The table is set for retailers this holiday season: portfolio manager

Peter Kenny
Peter Kenny

By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of KennysCommentary.com

Themes:

  • Goldman Sachs is expecting four interest rate hikes in 2018 as US growth accelerates
  • Defensive stocks lead US equity markets in November, for the first time this year
  • Investor doubts remain in regard to the certainty of tax reform this year
  • Tax reform, as currently framed, would act as a net stimulus for the US economy
  • Fundamentally sound economic underpinning for the US economy frames a constructive longer term outlook for investors
  • American consumers drive record gasoline demand in October
  • WTI crude remains well bid, closing Friday at $56.55/bbl, just off its 52-week high of $57.35/bbl.

——————————————————-
WTI Crude Oil (Nymex) (CL=F) $55.98/bbl
Gold (Comex) (CL=F) $1,276.80/t. oz.
10-year Treasury Note yield (CBOE) (^TNX) 2.370%
Volatility S&P 500 (^VIX) 10.58
——————————————————-

US equity markets, with the support of solid economic data and a very constructive Q3 earnings season, remain on solid ground as they hover close to record highs. Highlights from last week’s economic calendar confirm that. The NFIB Small Business Optimism Index rose marginally to 103.8 from the previous reading of 103.0. PPI-FD data for October was also marginally stronger than September. The M/M change was 0.4% while the Y/Y change was to 2.8% from the previous 2.6%. Less the volatile food and energy segments, the report’s reading was 2.3% in the month versus the previous month’s 2.1%. Though the CPI reading for October M/M was a weaker than expected 0.1%, every other reading within the report hit consensus. Retail sales for October were slightly less vigorous than expected as the M/M change was 0.2% versus September’s 1.6%. The control group of the report however reflects a less dramatic drop in retail volume by coming in at 0.3% versus September’s 0.4%. The weekly EIA Petroleum Status Report reflected inventories that were in line with expectations. However it is important to note that Y/Y, crude inventories have contracted by 6.4%. Lastly, and possibly most importantly, in last week’s data releases was the Industrial Production data for October. The M/M change was a very solid 0.9% versus September’s 0.3%.

This week’s economic calendar is rather light — particularly as a result of the shortened holiday work week. This morning, Leading Indicators for October came in ahead of consensus at 1.2%, rebounding from September’s hurricane-induced contraction of -0.2%. Given the forward looking nature of this index, investors are leaning into the results with an eye on the likelihood of further tightening by the Fed in coming quarters (after the expected move in December). The Chicago Fed National Activity Index, due out Tuesday morning, is expected to reflect accelerating growth as a result of continuing and ongoing gains in employment, a rise in house building permits and growth in manufacturing. Durable goods, consumer sentiment, and the release of the FOMC minutes will dominate the economic calendar for the balance of the week.

Given all the constructive economic data we have been receiving and an earnings season that has seen 75% of reporting companies beating Q3 consensus thus far, investors are wondering if the coast is clear for a smooth and eventless finish to the year. Should they be as complacent as the fear gauge suggests they are with the VIX at 11.43? My sense is that though there are some factors, largely tax reform-related and/or geopolitical in nature, that could upend markets between Thanksgiving and year-end, the over all health of equity markets is constructive — despite elevated price earnings multiples for the major equity indices. The odds are high that we will see an inline conclusion to a positive earnings season, continued modest gains in nearly all economic measures, a continued elevation in confidence readings and the passage of some form of tax reform. These themes — coupled with record corporate cash on hand, record cash flows, rising dividends and solid forward looking guidance — all speak to rising equity prices. Having said that, I do not expect much in the way of equity price appreciation between now and year-end.

The Dow Industrials (^DJI) are up 18.19% YTD, the S&P 500 (^GSPC) has gained 15.19% in the period and the Nasdaq Composite (^IXIC) has logged a whopping 26% gain. Given the run-up in prices we saw heading into 2017, our YTD performances and the stretched P/E ratios the major indices currently have, I expect to see a largely flat equity performance through year-end, unless of course tax reform legislation is passed. Last week’s performance by equity markets speaks directly to that. We lost incremental ground on the week and did witness some unfamiliar volatility in both directions, but at the end of the day, the stock market settled largely unchanged. Themes from last week that did and will continue to attract investors’ attention this (shortened) trading week include a natural focus on retail sales — given where we are in the calendar — and any follow through in the weakness in the technology sector (XLK) this week that we saw at the close of last week.

Commentary by Sam Stovall, chief investment strategist at CFRA Research

Despite GE (GE), the dividend picture remains positive, in our view, since companies continue to post record earnings, along with record levels of cash and favorable cash-flow. In addition, the bleeding in energy-related issues appears to have subsided. As has been the case for several years, income-oriented investors have few places to look beyond dividend-paying stocks. Computations by S&P DJ Indices show that actual payments for the S&P 500 set a record in Q3 2017, rising 8.4% versus Q3 2016, and they project similar gains in Q4 ’17, resulting in the sixth consecutive annual record. However, the annual rate of increase has been declining, as the first four years saw gains in excess of 10%, while 2016 posted a rise of 5.3% and 2017 looks to be in the low 6% area (even with GE’s cut). The energy and retail groups continue to face challenges, contributing to the slowing of the average percentage dividend increase for companies in the S&P 500.

Economic Calendar:

Tuesday
8:30 AM Chicago Fed National Activity Index
10:00 AM Existing Home Sales

Wednesday
8:30 AM Durable Goods Orders
8:30 AM Weekly Jobless Claims
9:45 AM Bloomberg Consumer Comfort Index
10:00 AM Consumer Sentiment
10:30 AM EIA Petroleum Status Report
2:00 PM FOMC Minutes

Thursday
Thanksgiving – Markets Closed

Friday
9:45 AM PMI Composite Flash
1:00 PM Baker-Hughes Rig Count
Early close