The question going into the new week is whether the market can shake off memories of last week\u2019s sharp losses, or if there\u2019s more selling to come. Key bank earnings continue, while other sectors also start to see company reports as the week advances. Retail sales looked disappointing.<\/b>
\n(AP Photo\/Mark Lennihan)
The first full week of earnings gets underway today with the investors perhaps still wiping their collective brow from all the ups and (mostly) downs of the last few sessions. Stocks fell 4% last week in the worst plunge since February, and major indices start the week back near July levels.
It may be a new week, but the market apparently hasn\u2019t shed all the negative sentiment that characterized last week\u2019s action. Weakness in Asia and Europe overnight appeared to help set the tone on Wall Street, where stocks fell in pre-market trading. Retail sales data for September out this morning didn\u2019t appear particularly helpful, rising just 0.1% when Wall Street analysts had been expecting 0.6%, on average. It was the second straight month of tepid retail sales growth and might cause some concern about the state of consumer demand.
In earnings, banks remain in the spotlight, with Bank of America reporting today and Goldman Sachs and Morgan Stanley tomorrow (see more below).
Bank of America earnings of 66 cents a share beat the third-party consensus estimate of 62 cents, while revenue of $22.777 billion pulled in just above the $22.67 billion consensus view. The headline numbers looked relatively strong, but the bank\u2019s investment banking unit saw fees fall 18% on the year, and trading revenue fell 2.5%. However, deposits grew 5%, and Bank of America’s earnings appeared to benefit from lower taxes.
Aside from Bank of America, today is relatively light on major earnings news. Expected earnings releases Tuesday include the first major results from the new Communication Services sector as Netflix steps to the plate. Also expected are a visit from \u201cBig Blue,\u201d otherwise known as IBM, and a walk down the medicine aisle with earnings from Johnson & Johnson and United Health.
There\u2019s also some data on tap in the days ahead, including September retail sales out this morning and housing numbers later this week. The housing sector could remain one to watch for more clues about the economy, with 30-year mortgage rates closing in on 5% and hitting their highest level since 2011 last week. Last week wasn\u2019t a good one for the home building sector, with shares falling to new 52-week lows for several major firms.
Amid the stock market turmoil last week, some data might have gotten a bit lost in the shuffle. On Friday, consumer sentiment for early October was a bit shy of expectations, according to the University of Michigan\u2019s latest report. The survey respondents seemed a bit more nervous about the possibility of near-term inflation, but long-term inflation expectations actually fell. The headline number of 99 remains near recent highs, but it\u2019s unclear whether the survey accounted for sentiment as the markets crumbled last week. The updated survey later this month might help give investors a sense whether the market shakeout had any impact on confidence, so consider staying tuned. Consumer sentiment arguably grows more important as the holiday season approaches.
The new week begins with no sign of a real thaw in icy trade relations between the U. S. and China, though chances of a meeting next month between the countries\u2019 presidents surfaced in the media last week. A deal between these two economic powerhouses is arguably key for the markets to get back on track. A full-blown trade war has the chance of undoing many of the administration\u2019s policies that some analysts see as pro-business. The concern is that if nobody blinks, it could negate the positive market impact of all the tax cuts.
With the China situation unsettled, it wouldn\u2019t be surprising to see volatility continue for a while, especially when you also factor in the U. S. election looming just a few weeks away. The market tends to shy from uncertainty, and that\u2019s exactly what a big election can bring. In addition, there\u2019s uncertainty about corporate outlooks, something investors are likely to learn a lot more about over the next few weeks.
Also on the foreign affairs ledger is what looks like growing tension between the U. S. and Saudi Arabia as the two countries sparred verbally over the weekend after the disappearance of a Saudi journalist. The question is whether this might affect the crude oil market, which had been retreating last week amid the global turmoil in stocks. Though U. S. oil production is at record high levels, the U. S. still imports close to one million barrels a day from Saudi Arabia, the world\u2019s largest producer. Anything that even hints of a disruption could have an impact on all the markets, not just oil.
If you have the stomach for it, let\u2019s look back at sector action last week and see how it played out. If you\u2019re hunting for a sector that went against the trend, you won\u2019t find one. Every S&P sector fell. It\u2019s only a question of degree. The best performer was utilities, which dropped just 1.26%, followed by consumer staples with a 1.94% retreat. That could indicate some investors searching for so-called \u201cdefensive\u201d parts of the market where they hope to see less volatility, though there\u2019s no guarantee.
Materials fell the most, plummeting 6.59% last week. Industrials closely trailed with a 6.51% loss, and financials fell 5.57%. The plunge in materials and industrials might partly reflect concerns about declining U. S.\/China trade relations and associated tariffs and how that might play into forward guidance from major industrial and materials firms as earnings season continues. The financial sector slumped despite decent Q3 numbers from the first three big banks to report and the recent climb in Treasury note yields. Some investors seem to be keeping away from financials, perhaps because they were burned when rates rose and then fell earlier this year.
Anyone looking to Europe or Asia for relief wouldn\u2019t find it. Japan\u2019s Nikkei fell 4.58% last week, and the Stoxx Europe 600 dropped 4.64%. The Shanghai Composite did even worse, plunging 7.6%, but that partially reflected much heavier trading than usual since it had been closed the entire week before in observance of a holiday.
In corporate news, Sears Holdings filed for bankruptcy after 132 years in business, another apparent victim of online shopping. The company said in a statement that it intends to stay in business, keeping profitable stores open. Many have closed already, though. It\u2019s been a long time since those days of combing through the Sears catalogue at holiday time, as some people might remember.
From a technical standpoint, this week could help tell the story of whether the base that seemed to start forming in U. S. stocks on Friday can hold, or if the market has further valleys ahead. One potentially constructive factor was Friday\u2019s S&P 500 settlement just above the 200-day moving average of around 2766. Just about every test of that average has held so far this year.
FIGURE 1: SMALL CAPS, BIG DROP. Even before last week’s equities meltdown, the Russell 2000 (candlestick) was dancing around its 200-day moving average (blue line). This after leading the S&P 500 (purple line) through much of the year. Data Source: S&P Dow Jones Indices, FTSE Russell Indexes. Chart source: The thinkorswim\u00ae platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. Data Source: S&P Dow Jones Indices, FTSE Russell Indexes. Chart source: The thinkorswim\u00ae platform from TD Ameritrade.
Stuck in a RUT: After outperforming the S&P 500 through mid-summer, the small-cap benchmark Russell 2000 Index headed south. Before last week’s hard selloff, the Russell had already dipped a toe in the sub-200-day moving average water (see figure 1 above). And the Russell barely nudged higher in Friday’s recovery. Why has the small-cap index gone from leader to laggard in such a short time, especially given all this talk of trade wars, which should, theoretically anyway, benefit smaller, domestic firms versus large multinationals? One issue is leverage. According to FactSet, debt-to-earnings levels among Russell components are about 3.5% \u2014 about double that of companies in the S&P 500. So a rising interest rate environment could pose more of a challenge for the Russell than for the S&P 500. And though there are still trade tensions, particularly between the U. S. and China, the USMCA\u2014the name for the NAFTA replacement deal agreed to a couple weeks ago\u2014seemed to cut into RUT’s lead. It’s not all bad news for small-caps, though. Had your eye on specific small-cap names but couldn’t justify the price a couple months ago? A pullback of this magnitude may offer up some opportunities for those who’ve done their homework.
More Bank Earnings on Tap: After Bank of America today and three other big banks that shared results last Friday, tomorrow\u2019s reports from Morgan Stanley and Goldman Sachs arguably wrap up the financial earnings season, though lots of smaller banks and credit card firms still report in the days and weeks ahead. Like a freight train roaring by, the big bank earnings season is fast, noisy, and doesn\u2019t stay around too long. Goldman Sachs and Morgan Stanley are both investment banks, and the focus with Goldman Sachs might turn to fixed income, currency and commodity (FICC) trading revenue, as well as investment banking. Some of those same areas are also key for Morgan Stanley, along with wealth management. Though there\u2019s been a lot of volatility lately, the Q3 wasn\u2019t a hugely exciting environment, so the question is whether that affected the companies\u2019 trading revenue. Last week, JP Morgan reported what it called \u201cmixed results\u201d in its fixed income business.
Inflation Still Seems In Check: Kind of lost in the shuffle amid all the market turmoil last week were two relatively benign inflation numbers. The consumer price index (CPI) rose less than Wall Street analysts had expected in September, at just 0.1%, and the Producer Price Index (PPI) rose 0.2%, in line with expectations. Core CPI, which strips out food and energy costs, rose 2.2% year-over-year, which was down from August.
While these numbers stand a touch above the Fed\u2019s stated long-term goal of 2% and probably point toward continued likelihood of another rate hike by the end of the year, they don\u2019t seem to indicate an \u201coverheating\u201d economy that would force the Fed to move even more quickly. The futures market projects December rate hike odds at 78%, down from above 80% a week ago but still a solid indication that many investors see another likely 25-basis point increase before year-end. Odds of another hike in March remain above 50%, futures prices indicate.
TD Ameritrade\u00ae commentary for educational purposes only. Member SIPC.
I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100 and S&P 500 pits. I’ve also worked for ING Bank, Blue Capital and was Managing Director of Option Trading for Van Der…<\/p>\n

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