Market Perspective for July 16, 2016

Markets reached new all-time highs this week. Mega banks lifted stocks with much better-than-expected earnings. Positive economic news and favorable central bank policies also fueled bullish sentiment. The Dow hit a new all-time high above 18,500, the S&P 500 recorded a new all-time intraday high of 2165 and the Nasdaq closed above 5,000 for the first time in 2016. The Russell 2000 Index climbed above 1200 for the first time since December 2015. The Financial Select Sector SPDR (XLF) was one of the best performing sectors this week, joined by materials, energy, industrials and technology.

Industrial bellwether Alcoa (AA) led off this earnings season with better-than-expected numbers on Monday. The company reported earnings per share of $0.15 on revenues of $5.3 billion. Shares of the company rose 4 percent on the news, and the broader commodity rally carried shares to a 10 percent gain on the week. JPMorgan Chase (JPM) also exceeded expectations with consensus EPS of $1.55 and revenues of $25.21 billion. The company reported impressive loan growth to businesses and consumers, plus a boost in trading profit following Brexit.

Like JPM, Citigroup (C) handily beat earnings estimates, but the bank generates more of its revenue overseas. A strong U.S. dollar headwind drove earnings down 14 percent from last year. The banks reported EPS of $1.24 on revenues of $17.55 billion. Wells Fargo (WFC) reported earnings that matched analysts’ expectations with EPS of $1.01 on lighter-than–expected revenues of $22.16. The overall financial sector with increases in loan origination, mortgage applications and consumer credit

The reports benefited smaller banks that lack investment banking, international and concentrated sector exposure. Regional banks rallied all week and bucked the weakness in some larger banks on Friday as investors focused on lending growth.

In the commodity space, gold fell nearly 3 percent while oil prices were relatively flat. Coal, steel and copper stocks set new 52-week highs. The U.S. dollar pushed higher as it gained more than 4 percent versus the yen. Bonds finally corrected, sending the 30-year Treasury indexes lower on the week. Overseas trading was also positive and the rally in commodity shares pushed iShares MSCI Emerging Markets (EEM) close to a 52-week high.

Rising bond yields weighed on utilities and consumer staples, which paced gains in most dividend funds, but value funds tended to perform well thanks to outperformance from financials and materials, coupled by growth subsectors such as biotechnology and Internet shares.

The May Job Openings and Labor Turnover Survey (JOLTS) reported fewer openings fell during the month, but they remain at multi-year highs. The number of workers filing new unemployment claims remained the same as last week despite the expectation of a slight increase. With interest rates at three-year lows, mortgage refinancing surged 11 percent while applications for new home purchases were down slightly. The Federal Reserve Beige Book indicated modest economic growth in most regions of the country. The Producer Price Index (PPI) and Consumer Price Index (CPI) increased 0.5 percent and 0.2 percent respectively in June. Retail sales climbed 0.6 percent in June, well ahead of the consensus estimate of 0.1 percent. Retail sales ex-autos increased 0.7 percent and online retailers saw sales rise 1.1 percent.


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