Market Perspective for October 5, 2015

Investors have again turned bullish after a one-month round of selling, as the rally in equities that began on Friday and carried into early trading today. Last week, the government reported job growth was much slower than expected in September, sparking an immediate sell-off in equities that reversed throughout the day, eventually turning into a substantial rally. If that is a news driven event, the best explanation is investors are reacting positively a further delay in rate hikes.  Job data for September seems to confirm the Fed’s decision to be cautious and investors are buying on the delay.

The best explanation for the shift in mood may be that investors were overly pessimistic in September. A week ago, Mark Hulbert reported his Nasdaq Newsletter Sentiment Index was at the lowest level since the bursting of the 2000 Internet bubble, indicating extreme pessimism. Usually this is a contrarian signal and the rally since Friday, in the face of negative economic news, is indicative of an improvement in the outlook on the market. Investors will likely continue turning more optimistic during the week, and anything remotely positive, from earnings reports to the Fed minutes, could help fuel a rally.

Earnings season will kick off over the coming days with Pepsi (PEP), Monsanto (MON), Alcoa (AA), Domino’s (DPZ) and Yum! Brands (YUM) reporting. This is a great cross section of the current economy. Alcoa operates in the hardest hit sector of the global economy: industrial commodities. China is most responsible for weakness in commodities due to its economic slowdown and rebalancing. That said, there’s a debate about the slowdown as bulls think China’s rebalancing is going well, with services and consumption making up for losses in heavy industries. Bears believe the government is fudging the data and underlying growth is still much slower than what is being reported. YUM, whose KFC stores are a common sight across China, could shed some light on the subject. Global multinational Pepsi will give a preview of the global economy and how currency fluctuations may affect other multinational firms.

Economic data will be very light this week. The trade deficit, consumer credit, and wholesale inventories for August, are the biggest items. The most important for GDP growth estimates is wholesale inventories; this number has frequently caused an adjustment in the Atlanta Federal Reserve’s GDP Now model.

Investors will focus on the minutes of the September 17 Federal Reserve meeting. The minutes from the previous meeting showed officials debated the policy of reinvesting the interest from assets purchased during the three rounds of quantitative easing. Earlier in the year, Janet Yellen said the Fed would likely end these purchases after raising interest rates. A rate hike was clearly on the table heading into September for officials to be debating reinvestment.

In the statement announcing their decision to leave rates unchanged, however, Federal Reserve officials didn’t give any explanation, with only one sentence referencing concerns about the global economy. Speculators have pushed their rate hike expectations to 2016, with odds currently at 55 percent. December rate hike odds are currently at 32 percent. Interest rates fell sharply last week, with the 10-year Treasury yield falling below 2 percent. Less than three weeks ago, the 10-year Treasury yield was 2.3 percent.

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