The Market Perspective for July 22, 2016

The Dow Jones Industrial Average achieved nine straight days of gains, including seven record closing highs, before profit taking on Thursday of this week. This is the longest such streak since an eight straight day bull streak occurred in mid-March 2013. This week the Dow also hit a new all-time intraday high of 18,622, and gained 0.3 percent. The Standard & Poor’s (S&P) 500 Index gained 0.6 percent and finished the week at a new all-time closing high. The Nasdaq is less than 3 percent away from a new all-time high after rising 1.4 percent the past week.  The Russel 2000 gained 0.6 percent for the week.

With approximately 20 percent of the S&P 500 reporting earnings this past week, investors had a lot of information to digest. Bank of America (BAC) began the week by posting quarterly earnings and revenues that beat analysts’ expectations. The commercial banking giant delivered earnings per share (EPS) of $0.36 on revenues of $20.4 billion. Although EPS and revenue numbers beat consensus estimates, shares of Netflix (NFLX) suffered a 15 percent decline when the company reported slower than expected growth in the number of paid subscribers. International Business Machine (IBM) beat expectations with EPS of $2.95 and revenues of $20.2 billion. The following day, the price of Johnson and Johnson (JNJ) and Microsoft (MSFT) advanced strongly on better than expected earnings reports.

Although quarterly earnings at Goldman Sachs (GS) and Lockheed Martin (LMT) improved, their stocks eased lower during the week. Both Intel (INTC) and Halliburton (HAL) saw stock price declines after reporting Wednesday. Two stocks that advanced strongly on the week were General Motors (GM) and Visa (V). The former delivered record quarterly profits, while the latter reported better than expected numbers and announced an increase to its stock buyback plan.

The mood was generally positive for earnings. Even companies with disappointing results such as Starbucks (SBUX) and Chipotle (CMG) nonetheless rallied in the wake of their earnings reports thanks to solid guidance. Paypal (PYPL) headed in the other direction after its executives delivered more measured guidance.

After this week, 25 percent of S&P 500 companies have reported earnings. The average analyst estimate called for a 5.6 percent decline in S&P 500 earnings this quarter versus year ago levels, but this has now improved to 3.7 percent thanks to the multitude of earnings beats. Industrials and technology are driving the upward earnings revisions.

While mood was positive and earnings reports generally strong, central bankers took some wind out of the market’s sails. The European Central Bank (ECB) did not take any action at its meeting this week as expected, but the result was a weaker euro anyway. More importantly, Bank of Japan Governor Haruhiko Kuroda rejected the idea of “helicopter money.” We take his words with a huge grain of salt because in January, Kuroda said negative interest rates weren’t coming shortly before the BOJ implemented negative interest rates. His comments led to a stronger yen though, as traders better on “helicopter money” pared back their bets against the yen. A weaker yen is usually good news for markets, and a weaker yen accompanied the recent push to new highs in U.S. stocks.

The price for a barrel of West Texas Intermediate Crude oil dropped 4.5 percent on the week. Crude inventories in the U.S. fell by 2.3 million barrels, which was in line with expectations, but gasoline inventories continue to pile up. The gasoline price has been falling since late May in the commodities market and since mid-June at the pump. Crude oil is now following gasoline lower. If this continues, crude could slide as much as 10 percent before it matches the drop seen in gasoline. The Energy Select Sector SPDR ETF (XLE) was lower by 1.3 percent on the week.

The 30-year Treasury bond was flat on the week as interest rates stabilized. The U.S. Dollar Index rallied on weakness in the euro and pound, helping domestic stocks beat their foreign competitors. The iShares MSCI EAFE Index (EFA) was flat on the week. One sector winner this week was biotechnology. iShares Nasdaq Biotechnology (IBB) climbed 3 percent. The buyout of Relypsa (RLYP) by Swiss biotech firm Galenica helped lift the sector.

In economic news, continued low interest rates and the availability of low-down payment mortgages boosted U.S. housing starts in all sectors of the country. Although there was a slight decline in mortgage refinancings, existing home sales climbed to the highest rate in almost a decade. Homebuilder stocks are on the verge of setting a new post-2006 high. The weekly unemployment claims number was the lowest in more than three months.

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