Market Perspective for January 25, 2016

Equity markets will try to carry last week’s momentum into this week after the S&P 500 Index rallied 5 percent from its midday lows on Wednesday to large gains on Friday. Shares in Asia and Europe rallied on Monday in reaction to Friday’s rebound. Oil rebounded as well, climbing 20 percent from low to high over the past three trading days, retreating, however, on Monday following Saudi Aramco’s announcement that it would not reduce investments in production. The U.S. equity markets also pulled back at the open on Monday. The dip in oil, a management shakeup at Twitter (TWTR) and a downgrading of Dow component Caterpillar (CAT), compounded Monday’s volatility. The abrupt exit of five top-level Twitter executives pulled TWTR shares down more than 6 percent. The company is also expected to announce a new marketing chief this week. Goldman Sachs anticipates continued weakness for CAT; shares have already fallen more than 40 percent from the peak set in mid-2014 and emerging market sales have been consistently weak since late 2012.

This week’s trading could hinge on the Federal Open Market Committee (FOMC) meeting that ends on Wednesday. Speculators were betting that a rate hike could come as soon as June, but now those odds have been pushed back to late 2016. Due to the drop in equities, however, investors will be looking to the FOMC statement for sentiment signals. If the Fed is focused on the economy, strong jobs data and core inflation will expedite the next rate hike. If instead the Fed is back to watching the markets, it could signal an indefinite delay. European Central Bank President Mario Draghi indicated last week that the ECB may wait until March to intervene, which led to further euro weakening. Later this week, the Eurozone core CPI for January will be released. Forecasts put core CPI at 0.9 percent and headline CPI at 0.4 percent.

Two different consumer surveys for January will be released this week, one on Tuesday and one on Friday. New home sales for December will be released on Wednesday, with the market expecting 503,000 homes sold. Durable goods orders and pending home sales for December will be out on Thursday. The initial estimate of fourth quarter GDP will be available on Friday. The average estimate calls for growth of 0.7 percent, as does the Atlanta Federal Reserve’s GDP Now model.

Earnings season is in full swing and individual company reports are influencing individual share prices. Last week, American Express (AXP) and General Electric (GE) both saw their shares substantially underperform the market following earnings reports that disappointed investors, despite the strong broad market rally. McDonald’s (MCD) overcame Monday’s tough market with upwards of 2 percent gains after toppling analysts’ fourth quarter earnings estimates. A number of blue chips will report this week, among them: Apple (AAPL), 3M (MMM), AT&T (T), DuPont (DD), Johnson & Johnson (JNJ), Proctor & Gamble (PG), Boeing (BA), Caterpillar (CAT), Microsoft (MSFT), Chevron (CVX), Visa (V), Honeywell (HON), Ford (F), Amgen (AMGN), Celgene (CELG), Biogen (BIIB), Abbvie (ABBV), Bristol-Myers (BMY), Abbot Labs (ABT), Facebook (FB) and Amazon (AMZN).

Apple is the largest stock by market capitalization and it is heavily overweight in the Nasdaq and 11.5 percent of PowerShares QQQ (QQQ), combining with MSFT, FB and AMZN, to represent 30 percent of QQQ. As noted above, investors appear to be reacting strongly to individual reports, so good or bad news from these firms will likely determine the Nasdaq’s performance this week. Technology funds, including the Internet subsector, consumer staples, chemicals, biotechnology and pharmaceuticals will also be impacted by this week’s reports. About 25 percent of Fidelity Select Pharmaceuticals (FPHAX) is invested in JNJ, ABBV and BMY. Growth-oriented funds are also likely to be affected by the heavy presence of large-cap tech and biotech in this week’s earnings reports.

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