Market Perspective for October 19, 2015

Earnings will dominate the domestic market this week. Morgan Stanley (MS) kicked things off this morning with an earnings miss. This follows weak reports from J.P. Morgan (JPM) and Goldman Sachs (GS) last week. All of these firms blamed trading profits for their misses or negative guidance. We favor regional banks for their lack of exposure to the financial markets. Smaller banks are tied closely to the local economy and benefit directly from rising interest rates, whereas larger financial institutions could see earnings fall due to fluctuations in equity and fixed income markets.

Later this week, General Motors (GM), Yahoo (YHOO), Biogen (BIIB), Google (GOOGL) and Amazon (AMZN) will report, along with Dow components Verizon (VZ), International Business Machines (IBM), Proctor & Gamble (PG), Coca-Cola (KO), 3M (MMM), Boeing (BA), McDonald’s (MCD) and American Express (AXP). The combined market capitalization of these firms comes to nearly $2 trillion and account for more than 10 percent of S&P 500 market capitalization. Some of the big earnings reports to watch are Amazon and McDonald’s. Investors will compare Amazon’s results to Wal-Mart, but also want to see solid growth from the firm’s cloud services division that is becoming a profit center. McDonald’s has been struggling and investors are looking for signs of a turnaround. The fast food giant is now offering all-day breakfast, but recent reports indicate some franchisees are not happy about the move.

Although this is a very light week for economic data domestically, China released a large amount of information Monday. The most significant was the third quarter GDP growth rate, which came in ahead of expectations at 6.9 percent. This number was made possible by a large GDP deflator, which increased the GDP estimate by about 0.7 percent. Producer price deflation is pounding the Chinese economy and without the deflator, nominal GDP only increased 6.2 percent. Headline watchers saw the 6.9 percent figure and came away with a positive view, but other data from September, including investment and industrial production, pointed to a further slowdown. Commodities fell on Monday as a result of the GDP report, with copper down about 2 percent. Oil prices were also down about 2.4 percent in mid-day trading.

Equities were led by the continued rebound in biotechnology and pharmaceutical shares on Monday. While the S&P 500 Index recently hit a two-month high as it retraces the losses made in August, some healthcare subsectors have yet to hit one-month highs. Biogen (BIIB), which reports this week, is 8 percent of iShares Nasdaq Biotechnology (IBB) and 6.3 percent of Fidelity Select Biotechnology (FBIOX). The firm is largely responsible for the lag in biotech funds. It missed second quarter revenue estimates when it reported in July and shares fell 25 percent over the course of a few days. Since then, shares continued to fall and, at one point last week, were down nearly 40 percent from their late June levels. Shares are undervalued to the point where investors who normally avoid the volatile sector may become buyers.  This will certainly help the broader sector.

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