Weighing The Week Ahead: Will Corporate Earnings Results Change The Message Of The Markets?

It is a light economic calendar without any of the most important reports. The government shutdown will command increasing attention as long as it continues. Finally, there is some real competition in financial news – the start of earnings season. For weeks it has been a battle between economic data and stock prices, between economists and traders, between those investing on fundamentals and those trying to time the market. Expect the punditry to be asking: Will corporate earnings results change the message of the markets?

I hope we can analyze stocks instead of political controversies in the week ahead.

Last Week Recap

In my last edition of WTWA I took a deeper look at indicators that were “rolling over.” While that did not slow down the exaggerated use of the term, perhaps a few people were inoculated.

I also mentioned my annual preview. This highlights the factors I see as most important in the year ahead. 

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis.

Stocks gained 2.5% with lower volatility. The trading range of 2.8% was only slightly higher. You can see the results compared to some past data in our indicator snapshot (below).

Noteworthy

Everyone is aware of the Internet of Things, and probably the growing importance. But what about the rate of that growth? Long-term investors should have something in the portfolio to take advantage of the expected revenue. Priceonomics has a good discussion and this chart.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

New Deal Democrat’s high frequency indicators are an important part of our regular research. This week’s update shows that the short-leaning indicators have declined further and are now negative. The long-leading forecast is now slightly positive “for the first time in months.

When relevant, I include expectations (E) and the prior reading (P).

The Good

  • CPI remained benign with a decrease of 0.1% (in line with forecasts and lower than last month’s flat reading. The core CPI was also as expected, showing an increase of 0.2%. Eddy Elfenbein explains the market significance.
  • FOMC Minutes confirmed the “more patient Fed” interpretation. Business Cycle expert James Picerno notes that Fed Funds futures are pricing in a pause in 2019.
  • Rail traffic is very strong reports Steven Hansen (GEI). He shows accelerating growth in rolling averages compared to one year ago.
  • NFIB Small Business Optimism registered 104. (P 104.8). Calculated Risk notes the strong result in a noisy series. Unlike during the recession where businesses cited “poor sales” as their biggest problem, it is now a question of finding qualified workers. Yes, there is a bit of “rolling over” as ratings remain near the all-time record.

  • Initial jobless claims declined to 216K, beating expectations by 12K and the prior week by 17K. The data do not yet include any effects from the government shutdown.
     

The Bad

  • ISM Non-Manufacturing recorded 57.6. Last month was 60.7 and the forecast was 58.0 so I am scoring it as “bad.” One of my “reliably bearish” Twitter follows quoted ZH in describing this as “plummeting.” I note that new orders increased to 62.7. The ISM’s research states that the index, if annualized, implies real GDP growth of 3.2%. This is the danger of “rolling over” in the hands of those on a mission to sell you something. Read the entire report for the component results and some comments from those surveyed.
  • JOLTS showed a decline in job openings to 6.888 million (P 7.131 M). This was treated as bad news by the market, which does a poor job on this report. JOLTS is not the best measure of job growth or economic strength. The monthly payroll report is better for that. JOLTS explains the structure of the labor market, especially whether it is tightening. The needed interpretation defies the capsule summary required by financial media.

And this update on the widely-misunderstood Beveridge Curve, among several other good ones in the chart pack.

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