By Pete Biebel, Vice President

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In the week before Halloween and the Day of the Dead (Día de Muertos) celebration, the market had a celebration of its own. I’ll call it Semana da las Ganancias, the Week of the Earnings. Last week was the current “earnings season’s” biggest week in terms of the number of companies reporting quarterly results. Those reports typically produce a sort of trick or treat reaction in the market. Positive surprises produce a sweet reward while a miss on earnings can result in the equivalent of those company’s stock prices getting pranked. While several of the earnings releases resulted in blood-curdling losses for the stocks of the reporting companies, the week included enough positive news to help the averages record some tasty gains.

Through the first four days of the week, it was several component stocks of the Dow Jones Industrial Average (DJIA) that took home the most candy. Most notable was Tuesday, a day on which neither the S&P 500 Index (SPX) nor the NASDAQ Composite Index (COMP) could get anywhere near its Monday high, and on which both indices ended the day with mediocre gains. That day several DJIA stocks were on a sugar high following their earnings announcements. That index hit a new high and ended Tuesday with a gain of nearly 170 points. Just three of the reporting companies accounted for all of that gain.

That bias reversed on Friday. The evening before, several of COMP’s biggest stocks announced glowing results and were rewarded with fat gains Friday morning. COMP, which had been in the red for the week as of Thursday’s close, leapt an eye-popping 2.2% on Friday to net a gain for the week of just over 1%. DJIA gained a paltry 0.14% on Friday to net a mere 0.45% gain for the week. SPX, which like COMP was underwater through Thursday, tacked on 0.81% Friday for a net 0.23% gain for the week.

A week ago, I pointed out that DJIA was the big gainer in the prior week (+2.0%) with SPX netting less than half as much and COMP less than half of SPX. Last week, COMP got the treat with DJIA claiming less than half of COMP’s gain and SPX roughly half of DJIA. Over that two-week stretch, DJIA has added 2.46% with both COMP and SPX gaining between 1% and 1.5%.

Only about one half of the S&P industry sectors had gains for the week. One sector that missed out on the market’s holiday party was Consumer Staples (down 1.47% for the week), though that sector was haunted by factors beyond just disappointing earnings. Higher interest rates played a role; the yield on Ten-Year Treasuries spiked to over 2.45% during the week, its highest level in seven months. Probably more damaging was news of potential increased online competition in the pharmacy business. That was a hard pill to swallow for traders who were spooked into selling stocks of established pharmacy firms, several of which are large component companies in the Consumer Staples sector.

The earnings goblins also put a scare into stocks in the Healthcare sector. That group relapsed by 2.24% last week. Continuing weakness in Biotech and Pharmaceutical stocks pulled the sector lower. Some component companies lost as much as 25% of their market value following their earnings announcements.

With last week’s gain, SPX is now a bit more than 1% above the 2550 level it reached early this month. So, while the averages have taken some small bites at gains through October, they still seem to be digesting September’s fat gains. The one to watch over the next two weeks might be the Russell 2000 Index (RUT) of small-cap stocks. Like a mummy rising out of its tomb, RUT, which looked deader than a zombie in mid-August, levitated more than 10% over the next five weeks. It helped to inspire the rallies to new highs in the major averages into early-October. Since then, RUT has backpedaled lower. Despite the week’s hoard of “week of the earnings” gains, RUT ended with a net loss for the week. We probably shouldn’t expect major progress in the major averages if RUT continues with one foot in the grave.

This earnings season has produced some of the biggest reactions to earnings surprises that the market has seen in many quarters. The number of earnings reports due this week is reduced, but, in the spirit of the season, at least a few trick-or-treat moves should be expected. Fewer mega-cap companies are on the docket, but three very big names in the Technology are scheduled to report through midweek.

The one looming factor that is likely to spark a large and lasting market reaction in the next two months is whether Congress can make real progress on a tax reform package. Last week’s House budget resolution kept hopes alive that a tax package could be cobbled together before year-end. Any indications of actual progress are likely to produce a very positive market reaction.

In addition to the Non-Farm Payrolls data on Friday, two other potentially large catalysts loom in the days ahead. One occurs Wednesday afternoon with the FOMC meeting announcement. While the market currently expects that the odds of a December rate hike are about nine-to-one, any ghost of a suggestion that alters those odds or that indicates a change in the anticipated pace of the Fed’s balance sheet reduction, could conjure up a flurry of volatility. A second possible catalyst could be President Trump’s announcement of his pick for FOMC chairperson. While it may not be accurate to describe Trump’s search as a witch hunt, the market expects that he will opt to replace Janet Yellen with someone more spiritually aligned with his beliefs. If his choice of a replacement is deemed to be too hawkish or too dovish, it could touch off a spike in volatility for interest rates and for interest rate sensitive sectors.


Date Report Previous Consensus
Monday 10/30/2017 Personal Income and Outlays, Income, M/M +0.2% +0.4%
Personal Income and Outlays, Spending, M/M +0.1% +0.9%
Dallas Fed Manufacturing Survey 21.3 21.3
Tuesday 10/31/2017 S&P case-Shiller Home Price Index, M/M +0.3% +0.5%
Chicago PMI 65.2 62.0
Consumer Confidence 119.8 121.0
Wednesday 11/1/2017 ADP Employment Report +135K +220K
PMI Manufacturing Index 53.1 54.5
ISM Manufacturing Index 60.8 59.5
Construction Spending, M/M +0.5% +0.1%
FOMC Meeting Announcement
Thursday 11/2/2017 Jobless Claims 222K 235K
Productivity and Costs, Non-Farm Productivity, Q/Q +1.5% +2.4%
Friday 11/3/2017 Employment Situation, Non-Farm Payrolls, M/M -33K +323K
Employment Situation, Unemployment Rate 4.2% 4.3%
International Trade, Trade Balance Level $-42.4B $-43.4B
PMI Services Index 55.3 55.9
Factory Orders, M/M +1.2% +1.2%
ISM Non-Manufacturing Index 59.8 58.7