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It's back to earnings and stretched valuations

Peter Kenny
Peter Kenny

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


• Senate reaches plan to end U.S. Federal Government shutdown
• Investor optimism reaches the highest level since 1986
• US manufacturing continues to defy conventional thinking, rising for a fourth straight month
• US oil production set to upend global trade – Reuters
• IEA sees explosive growth in US oil output as prices rally – Bloomberg
• 75% of US truckers expect volume to rise in the next six months and 70% expect rates to rise

Last week’s economic calendar continued to provide foundational support to the thesis that our economy’s growth is accelerating. Industrial production for December came in at a stunning 0.9% versus Bloomberg consensus calling for a more modest gain of 0.4%. November’s revised reading was -0.1%. The Housing Market Index for this month remained elevated at 72. Weekly jobless claims reflected a sharp decline coming in at 220k versus the prior week’s reading of 261k. The Philadelphia Fed Business Outlook Survey remained in channel for January coming in at 22.2. Not surprisingly, consumersentiment for January was a solid 94.4 versus December’s 95.9.

This week’s economic calendar, outlined below, should provide further evidence of economic expansion. Today’s Chicago Fed National Activity Index reflected a gain of 0.27. The Richmond Fed Manufacturing Index for January, due out Tuesday, is expected to come in at 18. Weekly housing data aside, investors will watch closely as the weekly jobless claims hit the tape on Thursday as well as advance reports on wholesale and retail inventories. The three most important data releases of the week will be leading indicators Thursday and durable goods orders and GDP on Friday.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Jan. 22, 2018. Photographer: Michael Nagle/Bloomberg

With all of this economic data providing a constructive backdrop for markets and with Q4 earnings providing a lift for equity prices, even a partial government shutdown did not slow the ascent of equities, with the S&P 500 and Nasdaq Composite claiming new highs this morning prior to the Senate deal that paves the way to reopen the U.S. government. With the specter of a protracted shutdown in the rearview mirror, focus again turns to earnings.

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Earnings are backward looking; guidance is forward-looking. Purely from the perspective of earnings, equity markets are in the midst of a leg-up in prices. Though it is early in the earnings season, if financials are any indication of what to expect from the broader market, we should see a rising tide continue to take shape in the form of rising equity prices

Investors never priced in a protracted shutdown, as is evidenced by the continuation of our run-up in prices. The rally in prices that we have witnessed over the past 52-weeks has left the S&P with a gain of 26.31% and a P/E of 23.41. Over the same period, the Dow Industrials have risen a stunning 34.65% while currently sporting a P/E of 21.61. Let’s face it: Markets should hypothetically be due for a pause in their march higher if not a constructive pullback of sorts. They “should” hypothetically, but will they?

The complacency current priced into markets is a concern. Volatility, as measured by the CBOE Volatility Index (^VIX), is currently 11.00. Though well above the lows of the first week of January (9.15), it is still not reflecting any meaningful concern on the part of investors.

Credits markets are reflecting the same bullish sentiment. The closely watched 10-year T-Note (^TNX), for example, yields 2.66%—a level not last seen since July, 2014. It could be argued that in recent months that interest rates across the board have risen at a rate faster than can be justified given the current economic landscape. There “should” be a degree of modest retracement, but will it materialize?

Last Monday I wrote about the relationship between the Baker-Hughes Rig Count (rising) and the rising price of crude. My argument being that crude would ultimately have to contend with a dramatic increase of US shale oil production above $60/bbl. Crude spent last week in a holding pattern, which continues today. In fact on Friday, January 12, WTI crude (CL=F) closed at $64.30/bbl. A week later, last Friday, it closed at $63.37/bbl. Though hardly a meaningful tick lower, it was, in fact, the weakest performance for crude, on a weekly basis since the second week of December (It currently trades at $63.44.). On Friday, Bloomberg published a piece outlining my argument.

Commentary by Sam Stovall, chief investment strategist at CFRA Research

The financials sector (XLF) has dominated the fourth-quarter earnings season thus far, and results are solid. However, investors have been stoic in the face of large tax charges related to the new tax policy given management’s optimistic tone regarding the future earnings benefits from the tax plan. Guidance for much lower tax rates (around 19% vs closer to 29% on average previously) in 2018 has been provided, and we believe 2018 earnings estimates are seeing upward revisions. Investment banking revenues, loan growth and expense control were highlights in many of the quarterly reports, while a significant decline in trading (especially FICC) was partly an offset for many. Immediate price reaction to the releases have been mixed, with JPMorgan (JPM), BlackRock (BLK) and Citigroup (C) shares among those initially moving higher.

WTI Crude Oil (Nymex) (CL=F) $63.44/bbl
Gold (Comex) (GC=F) $1,331.80/t. oz.
10-year Treasury Note yield (CBOE) (^TNX) 2.659%
Volatility S&P 500 (^VIX) 11.00

Economic calendar:

8:55 AM Redbook
10:00 Richmond Fed Manufacturing Index
Charles Evans, 6:30 PM

7:00 AM MBA Mortgage Applications
9:00 AM FHFA House Price Index
9:45 AM PMI Composite Flash
10:00 AM Existing Home Sales
10:30 AM EIA Petroleum Status Report

8:30 AM International Trade in Goods
8:30 AM Weekly Jobless Claims
8:30 AM Retail Inventories (Advance)
8:30 AM Wholesale Inventories (Advance)
9:45 AM Bloomberg Consumer Comfort Index
10:00 AM New Home Sales
10:00 AM Leading Indicators
11:00 AM Kansas City Fed Manufacturing Index

8:30 AM Durable Goods Orders
8:30 AM GDP
1:00 PM Baker-Hughes Rig Count