The tone of the market remained up

BY  | FROM  | 2017-02-28 13:54

The tone of the market remained up this shortened week (Monday was a U.S. holiday), as the market posted its fifth week of gains, and closed at a new closing high – for the third week in a row.  The February rally continues, up 3.88% for the month-to-date and 10.65% (11.38% with dividends) since the election, and it is now being referred to as the Trump Hope rally, with some tax reform expected, which will also have incentives for domestic business.  The expectation will be heightened when Trump addresses a joint session of Congress on Feb. 28, 2017, at 9 p.m.  From there, legislation is expected to start to form, as lobbyist, protesters, and special interest groups go in to exert their “pressure.”  I don’t think I’ll be visiting Washington during that time (note, Washington is beautiful in August—when congress is in recess).  

Trading numbers were not convincing on the Street this week, last week, or the week before that…  But the numbers do talk via new closing highs for the S&P 500 and an eleven-day run of closing highs for the Dow (as Friday’s late session story that the White House opposed some boarder taxes took the Dow from a loss to a gain), an event not seen since January 1987 (the same year as the crash), when it ran for twelve.  And the gains are moving around, as information technology was up 15 days in a row (from Feb. 1 through Feb. 22, 2017), only to break its string on Thursday with a 0.11% decline, and start it up again Friday, with a 0.20% gain.  Notable to the gain was Apple (AAPL), which was up 12.62% month-to-date, but slowed, closing the week with a 0.69% gain (up 23.05% from the election). 

In Washington, Trump & Company continued at a rapid pace on several fronts.  Mr. Trump nominated Lieutenant General H.R. McMaster as his advisor for National Security. Meanwhile, Homeland Security said anyone in the U.S. illegally “could” be deported, adding that they would not be looking for individuals or doing roundups, but would prioritize criminal (or suspected criminal) individuals.  Trump said some health care reform will be released in mid-March, as test balloons appeared in reports.   Health care needs to be done first to adjust the U.S. budget to “book savings” to stay within the debt limits (the debt limit issues, along with the associated politics of the issue, closed the U.S. government down for 16 days in October 2013), with income tax reform after that, which potentially may need to be revenue neutral.  Trump’s budget is “expected” on March 13. Treasury Secretary Steven Mnuchin said his goal was to get a tax-code overhaul by August 2017, which gave confit to stocks.

Earnings stayed in the background, with a few retailers popping their heads up.  Currently, 92% of the issues have reported, with the year-over-year gain nice, but Q4 at this point is a few cents lower than Q3 2016.  The forward estimates have held up, as many analysts appear to be waiting for details of policy from Washington.  The bottom line is that the market is selling at 22 times current earnings—either forward EPS pick up or the market ticks down. 

In global economic news, the IHS Markit Eurozone PMI increased to 56.0, from January’s 54.4, as growth continued upward.  Japan posted a trade deficit in January of USD 9.6 billion, as exports increased 1.3% year-over-year and imports increased 8.5%. U.K. GDP for Q4 2016 was revised upward to 0.7% from the previous 0.6%. Eurozone inflation for January came in at 1.8% (the ECB’s target rate is 2.0%). Brazil’s central bank lowered its interest rate to 12.25% from 13.0%; it was the fourth cut in five months.  In the U.S., the February PMI Manufacturing Index missed its 55.5 estimate, coming in at 54.3, down from January’s 54.1. Existing Home Sales for January came in up 3.3%, at an annualized rate of 5.69 million—a 10-year high—when 5.58 million was expected; the year-over-year gain was 3.8%.

New Home Sales for January came in at an annual rate of 556,000, when 576,000 were expected, but still up from December’s 536,000. The December FHFA House Price Index rose 0.4%, as expected, and the year-over-year gain was (a healthy) 6.1%. The FOMC’s Jan. 31-Feb. 1, 2017, meeting notes showed an expectation to increase interest rates “fairly soon,” but appeared to shy away from March 2017, leaving May as the favorite, with June the next pick.  In the weekly reports, the Mortgage Application Report posted a 2.0% decline, as Purchase applications fell 3.0% and Refinancing ones declined 1.0%. The EIA Petroleum Crude Oil Inventory report posted a 0.6 million barrel increase in crude oil inventories. The weekly new Unemployment Claims Report came in with 244,000 new claims, as expected.

In M&A, Canadian issue Restaurant Brands International (QSR.TO; up 2.9% for the week), owner of Tim Hortons and Burger King, said it would buy fast-food issue Popeye’s for USD 1.8 billion.

Telecommunication services issue Verizon (VZ; up 2.9% for the week) formalized a USD 350 million reduction in the web asset purchase from Yahoo! (YHOO; up 1.0%), resulting in what is viewed as a final deal, at a price of USD 4.48 billion. Investor Carl Icahn made an investment in Bristol-Mayer’s Squibb (BMY; up 3.4% for the week) but did not disclose the amount. In non-M&A, Kraft Heinz (KHC; off 3.7% for the week, but up 3.2% over two weeks) said it would not pursue Unilever (UL; off 2.9% for the week but up 12.8% over two weeks); last week, Unilever rejected Kraft’s offer, with Kraft saying it would continue to seek a deal.

On an issue level, home improvement store Home Depot (HD; up 2.1% for the week) beat estimates, as consumers appeared to be spending on home improvement (which was the larger market takeaway); it also increased dividends and buybacks. Giant discount store Wal-Mart (WMT; up 4.4% for the week) reported lower earnings but beat estimates (slightly), same store sales were up, and it was spending more to compete with online retailer (AMZN; flat for the week). Retail store Macy’s (M; up 2.9% for the week) beat on earnings but was shy on sales, as costs for store closing hurt. S&P Ratings upgraded Alphabet (GOOGL; up 0.1% for the week) to “AA+” from “AA,” citing strong operating performance, and it downgraded Macy’s (M) to “BBB-” from “BBB,” citing weakened operating performance. Of note, in the on-again negotiations for Greek loans, an agreement to create a team to work out new reforms (labor, pensions, taxes, etc.) was completed, with the next tranche of funds (USD 91 billion) scheduled for the end of Q3 2017. On-line retailer Amazon (AMZN; flat for the week) said it would add 5,000 new jobs to its UK unit, bringing that country’s force to 24,000. Continued low energy prices resulted in Exxon Mobil (XOM; off 0.8% for the week) lowering its estimate of oil and gas reserves by 15%. Discount retailer J. C. Penney (JCP; off 8.1% for the week) said it would close 140 of its approximate 1,000 stores, and offer a buyout program for 6,000 workers.

S&P Dow Jones Indices announced that it would make six changes to the S&P 500 next week.  Added will be exchange issue CBOE (CBOE), biotechnology issue Incyte (INCY), and retail REIT issue Regency Centers (REG); pharmaceutical issue Endo International (ENDP), office supply issue Pitney Bowes (PBI), and energy issue Spectra Energy (SE) will be removed.

Politics continued to impact the market this week, as the anticipation of a tax cut helped stocks.  The market posted its fifth consecutive week of gains, as the shortened week set new closing highs on Tuesday, a new intraday high on Thursday, and closed the week out with another new closing high (third week in a row of closing the week on a high).  For the week, the market closed at 2,367.34, up 0.69% from last week’s 2,351.16 record close.  Year-to-date, the market is up 5.74%, with the gain since the U.S. Nov. 8, 2016, election being 10.65% (11.38% with dividends).  Trading was mostly uneventful, as the daily volatility remains low. 

Breadth declined, but it remained positive for the week, as 319 issues gained, down from last week’s 365, and 184 declined, up from the prior week’s 140.  One issue gained at least 10% (two did last week) and thirteen additional issues were up at least 5% (24 for the prior week).  Five issues declined at least 10% (none did so last week), and 7 issues declined at least 5% (12 did so the prior week).  Year-to-date, breadth increased—389 issues were up (375 were up last week), with 122 up at least 10% (111), while 116 issues were down (129 last week), with 21 (20 last week) down at least 10%.  Breadth from the Nov. 8, 2016, election was 423 up and 82 down.

Sectors continued to vary, as 8 of the 11 groups posted gains, down from 10 gainers last week.  Utilities did the best, up 1.98% for the week, although the sector offered no leadership (or uplifting) for the market.  The group is up 5.61% year-to-date.  Real estate also outpaced most, adding 2.35%, and it is up 4.09% year-to-date.  Energy again did the worst, falling 1.29% and leaving it as the worst-performing sector to date for 2017, off 6.85%.  Health care added 1.50%, as President Trump said he would release some initial Obamacare changes in mid-March.  The sector is up 8.34% year-to-date. Information technology was up 0.77%, as it ended its 14-day run of gains (Feb. 1-22, 2017) with a minor 0.11% decline on Thursday (it was up 0.20% Friday); the sector is the best performing sector year-to-date, up 9.94%. Financials took a step down, off 0.13%, as its 4.84% year-to0date performance is sub-performing the index (5.74%), but it remains up 22.15% from the election (10.65%). 

Trading volume slightly increased.  For the week, trading was 3% heavier, after last week’s 3% increase, and it is even with the one-year average (and 4% above the five-year average).  Measurable volatility (the high-over-low price variance) declined to 0.57% from last week’s 1.29%, and the one-year average was 1.98%.  No day posted a change of at least 1%, with the last 1% gain being on Dec. 7, 2016 (1.31%) and the last 1% decline on Oct. 11, 2016 (-1.25%).  Tuesday was the largest mover, adding 0.60% for the day, and Thursday was the biggest decliner, off 0.11%. 

VIX closed at 11.49, flat last week’s 11.49.  Interest rates ticked down, as the FOMC noted that interest rates would increase “fairly soon,” which was seen as May or June by most.  The 10-year U.S. Treasury closed at 2.32%, down from last week’s 2.42% (2.45% at the close of 2016).  The 30-year U.S. Treasury closed at 2.95%, down from last week’s 3.03% (3.07%).  Oil continued in its range, closing at USD 54.05, up from last week’s USD 53.39 (USD 53.89).  Gold closed at USD 1,257.60, up from last week’s USD 1,236.60 (USD 1,152.00).  The euro closed at 1.0558, down from last week’s 1.0615 (1.0520), and the pound closed at 1.2461, up from last week’s 1.2421 (1.2345 at year-end 2016).  The yen (quoted in yen to U.S. dollars) closed at 112.17, down from last week’s 112.85 (116.36).  The yuan closed at 6.8687, up from last week’s 6.8635 (6.9448).  

On a market-value basis, the S&P Global BMI increased USD 95 billion for the week, compared with last week’s USD 531 billion increase (to USD 47.689 trillion), and it is up USD 2,658 billion year-to-date.  The S&P 500 increased USD 139 billion for the week, compared with last week’s USD 302 billion increase (to USD 20.371 trillion), up USD 1,103 billion year-to-date.  The S&P 500 represented 42.72% of the S&P Global BMI, up from last week’s 42.51% (it represented 42.64% at year-end 2016 and 33.87% at year-end 2010).  The Nikkei was up 0.25% for the week (up 2.44% last week) and 0.89% year-to-date, and the Shanghai was up 1.60% for the week (up 1.80% last week) and 4.83% year-to-date.

Earnings slowed for the week and will continue to wind down.  To date, 447 issues, representing 92% of the market value, have reported, with 302 issues beating their operating earnings estimates (67%, with the historical average also being 67%), 98 missing, and 47 meeting.  In sectors, information technology has beaten estimates 83% of the time, financials 80%, and health care 79%.  On the missed side were telecommunication services, where only 25% of the issues beat and which was off 4.16% year-to-date (the worst sector), and energy, which beat 58% of the time and was off 4.13% year-to-date (the second worst sector).  On the sales front, one-half of the issues with fully compatible data have beaten estimates (222 of the 444); sales are up 3.7% over Q3 2016 and 4.4% over Q4 2015. There are 28 issues (3.8% of the market value) scheduled next week, with only four the following week (Mar. 6-10, 2017; representing 0.2% of the market value).  Next week’s earnings highlights will start Monday with real estate issue American Tower (AMT), with internet-based buy/sell services issue Priceline Group (PCLN; the highest-price issue in the index, over USD 1,600) after the close.  Tuesday will bring retail department store Target (TGT), with customer information to businesses issue (CRM) after the close.  Wednesday will bring electronics and appliance store Best Buy (BBY), discount store owner Dollar Tree (DLTR), and building materials and improvement store Lowe's (LOW).  Thursday will start with supermarket and convenience store owner Kroger (KR) and continue after the close with computer-aid design and drafting issue Autodesk (ADSK), wholesale club merchandiser Costco Wholesale (COST), tax preparer H&R Block (HRB), and information technology solutions issue Hewlett Packard Enterprise (HPE).  Friday will close the week with office supply store Staples (SPLS). 

Economic reports will open Monday with the January Durable Goods Orders Report and then at 10 a.m. with the January Pending Home Sales Index.  Tuesday is the last day of the month, with no additional trading expected.  The fourth quarter GDP will be updated (the final on March 30), along with International Trade (exports and imports) and the S&P CoreLogic Case-Shiller Home Price Index.  Consumer Confidence for February is due out at 10 a.m.  At 9 p.m., President Trump will address a joint session of congress (the House of Representatives and the Senate) on a topic of his choice (which could impact global markets’ open and the U.S. opening).  Wednesday will open with the February Motor Vehicle Sales and Personal Income and Outlays Report, with February’s PMI Manufacturing Report at 9:45 a.m. and the February ISM Manufacturing and January Construction Reports at 10 a.m. At 2 p.m., the Fed Beige report will be released.  Thursday will open with the weekly unemployment report and Chain Store report, and Friday will close the week with the February PMI Services Report at 9:45 a.m. and the ISM Non-Manufacturing Report at 10 a.m.

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