Stayin’ Alive!

Stayin’ Alive!  Markets managed to hang on and pull out of a midday dive and close in the black, largely propelled by earnings.  Washington DC seems to be doing everything possible to keep the equity markets at bay with no resolution to the shutdown in sight, mixed messages about a Chinese trade deal, and a contentious Congress. Add to that fears of a global economic shutdown not only stemming from China but also the EU and you get what should be a pretty tense atmosphere in global equities, but you wouldn’t know if you looked at the market’s performance since hitting their lows in December.  That said, many investors are starting to get a bit skittish wondering if markets have come too far too fast.  As I have said in my notes, markets have most likely factored in all of the positive potential scenarios including a positive resolution to the trade war with China and a Fed that has capitulated to Presidential and market tantrums.  Those are the big ones and if there are any hints of a turn around in either, we can expect markets to reverse course.  A few issues that have yet to be factored into the market are Brexit, a domestic economic slowdown(recession), and the government shutdown.  These all remain uncertainties.  On the economic slowdown front, traders are looking more carefully at economic releases, corporate earnings, and corporate guidance.  Economic numbers are showing some small cracks but not enough to render any conclusions yet.  Corporate earnings are another thing altogether as performance is largely based on beats or misses of expectations.  Skilled managers work closely with the analyst community to make sure expectations are in close sync with reality, often adjusting targets prior to an actual release.  In volatile sectors such as technology and consumer discretionary, even skilled managers miss the mark sometimes.  Industrials such as United Technologies, which handily beat expectations yesterday before the bell, can more effectively forecast sales based on the nature of their business and therefore have an easier time managing analyst expectations.  For example, UT owns Pratt and Whitney which manufactures aircraft engines.  As you might suspect aircraft engines are not seasonal or whim-based purchases, so the company has a pretty good idea of how many engines it will be selling.  United Technologies’ beat combined with beats by Proctor & Gamble and IBM helped to buoy stocks yesterday, particularly the Dow, which includes the three companies.  The S&P500 rose by +0.2%, the Dow Jones Industrials climbed by +0.7%, the Russell 2000 fell by -0.22%, and the NASDAQ 100 went up by +0.18%.  The S&P500 was unable to get a close above a key Fibonacci resistance line at 2643 but all of the other major indexes managed to stay above their key support lines (see charts 4,6,7, and 8 in my attached daily chartbook).  Getting back to expectations, though it did not receive a lot of press because it came out last Friday, the University of Michigan sentiment indicator came in at 90.7 down from last month’s 98.3 with analysts expecting 96.8.  The Expectations index, which is also part of the same release, came in at 78.3 versus last month’s 87 with analysts projecting 86.5.  These rather large misses should not go unnoticed and may very well reflect the recognition of the shutdown and recession fears, something which the markets have not yet factored in.  Finally, it should be noted that although 78% of the S&P500 companies that have reported so far have beat estimates, some mentioned potential risks associated with the shutdown.  Aside from the furloughed workers who aren’t getting paychecks and spending money, in certain cases a shutdown can mean holdups for regulatory approvals or slowdowns in purchases, which affect corporate earnings.  Lots more to come in earnings season.

Today, before the bell, we will get American Airlines, Jet Blue, Southwest Airlines and Bristol-Myers Squibb amongst others.  Last night Ford announced with a miss after the Bell and all of these will certainly affect the mood in equity markets in todays session.  On the economic front we will start the morning with the Markit Manufacturing PMI which is expected to come in at 53.5 versus last month’s 53.8.  We will also get the Leading Economic Indicators (LEI) which is expected to have fallen by -0.1% after a +0.2% rise last month.  The European Central Bank (ECB) will meet to discuss monetary policy and traders will be watching for the outcome, which is largely expected to reflect patience in response to soft numbers (similar to the US Fed).  Finally, today the Senate will vote on two measures to potentially end the government shutdown.  As neither is likely to pass, expect the dialog to begin to focus on real potential economic effects on the economy… and the market.

daily chartbook 2019-01-24