Elections, Earnings & Reports Rule Markets

Elections, Earnings & Reports Rule Markets

The future will be on investors’ minds this week as the 2016 election campaign, the ability of companies to weather the troubles in China and emerging markets, and the performance of the US economy during the recent market correction all come into view.

Elections, Earnings & Reports Rule Markets
Elections, Earnings & Reports Rule Markets

On Monday evening the 2016 election process officially begins with the byzantine process that is the Iowa caucuses.  Final polls from the Des Moines Register show Donald Trump leading Ted Cruz on the Republican side and Hillary Clinton holding a slim lead over Bernie Sanders on the Democratic side. While all four candidates have ties to Wall Street in one way or another, all have attempted to distance themselves in their speeches. Most analysts agree that voter turnout will be the key factor in determining the outcome. 

Besides the start of the election campaign, the week contains a ton of economic reports, any or all of which could be the catalyst for market movement. The main event comes Friday, with the release of the jobs report from the first month of 2016. During the month of January, the S&P 500 fell about 5%, the Dow Jones Industrial Average lost about 5.5%, and the Nasdaq lost nearly 7%. After a record 70 straight months of net job creation during the Obama presidency, if job creation shows signs of weakening, that would be a blow to investors’ hopes that low oil prices will in the end have a net positive effect. 

The closeness with which equities and crude oil prices moved with each other last month went from surprising coincidence to a truism some came to rely on. Last week saw some divergence, but stock traders are still watching the oil market for clues. 

Although much of the earnings news last week was about the slowdown in sales of Apple’s iPhone. The weakness in Apple’s sales in China and emerging markets seemed to point to larger economic troubles in many countries, a factor Apple CEO Tim Cook pointed to in his call to investors. Apple remains the most valuable company and its stock took only a modest hit, but the other big Apple story was the rise of Google’s holding company, Alphabet, which is just a few share points from surpassing Apple’s market valuation. 

Another big tech company that took a weird punishment despite strong performance was Amazon, which posted record profits, but whose stock fell simply because they weren’t as big as the record profits expected by analysts. It was the soft bigotry of overblown expectations at work. 

Apple’s possible weakness and Amazon’s failure to be record-breaking enough notwithstanding, companies in general beat earnings expectations. FactSet reported that companies reported aggregate earnings 1.7% higher than estimated. That’s below the 5 year average but still positive. 

The week ahead will have reports including but not limited to: manufacturing, construction, auto sales, factory orders, consumer credit, and jobless and monthly nonfarm payroll employment. The last set of numbers are of particular interest because job creation remains a condition of Fed monetary policy. The earlier numbers could, taken together, give hints about the direction of prices and inflation. 

This week’s data will affect what Fed Chair Janet Yellen tells Congress next week, when she gives testimony February 10-11 on Capitol Hill that is expected to either leave open the possibility of a March rate hike or confirm the consensus that the Fed is in no hurry to rush ahead of the US economy in normalizing monetary policy.

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