After The Close - After an auspicious open to the session, the major market indexes each ended the week with a swift selloff in the final hour of trading. As the end of the day neared, the averages lifted off their late-day lows, but remained below their breakeven lines. The downtick followed Thursday’s running of the bulls, which saw the Dow Jones Industrial Average gain nearly 300 points. Easing geopolitical tensions and optimism for Corporate America’s just-started quarterly earnings season were the primary drivers to yesterday’s rally, which investors collected profits off of today. Overall, though today’s action cut into what could have been the best five-day span in several weeks (the Dow lost over 100 points by the closing bell), it was ultimately still a solid week for the averages.
The selling pressure stemmed mostly from the financial sector, which slipped after a number of banks reported their quarterly earnings. Of the bunch, Citigroup (C), JPMorgan Chase (JPM – Free JPMorgan Chase Stock Report), and Wells Fargo (WFC) fared particularly poorly, despite exceeding consensus revenues and earnings estimates. We believe that high hopes for this round of reports is causing some investors to collect profits before a flurry of corporations publish their performance data in the coming weeks. The financials grouping is expected to recover on the heels of a favorable interest outlook and the impending releases from Bank of America (BAC), Goldman Sachs (GS – Free Goldman Sachs Stock Report), and several other banking giants. Wall Street is forecasting that Corporate America grew earnings 17% in the three-month March-ended period, due in large part to the favorable projected impact of the Tax Cuts and Jobs Act.
Meanwhile, U.S. crude oil posted a nearly 9% weekly gain due to elevated risk overseas. President Trump’s tweets earlier in the week indicated the United States may be on the verge of entering the Syrian conflict. But while this prospect initially hurt equity markets, the per-barrel value of domestic crude oil benefitted from the potential disruption of overseas drilling. Though the discourse has softened somewhat in recent days, there remains plenty of uncertainty as it relates to the Middle East, including growing tension between Iran and Saudi Arabia.
Looking ahead, investors will be primarily focused on earnings over the coming weeks. We believe a solid showing will help to put today’s downturn in the rearview mirror. And while we don’t anticipate scheduled economic releases to move the needle unless they disappoint, geopolitical developments could insert themselves into trading and add volatility to the market. – Robert Harrington
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
Before The Bell - The roller coaster ride for equity investors continued yesterday, with the bulls holding the upper hand throughout the session. There were a few factors that prompted the buying, most notably the easing of concerns about a conflict between the United States and Russia in Syria. Earlier in the week, the major equity averages fell after President Trump tweeted that the United States would not back down to Russia in the troubled Middle East hot spot. But yesterday, the Commander in Chief pulled back on his threat of military strikes in the region, and investment community’s worries abated a bit for the moment.
The major market indexes were in rally mode yesterday, with respective gains of 1.2%, 1.0%, and 0.8% for the Dow Jones Industrial Average, the tech-heavy NASDAQ Composite, and the broader S&P 500 Index. The recoveries in the small- and mid-cap sectors were not as pronounced as the large-cap space, though. Overall, advancing issues led decliners on both the Big Board and the NASDAQ, but the spread was not overwhelmingly positive. From a sector perspective, the leadership came from the technology and financial groups, with the rise in bond yields giving a big boost to the banking stocks. Conversely, there was some modest rotation out of the higher-yielding and more-defensive utilities, consumer staples, and telecommunications group. The lessening of tensions in the Middle East, at least for the moment, and the resultant higher fixed-income yields led to decrease interest in those groups.
Another factor helping the stock market yesterday was optimism ahead of the first-quarter earnings season, which commenced earlier this morning with the release of March-period results from Dow-30 component JPMorgan Chase (JPM – Free JPMorgan Stock Report). The prevailing consensus among Wall Street pundits is that it will be the strongest reporting season in seven years for Corporate America. Profits for S&P 500 companies are projected to rise by more than 18% year over year, helped by the reduction in the corporate tax rate from 35% to 21% this year. And on point this morning, JPMorgan, the largest U.S. bank by assets, reported earnings of $2.37 a share, versus the consensus estimates of $2.27, on net revenues of $28.5 billion. The bank posted a top-line figure of $25.85 billion in the prior-year period. Shares of JPMorgan are up slightly higher in the pre-market trading. Also on the earnings schedule today are fellow U.S. banks Citigroup (C) and Wells Fargo (WFC).
Meantime, the news on the economy also was uplifting on Thursday, with the weekly report on initial unemployment claims pointing to sustained strength in the labor market. As far as today goes, it will be quiet on the business beat, with no notable reports due. That said, investors will get commentary from a number of Federal Reserve leaders. On Wednesday, the minutes from the last FOMC meeting showed that the central bank may be a bit more measured with regard to interest-rate hikes. The prevailing consensus is that the Fed will raise rates two more times in 2018. The slightly more dovish-than-expected tone of the minutes gave some support to stocks.
With less than a half hour to go before the commencement of trading stateside, the equity futures are presaging an extension of yesterday’s buying when the U.S. equity market opens. So far overseas, the major equity indexes are nicely higher, setting the stage for stocks set to post their biggest weekly gain in over a month. Right now, investors seem to be shrugging off the uncertainty over tension in the Middle East and the prospect of a global trade war. However, the situation is the Middle East—and the ongoing reaction from Washington D.C.—remains fluid, so we would not rule out volatility returning. But, at least for the moment, investors appear to be turning their attention to corporate earnings, which may prove to be a good thing for equities. Stay tuned. - William G. Ferguson