A day of rest

A day of rest.  Friday marked a day of rest for stocks as markets pulled back slightly in the wake of an impressive 5 day winning streak. Equities started the day in the red and slowly climbed throughout the session closing just short of breakeven.  Benign CPI data that was released Friday morning supported the theory that under-control inflation would give the Federal Reserve room to pause in their rate hikes.  This generally accepted stance combined with positive movement in trade talks with China has vastly changed investor sentiment in the past 3 weeks that included respectable weekly gains.  There are probably some historical numbers that suggest that years which begin like this one have better odds of ending positive for the whole year, but those types of predictions would not pass muster with any real statisticians.  What will really impact market performance in the year ahead will be Fed policy and corporate performance.  For now the Fed is “patient” and as far as corporate performance goes, we will get our first taste of that for 2019 as earnings season kicks off this week with most of the major banks and financials amongst others.  The week kicks off this morning before the bell with Citigroup which is expected to post a 4th quarter EPS of $1.547.  Tomorrow begins the onslaught of others which will include JP Morgan Chase, Goldman Sachs, Wells Fargo, Schwab, E*Trade, Morgan Stanley, and American Express, to name a few.  It is worth noting that we will also get our first FAANG stock reporting this week with Netflix on Thursday.  Please refer to the attached weekly earnings and economic calendar for details on releases. Earnings will set the pace for stocks in the short run as analysts are expecting around a +10% growth in earnings making this the 5th consecutive quarter that featured double digit earnings growth.  This quarter will also be the first time that earnings growth is below 20% in a year.  While the actual earnings are important for valuation (see last weeks geek-out Wednesday on P/E at:  https://www.siebertnet.com/blog/index.php/2019/01/09/progress-principle/ ), it is expectations which usually determine market response, though it is not an exact science. Expectations are carefully managed by analysts making them a moving target and some would argue that they are always artificially lowered to enable companies to beat them.  That aside, investors will really be paying attention to the subtext around trade and interest rate impacts on business.  Additionally, investors will focus on guidance for the year.  Weaker guidance usually spells pain for investors and Apple’s recent fallout is an example.  On Friday, the S&P500 closed off by -0.1%, the Dow Jones Industrial Average slipped by -0.3%, the Russel 2000 gained by +0.14%, and the NASDAQ 100 fell by -0.3%.  All of the equity indexes are at key inflection points with the S&P and Dow encountering strong resistance at 2600 and 24000 respectively (see charts 4, 6, 7, and 8 in my attached daily chartbook).  Crude oil slipped by -1.9% on Friday after posting 9 consecutive positive sessions prior.  Bonds traded up slightly as 10 year treasury yields pulled back to 2.66%. The front end of the yield curve remains slightly inverted which means investors should focus on shorter maturities.  For example, it would not make sense to lend money for 5 years at 2.48% if you could get 2.5% for just two years.  Going out 10 years and picking up an additional 15 basis points does not offer significant payment for the additional duration risk either.

Today, there are no scheduled economic releases which leaves traders a day to reflect on the longest government shutdown in history.  A government shutdown will start to affect the real economy at some point but it certainly has not affected the markets in the prior weeks.  Additionally, the news cycle will continue to ponder politics, which should not impact markets in a financial way but certainly can dampen enthusiasm.  Starting tomorrow, the week ahead includes a packed economic release calendar including PPI, lots of housing numbers, Durable Goods, Factory Orders, Retail Sales, Trade Balance, and Industrial Production, to name but a few.  It will probably be a fasten your seatbelt kind of week.  China released some more weak economic numbers WHILE YOU SLEPT which may dampen equities in the session ahead.  Please call if you have any questions.

daily chartbook 2019-01-14

earnings releases 1_14

econ numbers 1_14