“Lower for longer” seems to be the new mantra for investors this week. After disappointing unemployment numbers last Friday, we are back into the “bad news is good news” mode with regards to the Fed. Traders this week have basically used the disappointing data to postulate that the Fed won’t be raising interest rates any time soon.
That means it was game on for the stock markets and risky assets.
Meanwhile on the earnings front, things continue to be a mixed bag. Some of the bellwethers beginning to report numbers have had some troubling guidance, enough to continue the idea that the Fed won’t raise rates. All in all, it’s made for a volatile week and start to the fourth quarter.
Stocks started off with a bang on Monday as traders digested Friday’s dour unemployment picture. At the same time, the Institute for Supply Management’s newly released ISM Non-Manufacturing PMI metric showed that the U.S. economy isn’t as healthy as we all thought. The number came in at 56.9, well below the previously reported metric and less than estimates. While not showing a contraction in activity, the drop was staggering.
However, as we said in the opening, “good news is bad news” once again. All three major indexes surged. The Dow Jones Industrial Average rose 304 points, the S&P 500 gained 35 points and the NASDAQ climbed 73 points as traders and investors bet that the Fed wouldn’t raise rates for the rest of 2015.
There were no dividend-related earnings reported on Monday.
This Tuesday saw trade imbalance data from the Bureau of Economic Analysis. As expected, the U.S. imported more goods than it exported for the period. However, the number was higher than estimates, coming in at over $48 billion. While not particularly bullish or bearish, it does show that manufacturers aren’t selling as much overseas as they were expected to. Again, this plays into the Fed’s decision to keep rates low.
The markets were mixed on Tuesday as that positive development for stocks/zero interest rates were met with continued selling pressure in health care and biotech stocks. As was the case last week, several Presidential candidates expressed concerns about the pricing of drugs by health care stocks. The Dow Jones Industrial Average managed to gain 13.76 points to reach 16,790.19 while the S&P lost 7.16. The biotech-heavy NASDAQ saw the biggest declines on the day, sinking 32.90 to reach 4,748.36.
- PepsiCo’s (PEP ) latest earnings were as bubbly as its beverages. PEP managed to report EPS of $1.35, which beat expectations by 9 cents. The soft drink, snack food and beverage giant yields 2.98%.
- Perhaps betting so heavily on China wasn’t a great idea for Taco Bell/KFC owner Yum! Brands, Inc. (YUM ). YUM saw its earnings tank and miss estimates by 7 cents. Poor guidance sent the stock down by double digits. YUM now yields 2.7%.
Investors got a much needed break this Wednesday as there wasn’t really anything significant to report. Crude oil inventories did come in higher than expected. Also, consumer credit numbers showed a big decline in the amount of debt outstanding.
Investors brushed off any bad news and went bargain shopping for beaten down health care stocks. Gains in those stocks helped propel the major indexes higher. The Dow Jones Industrial Average tacked on another 122.10 points to reach 16,912.29. Likewise, the S&P 500 and NASDAQ also saw gains of 15.91 and 42.79, respectively. The S&P finished the day within striking distance of the critical 2,000 mark.
- While its yield at 0.3% is terrible, lighting and LED specialist Acuity Brands’ (AYI ) earnings were not. AYI managed to beat analyst projections by a penny and report EPS of $1.63 per share.
- Spirits maker Constellation Brands Inc. (STZ ) broke out the champagne this earnings report. STZ crushed analyst estimates by a whopping 24 cents per share. The company reported improved guidance as well and yields 0.9%.
- For agricultural giant Monsanto (MON) things were not so great. The GMO seed and fertilizer specialist reported a much wider loss than predicted at 19 cents per share. That was 17 cents below analyst estimates. Those poor results pushed up MON’s yield to 2.4%.
Once again, this Thursday was the culmination of multiple pieces of very important data. To start with, unemployment claims came in lower than expected. Last week only saw 263,000 people file for initial claims. That’s a marked improvement from the previously reported number. However, the real big guns came from the Fed. Thursday saw the release of the FOMC’s meeting minutes and they were a doozy. Ultimately, low inflation and slow economic growth were the Fed’s main concerns, which mean only one thing, the Fed isn’t going to raise rates any time soon.
As such, the markets rallied. The Dow Jones Industrial Average rose 138.46 points to 17,050.75 while the S&P 500 rose 17.60 to break 2,000 and settle at 2,013.43. However, once again, biotech’s hurt the NASDAQ and it only eked out a 19.64 gain towards the end of the day.
- As an economic bellwether and official kick-offer to earning season, Alcoa Inc. (AA ) managed to set a somber mood for the fourth quarter. AA reported earnings of just 7 cents per share, about 50% lower than expected. AA yields 1.1%.
- Pizza maker Domino’s Pizza, Inc. (DPZ ) delivered lukewarm earnings as well. DPZ managed to report just 67 cents per share in profits. That was below expectations by 7 cents.
For investors, this Friday will be all about the global economy. Data released in the U.S. is pretty meaningless and the few Fed governors set to speak are irrelevant now that the FOMC minutes have been released. However, manufacturing numbers from several key European Union members will be released. Those numbers could show how bad the world’s economy is really getting.
Premarket trading is showing that we could see slight losses this Friday, with the Dow currently down 7 points.
On the earnings front, investor’s get another break as there are no dividend-related reports today.
The Week Ahead
Coming off the long weekend, investors will be treated to a variety of critical economic data, including inflation numbers, consumer retail sales as well as a host of speeches by Federal Reserve board members, all of which could help ignite the “lower for longer” trend with the Fed and ultimately push up the markets.
In terms of earnings, the fourth quarter is well underway and we’ll see reports from such dividend stalwarts as Kinder Morgan (KMI ), Johnson & Johnson (JNJ ) and JPMorgan Chase (JPM ). While the numbers will be important, guidance numbers are even more so and just how healthy their outlooks are.
Disclosure: Author is Long KMI