Equities rallied back to flat for the week by the close on Thursday, but heavy selling resumed today. Although retail sales and bank earnings were solid during the week, investors viewed data though a negative lens as selling picked up on Friday.
Mixed earnings overshadowed the positive reports on a Friday that was dominated by the sell-off. JPMorgan Chase (JPM) reported earnings before Thursday’s bell that beat expectations, lifting the stock 2.2 percent. Wells Fargo (WFC) posted mixed results today; earnings exceeded expectations, but revenues fell short. Citigroup (C) was in line with projections. Shares of Intel (INTC) disappointed investors with a 5 percent slip in after-hours trading that grew to 9 percent in Friday trading.
Analog Devices (ADI) did not report this week, but made headlines by lowering guidance. The high-end of the new range is 20 percent below analyst estimates. ADI is not a key stock for the market, but it is a major supplier to Apple (AAPL) and thus could offer clues in regard to Apple’s future earnings. As the largest component in the S&P 500 Index and over 10 percent of the Nasdaq-100, the direction of Apple shares is critical to the indices.
The oil market continued its descent this week. A barrel of West Texas Intermediate (WTI) crude broke $30 on Tuesday and then rallied approximately 6 percent before giving up all of the gains on Friday and making a decisive break below the $30 level. Below this level we could begin to see significant pressure on Russian and Saudi Arabian government finances.
The Producer Price Index was down 0.2 percent in December and retail sales were off by 0.1 percent. The focus on the headline retail sales figure detracted from the underlying data; sales are down due to falling prices, not falling consumption. This is a subtle difference for retailers, but a big difference for the economy. Sears (SHLD) and Wal-Mart (WMT) joined Macy’s (M) to announce store closures as brick-and-mortar retailers move to the web and succumb to online competition, leading to SPDR Retail (XRT)’s underperformance. Consumer discretionary stocks do not point to weak consumption; they have been outperforming the S&P 500 Index since September 2014 and the trend has intensified since November 2015.
On Wednesday, the Federal Reserve Beige Book showed mixed economic signals. Although there were improvements in the labor market and consumer spending, selling pressure in the energy sector and a strong dollar were portrayed as potentially problematic. That same day, Boston Federal Reserve President Eric Rosengren stated that sluggish U.S. and global growth might lead to a slower pace for the Fed’s rate hikes than originally envisioned. In a speech the next day, St. Louis Fed President James Bullard remarked the following day that the continued decline in inflation may persuade him to change his outlook regarding further tightening. Rosengren and Bullard are voting members on the central bank’s policymaking committee. Odds of a March rate hike fell substantially in the futures market.
Traders likely did not wish to hold shares over the long weekend. The Martin Luther King, Jr. holiday means markets are closed on Monday and China will have two full days of trading before U.S. markets open on Tuesday.
During this time, it is important to remain patient. While the ongoing volatility and recent sell-off have concerned many investors, investing in domestic equities will likely pay off over the coming year. If you have any questions pertaining to the reallocation of your portfolio, please call us at (888) 252-5372.