates unchanged at this week’s meeting, initiating a mid-week U.S. stock rally.  The Nasdaq advanced to a new all-time high, while the S&P 500 Index erased early September losses and turned positive on the month. Dividend funds, utilities and real estate shares outperformed the broader market following the Fed’s announcement. Financials also rallied, with SPDR S&P Regional Banking (KRE) climbing about 2 percent on the week.

Commodities also benefited from the rate hike delay. Gold rose 2 percent on the week, despite closing lower on Friday.  West Texas Intermediate crude oil gained slightly less than 5 percent on the week following a larger-than-expected draw down in oil inventory and rumored production freezes ahead of next week’s OPEC meeting.  Commodities and foreign shares also benefited from the weaker U.S. dollar.

The Bank of Japan (BoJ) also left their benchmark interest rate unchanged, as anticipated. Although the BOJ did not increase its stimulus program, officials plan to target the yield curve in an effort to keep 10-year government bonds at or near zero percent while lifting longer-term interest rates. The 10-year bonds currently yield less than zero. Investors reacted positively to the BoJ news as well, sending global markets higher.

Continued strength in the labor market was tempered by weaker-than-expected housing data.  First-time unemployment claims, already at four-decade lows, beat expectations with a drop to the lowest level in two-months. Markit’s flash PMI for September came in at 51.4, slightly below expectations of a 51.9 reading, but signaling sector expansion nonetheless. August housing starts slid 5.8 percent and the weekly mortgage purchase applications index declined 7.4 percent. Existing homes sales also fell 1 percent from July.

Adobe Systems, FedEx, Bed, Bath & Beyond, AutoZone and Rite Aid reported earnings this week. Shares of software giant Adobe Systems (ADBE) rose Tuesday to all-time highs after the company easily beat earnings estimates on a 20 percent rise in revenues. FedEx (FDX) also reported better-than-expected adjusted fiscal first-quarter earnings. While the integration of TNT Express hampered performance, the company saw strong growth in its ground parcel delivery business. Shares rose 7 percent and lifted the Dow Transports by 1.8 percent on the day.

Bed, Bath & Beyond (BBBY) missed estimates with lower overall sales and earnings figures, despite a 20 percent increase in online orders. AutoZone (AZO) reported a 6.4 percent increase in profits on higher revenue, handily beating estimates. Rite Aid (RAD) reported earnings and revenues lower than the comparable year-ago period. Shares of the company rose slightly as its merger with Walgreens (WBA) appears to be gaining governmental approval. RAD trades at an 11 percent discount to the buyout price offered by WBA, signaling investor skepticism regarding a successful deal.

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P MidCap 400 (MDY)
iShares Russell 2000 (IWM)

The Nasdaq and small-cap Russell 2000 Index recovered from early September losses and are positive on the month. The strength in more volatile assets generally signals bullish market sentiment.

The CBOE Volatility Index also declined over the past week, back to levels seen last spring. Despite a few overseas predictions for a September rate hike, the Fed announced it would leave interest rates unchanged on Wednesday, alleviating anxiety. The VIX immediately tumbled almost a full point following the announcement.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
iShares iBoxx Investment Grade Bond (LQD)

Bond yields steadied over the past week, with the 10-year Treasury yield holding around 1.7 percent. Investors took the opportunity to climb back into corporate and investment-grade bonds.

The Bank of Japan left interest rates at 0.10 percent following its meeting on Wednesday, but changed its asset buying strategy. The BoJ will try to increase long-term interest rates (in this case bonds with maturities beyond 10 years) by either increasing purchases of short-term bonds or decreasing purchases of long-term bonds.

A positive yield curve allows banks to profit by borrowing short and lending long. When the Bank of Japan cut rates below zero, however, it flattened the yield curve, making it harder for banks to profit. Financial stocks in Japan fell continuously until July of this year, when the BoJ started to signal a shift in strategy.

The market reaction was mixed. The yen strengthened, while the Nasdaq Japan Financials Index climbed 5.8 percent on Wednesday. Overall, the impact on U.S. interest rates is muted at the moment, but if Japan is able to lift longer-term bond yields, it should reduce some buying pressure from yield-hunting Japanese investors.

The 10-year Treasury yield slid in the wake of the Fed’s announcement to hold rates steady, providing another lift for bond funds.

Sector Performance

Energy and oil prices fell last week, while interest rate stabilization fueled a rebound in the utilities sector. Healthcare and technology were both up about 1 percent.

Home builders fell following disappointing earnings reports and slightly slower-than-expected housing starts in August. ITB remains locked in its trading range as a result.

Biotechnology funds pushed to their highest levels since January last week. Both XBI and FBIOX are moving higher, but IBB is still below early August highs. Biotech has become a driving force behind the healthcare sector.

VanEck Vectors Semiconductor ETF (SMH) saw assets climb 106 percent to more than $500 million. This moved the fund’s assets under management ahead of iShares PHLX Semiconductor’s (SOXX) $483 million.

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

West Texas Intermediate Crude fell over the past week, while natural gas spiked to a new 52-week high. Investors bought coal and steel producers, while copper and gold miners saw smaller gains.

Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)
iShares Core Dividend (HDV)
WisdomTree U.S. Quality Dividend Growth (DGRW)
SPDR S&P Dividend (SDY)
iShares Select Dividend (DVY)

The chart below compares the price of SPDR S&P 500 (SPY) to various dividend funds, with a rising line showing outperformance by SPY. The blue line is the 10-year Treasury bond yield. Over the long-term this trend will not hold, but in the near-term, we’re likely to see a continuation of this trend.

Both the Bank of Japan (BoJ) and Federal Reserve are scheduled to meet on Wednesday. Negative interest rates have failed to spur on the world’s third-largest economy and Japanese policymakers believe that further easing is necessary, but they are uncertain of the precise way to accomplish that goal. Some argue for cutting interest rates further below zero, while others argue for buying more assets, but the BoJ is expected to do neither at this week’s meeting. While the odds of a near-term interest rate hike in the United States greatly diminished last week, investors will still be paying close attention to the Fed in order to gauge the probability of a December hike.

The U.S. housing market will also be in focus this week. On Monday, the September Home Builders’ Index, a gauge of sentiment in the industry, climbed to its highest level since October 2015 and before that the highest level since 2005. On Tuesday, housing starts and building permits for August will be out. The weekly mortgage purchase applications index will be released on Wednesday. Existing home sales for August are due on Thursday. Analysts expect housing starts will show a slight decline, but anticipate a small increase in existing home sales.

In addition to Wednesday’s weekly oil inventory data investors and traders are assessing the impact of a gasoline pipeline leak in the Southeast. Several states have declared a state of emergency as gasoline supplies run low. Prices in Georgia jumped more than 20 cents per gallon in four days, with Tennessee and Alabama prices rising nearly 10 cents a gallon. Weekly unemployment claims and Eurozone consumer confidence will be available on Thursday and flash Purchasing Manger Indexes (PMI) for various nations will be out on Friday.

In earnings news, investors will hear from Adobe Systems, FedEx and Bed, Bath & Beyond as well as AutoZone and Rite Aid. Adobe (ADBE) is expected to continue its strong run of earnings and sales growth when the company reports its third quarter results Tuesday after the bell. Investors are looking for the company to show strength in its cloud computing services operations. Analysts predict FedEx (FDX) will easily beat earnings and revenue estimates. Margins are forecast to improve despite volatility in the company’s fuel costs. Economists also follow Fed Ex’s earnings reports to identify shifts in the global economy.

Analysts expect houseware retailer Bed, Bath & Beyond (BBBY) will report lower sales and earnings figures after the bell Wednesday as the company continues to face strong headwinds. AutoZone (AZO) will report fourth quarter results on Thursday.  It too is facing headwinds, including tougher currency translations as the U.S. dollar rallies versus the Mexican peso. Analysts anticipate Rite Aid (RAD) will post slightly higher earnings and revenue figures compared to the same period a year ago.

Policymakers alleviated apprehensions regarding a potential interest rate following a volatile trading week. Federal Reserve Governor Lael Brainard and Minneapolis Fed President Neel Kashkari both warned against raising rates too soon. While the SPDR Standard & Poor’s (S&P) 500 index ETF (SPY) was up approximately 1 percent on the week, the SPDR Technology Select Sector ETF (XLK) rose 3 percent in response to a strong performance late in the week from Apple (APPL) based on strong sales of the new iPhone 7. The Dow and the Standard & Poor’s 500 index rose 1 percent, and the tech-heavy Nasdaq increased by more than 2 percent.

Chinese industrial production numbers rose 6.3 percent due to housing construction and government spending. The UK Consumer Price Index (CPI) and the Producer Price Index (PPI) figures were also released. Both reports reflected slight increases, which continue to allay fears over Brexit. These concerns were also alleviated by Thursday’s UK retail sales figure that was stronger than expected. As anticipated, the Bank of England (BoE) kept their benchmark interest rate unchanged.

Eurozone industrial production numbers unexpectedly fell in July, suggesting the region may struggle in the second half of the year. Thursday’s economic reports also included the latest eurozone CPI figures, which showed a slight increase and met analysts’ expectations. iShares MSCI EAFE ETF (EFA) and the MSCI Emerging Markets ETF (EEM) were relatively unchanged on the week.

On Wednesday, mortgage purchase applications jumped 4.2 percent on speculations that homebuyers would attempt to lock in rates before any possible increase by the Fed. Oil was down more than 7 percent on the week and shares of the Energy Select Sector SPDR ETF (XLE) were down more than 2 percent. Weekly unemployment claims continued to hover near historic lows at just 260,000 first-time claims. Retail sales figures released Thursday, showed an unexpected drop of 0.3 percent, the first decline in six months.

Widely-held tech giant Oracle (ORCL) reported quarterly earnings and revenues that missed both top and bottom line expectations. Shares were lower by more than 2 percent on the news. Shares of Novavax (NVAX) plummeted over 80 percent on heavy volume when the company’s respiratory disease vaccine failed clinical trials.