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Today’s Bond Blunder? Parking Too Much Money Short Term

Weekly Market Guide

  • 10.31.19
  • Markets & Investing
  • Commentary

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

The market was able to break out to new all-time highs on trade progress, a dovish Fed, and generally positive response to Q3 earnings season. New highs have historically been suggestive of above average market returns over the intermediate term and support our positive stance. However, it is worth noting that the S&P 500 was able to break out to new highs during Q1 and Q2 earnings seasons before pulling back in both instances as trade tensions escalated.

While we have a positive bias to trade, we have guarded optimism due to disappointments having taken place over the past year. Accordingly, while we are also positive on equities, we refrain from rushing into wide-scale purchases with the market at short term overbought conditions, as well as approaching overhead resistance (ascending trend line from the January 2018 market highs). Moreover, breadth is not as strong as we would like to see, which is contributing to our pause for the short term. For example, there has been a decreasing number of members within the S&P 500 making new highs as the market made new highs. Therefore, we would be selective through earnings season and buy areas as they pull back and hold support.

As for earnings season, 69% of the S&P 500 has reported Q3 results thus far. 79% of these companies have beaten on earnings by an aggregate of 5.0%, while 61% have beaten on sales by an aggregate of 0.78%. In general, the response has been positive with the average price reaction on earnings being 0.87%, led by the more domestic-focused companies (due to the weaker global macro). S&P 500 companies with over 50% of their revenues from the US have reported average sales and earnings growth of 5.3% and 2.1% respectively (with a 0.7% average price reaction), comparing favorably to S&P 500 companies with less than 50% of their revenues from the US growing sales and earnings by 2.9% and -2.1% respectively (with a 0.4% average price reaction). Full quarter earnings estimates now reflect -2.4% for the S&P 500, trending up from -4.4% when Q3 earnings season began. Looking ahead, forward estimates have trended lower, now reflecting 0.4% growth in Q4. We remain at $173 in expected earnings for 2020 (~3.5% below current consensus of $178.87).

At the sector level, the best price reactions on Q3 earnings have come from the Health Care, Materials, Industrials, and Financials sectors on average. The positive Q3 results from Health Care are creating some technical momentum, as the sector broke out of a triangle pattern this week. This is suggestive of additional gains in the short term, as the sector attempts to rebuild momentum to the upside.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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