The market focus on Jackson Hole

BY  | FROM  | 2016-08-29 13:30

Anticipation had been mounting for weeks for the main event, and this week saw headlines each day, counting down the clock.  Finally, in a remote resort town known as Jackson Hole (in Wyoming), at 10 a.m. on Friday, Chair Yellen rose and gave her speech.  All eyes, ears, websites, and stations focused in on her words (with some having their finger on buy/sell button). The Chair said the case for increasing interest rates “has strengthened in recent months” (higher rates coming), but also noted that “our decisions always depend on the degree to which incoming data continues to confirm the [Fed’s] outlook” (another “but").  She gave few details as to when interest rates may change, appearing to leave September on the table, with December more of a possibility, again depending on the data.  By the end of the speech, nothing new was known and there were no new indications of when, with the takeaway being that interest rates will rise – eventually, when the data tells us they should. The market, which was slightly up before her speech, held its level (adding a point or so) as the speech continued and concluded.  But after that, prices fell into the red – not significantly (they hadn’t been up significantly either), but into the red, ending the day off 0.16%.  Interest rates, which were slightly lower, also reversed, ending the session higher, with the U.S. 10-year at 1.62%, up from the mornings 1.53%. The bottom-line was that the speech was more positive on the economy than negative, as she offered positives, negatives, and more data dependent statements.  The market’s reaction was mostly a yawn (although rates did increase), and a quick exit for the door after the 4 p.m. bell, as a boring week of trading ended with a non-event (and the potential for an equally boring one next week, ahead of the long holiday weekend – Labor Day, Monday, September 5).
With earnings mostly closed (but still subject to 10Q review until June 30, 2016), the second quarter has been marked an unenthusiastic success.  The quarter did what it needed to do—it showed an increase in earnings and sales from the depressed first quarter, produced limited negative forward guidance, and maintained the optimistic third-quarter forecast.  The result of those “successes” was support for stocks through the high multiple concerns, as they permitted new closing (and intraday) highs.  They also increased the importance of the upcoming third quarter earnings, which must continue to show gains (and some momentum) to support multiplies and the view that the economy is on the right track. 
With respect to earnings, the next few weeks should be dominated by analysts’ changes and companies issuing negative guidance (over the past few years, companies have attempted to get ahead of bad news, but permit the underestimates to continue, with the result being a higher negative-positive guidance ratio).  Actual off-fiscal reporting will start in the third week of September, with full reporting starting the second week in October, with over 70% to be reported by the end of October.  Typically, earnings dominate the news, but this year they will have the competition of the U.S. election, with the potential for reallocations based on who is ahead (and what congress may look like).  Bottom line could be higher volatility for the season, but almost anything would be more volatile than this August was.
In economic news, Bank of Japan’s Governor Kuroda said the bank did not rule out negative interest rates.  The August Markit German PMI declined to 54.4 from June’s 55.3, and the eurozone came in at 53.3, up from July’s 53.1.  The German Ifo Institute’s August Business Climate Index declined to 106.2 from July’s 108.3, when an increase to 108.5 was expected.
In U.S. economics, the August PMI Manufacturing Flash report came in at 52.1, when a 53.2 level was expected (July was 52.9).  The weekly Mortgage Application report posted a 2.1% decline, as new purchase applications fell 0.3%, with refinancing ones falling 3.0%.  New Home Sales for July came in higher than expected, up 12.4%, with 654,000 new units (annualized)—the highest level since October 2007—when 580,000 was expected; June was 582,000.  Existing Home Sales for July came in at an annual rate of 5.39 million units, when a 5.52 million rate was expected (June was 5.57 million); the year-over-year change was -1.6%.  The HFHA House Price Index for June posted a 0.2% gain (the same as May), when a 0.3% change was expected; the year-over-year rate was at 5.6%.  The weekly EIA Petroleum Report showed a 2.5 million barrel increase in inventories, and gasoline inventories were flat.  The July Durable goods Report showed a 4.4% gain in new orders, when a 3.7% gain was expected, as the year-over-year rate remained in the red, at -3.3%. The weekly new unemployment claims report came in at 261,000, a tick less than the 265,000 that was expected.  The update for U.S. second quarter GDP came in as expected, at 1.1%, which was down from the initial report (last month) of 1.2%; the final update will be released on September 29, 2016. International Trade for July showed Exports had increased 2.4%, as Imports declined 1.3%, resulting in a USD 59.3 billion deficit (it was expected to be larger, at USD 63.2 billion). Wholesale Trade for July came in flat, as the year-over-year second quarter corporate profits came in at -2.2%. Chair Yellen’s Jackson Hole speech spoke from both sides: things were looking better, but some not, with the FOMC’s bottom-line being that they will see what the data brings; the market’s bottom-line was no new news was almost good news, especially if things continued to improve not much to trade up on).
In M&A, health care product and specialty chemical issue Pfizer (PFE; up 0.1%% for the week) said it would buy prostate cancer drug biotech issue Medivation (MDVN; up 19.6% for the week) for USD 14 billion in cash.  Pfizer will also buy AstraZeneca’s (AZN, off 1.5% for the week) small-molecule antibiotics operations for an estimated USD 1.57 billion.  Japanese semiconductor issue Renesas (RNECY; off 4.4% for the week) said it was in talks to acquire U.S. automotive chip maker Intersil (ISIL; up 22.4% for the week), with an estimated value of USD 3 billion.
For the week, the market failed to post a new intraday or closing high, as it had done in each of the prior three weeks (and five out of the last six weeks).  The market posted its second week of declines, as it closed at 2,169.04, off 0.68% from last week’s 2,183.87, which was a mere 0.01% decrease from the prior week’s 2,184.05.  Year-to-date, the market is up 6.12% (7.67% with dividends), up 3.34% for the quarter-to-date, which reflects the improvement in earnings for the second quarter from the poor first quarter showing, and up 18.59% (20.00% with dividends) from its February 11, 2016, low (1,829.08). 
Breadth turned negative from last week’s positive position.  For the week, 178 issues gained, down from last week’s 271, and 325 declined, up from the prior week’s 231.  One issue gained at least 10% (six did so last week), with another six up at least 5% (21 were the prior week).  Five issues declined at least 10% (none did last week) and another 16 issues declined at least 5% (eight did the prior week).  Year-to-date, breadth continued to be positive, as 354 issues were up (354 last week), with 240 (247) issues gaining at least 10%, and 107 (115) of them up at least 20%.  On the year-to-date downside, 148 (147 last week) issues were down, as 64 (64) of them were off at least 10%, and 25 (20) of them were down at least 20%. 
On a sector basis, two of the ten sectors gained in price, compared with five last week (and the prior week’s six).  Financials, which has underperformed the market, posted the best week, up 0.36%, as it remains the worst sector year-to-date (but in the black), with a 0.77% gain. Information technology was the other group to post a gain, up 0.04%, as it is up 8.62% year-to-date. Utilities did the worst, off 2.28%, as Friday’s 2.11% fall was blamed on the potential for higher interest rates, and some profit taking; the sector remains up 12.89% year-to-date. Health care did poorly, off 1.80% for the week, as increases in prescription drug prices again dominated the news; the sector remains positive year-to-date, by 1.14%.  Energy posted a 1.34% decline, as oil prices fell, and there were fewer calls of USD 50.  Energy had done the best for each of the past two weeks (up 1.97% and up 1.25%, respectively), and its year-to-date gain is 14.00%. 

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