After Dow Breaks Up 20,000, What’s Next?!
By: Shlomo Cooper, Senior Analyst at Tradenet
Wall Street saw a jam-packed week, replete with drama, sagas and hairpin turns. When push came to shove, the major market indexes ended the first week into the new president’s term in the green; likewise, the Dow Jones finally succeeded in scaling past the most talked about psychological level in financial media, cutting up past the 20,000 point level as leading tech companies, Google (GOOGL), Microsoft )MSFT) and Intel (INTC) releasing their Q4 2016 reports. With that said, investors’ response to the earnings reports of the tech giants was mixed.
In a world where our heads were screwed on straight, in a week featuring a Federal Reserve meeting, employment figures and a continual flow of Q4 earnings results, investors’ attention would be re-directing itself from the start of a new president’s first 100 days to focus on economic developments. But in our world, with “The Donald” on center-stage around the clock, what we’ll be getting is anything but normal, with all eyes being peeled on what Trump will say or do next, his warnings, admonitions and threats overshadowing economic numbers and whatever the Chairwoman of the Fed has to say about inflation and economic growth.
Wall Street had already grasped the fact that the economic recovery is in place and therefore placed its bets on solid economic figures and strong earnings reports – simultaneously steeling itself for Yellen’s rate hikes; investors. are still at odds, though, about the new president who seems to shoot in all directions, leaving investors riddled with confusion.
While stocks have rallied since the November 8th elections on the background of hopes for rate cuts as well as loosened regulation and a generous fiscal stimulus package, investors are still waiting for solid proof that Trump has not only the will but also the ability to put into motion his business friendly campaign promises.
On the background of these concerns, another factor adding to the uncertainty is anxiety about Trump’s threats to impose high import taxes on commodities, as well as his claims of Chinese currency devaluation.
Future contracts on the Fed rate show that there’s a 96% chance that the Fed will leave interest rates unchanged upon concluding its 2-day meeting this Wednesday. Investors will have their eyes peeled for any hint from makers of monetary policy about the trajectory for 2017 rate hikes. If their language hints at a faster than expected clip for hiking rates, the stock market rally could come to a halt as investors recalibrate their going assumptions. Investors, though, don’t expect the Fed to rock the boat this coming week, at least not until we get more clarity about Trump’s policy platform. Like many of us, the Fed, presumably is also waiting to see how things develop in the Oval Office vis a vis policy changes from the new administration.
All-in-all, earnings reports for Q4 2016 and full-year forecasts for 2017 were two catalysts for the 10% surge on the S&P that started off in November, with many more companies expected to continue reporting this coming week. Two weeks now into the earnings season and analysts are expecting Q4 earnings reports to record growth of 6.8%, a rise from earlier expectations on January 1st of 6.1% growth. This growth pace would be the fastest over the last 2 years.
On Friday, the U.S. Dept. of Labor is expected to report that 171 thousand new positions were produced in January, a rise from the 156 thousand added in December. As long as the number isn’t beneath 100 thousand or above 300 thousand, stocks are not expected to react drastically.
Besides the search for clarity about Trump’s business friendly policies, the market will continue to seek out signs as to whether Trump, at the end of the day, will wind up benefiting or hurting trade. Take for example, the U.S. administration’s declaration that it plans on imposing a high 20% import tariff on Mexican imports in an attempt to help fund the building of a wall on the U.S.- Mexico border. A tax of this magnitude is likely to push up inflation and push the Fed to adopting a stricter monetary policy.
Investors are also on pins and needles, anxiously waiting to see whether Trump will officially announce that China is a currency manipulator, something he vowed to do on his first day in the White House. The best thing for the market would be if Trump were to simply sit down and negotiate a trade agreement with the world’s second largest economy. In our view, what Trump says should be taken seriously with the presumption that he plans on executing what he’s promised, yet at the same time, he needs to take into account that even as the head of the world’s #1 superpower, he needs to collaborate with others.
On a technical level, investors need to maintain a certain level of caution and alertness. Indexes are traded at significantly oversold level, and stocks are vulnerable to profit-taking, which would drag down market prices.
Weekly Summary: The main indexes ended in the green, led higher by NASDAQ. The Dow Jones ended up 1.35%, the S&P 500 tacking on 0.98% and the NASDAQ taking the lead with gains of 2.07%.
|Monday||10:00||Pending Home Sales||1.3%||Medium|
|Tuesday||9:00||S&P Case Shiller Home Price Index||5.0%||Medium|
|Wednesday||8:15||ADP Employment Change||165K||High|
|Wednesday||14:00||FOMC Rate Decision||0.625%||High|
|Thursday||8:30||Unit Labor Costs||1.9%||Medium|
|ZBH||Zimmer Biomet Holdings, Inc.||AM||Tuesday|
|VLO||Valero Energy Corporation||AM||Tuesday|
|TMO||Thermo Fisher Scientific Inc.||AM||Tuesday|
|LLY||Eli Lilly and Company||AM||Tuesday|
|UPS||United Parcel Service, Inc.||AM||Tuesday|
|XOM||Exxon Mobil Corporation||AM||Tuesday|
|APC||Anadarko Petroleum Corporation||PM||Tuesday|
|CHRW||C.H. Robinson Worldwide, Inc.||PM||Tuesday|
|OKS||ONEOK Partners, L.P.||PM||Tuesday|
|EA||Electronic Arts Inc.||PM||Tuesday|
|BAX||Baxter International Inc.||AM||Wednesday|
|MPC||Marathon Petroleum Corporation||AM||Wednesday|
|JCI||Johnson Controls International plc||AM||Wednesday|
|ADP||Automatic Data Processing, Inc.||AM||Wednesday|
|MO||Altria Group, Inc.||AM||Wednesday|
|LNC||Lincoln National Corporation||PM||Wednesday|
|ALL||The Allstate Corporation||PM||Wednesday|
|NXPI||NXP Semiconductors N.V.||PM||Wednesday|
|EW||Edwards Lifesciences Corporation||PM||Wednesday|
|IP||International Paper Company||AM||Thursday|
|BSX||Boston Scientific Corporation||AM||Thursday|
|EL||The Estee Lauder Companies Inc.||AM||Thursday|
|CME||CME Group Inc.||AM||Thursday|
|PM||Philip Morris International Inc.||AM||Thursday|
|MRK||Merck & Co., Inc.||AM||Thursday|
|MSI||Motorola Solutions, Inc.||PM||Thursday|
|HSY||The Hershey Company||AM||Friday|
|LYB||LyondellBasell Industries N.V.||AM||Friday|
|CLX||The Clorox Company||AM||Friday|
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