Investment Commentary – November 4th, 2015
Market Indices as of Market Close November 4th, 2015
Dow 17,868 (0.25% YTD)
S&P 2,102 (2.11% YTD)
NASDAQ 5,142 (5.58% YTD)
Global Dow 2,452 (52 week low 2,203/high 2,644)
10-year Treasury 2.09 % (52 week low 1.64/high 2.50)
Gold 1,106 (52 week low $1,074/high $1,310)
Oil 46.29 (52 week low $39.22/high $80.33)
Earnings season in full swing
T. Rowe Price traders note that roughly one-third of the companies in the S&P 500 were scheduled to report third-quarter earnings during the week, and the typical mix of positive and negative surprises drove much of the week’s market action. According to analytics and data firm FactSet, market analysts continued to predict that overall quarterly earnings for the S&P 500 would see their worst year-on-year decline since 2009. The decline was shaping up not to be as large as anticipated, however, with even more companies than usual managing to surpass earnings estimates. Companies are often thought to moderate estimates in order to be able to surmount them when they actually report earnings.
Fed eases China fears
A further mitigating factor was that much of the earnings weakness was concentrated in just two sectors—energy and materials. Both segments have seen profits plunge alongside oil and other commodity prices, but investors grew a bit more optimistic about the outlook for commodity demand during the week. T. Rowe Price traders observe that this was partly due to the Federal Reserve softening its reference to the risk of international economic and financial developments threatening U.S. economic growth in its official statement following its Wednesday policy meeting. Investors appeared to interpret the change as a signal that policymakers believed that the slowdown in China would be unlikely to spread outside the region. The Fed also left interest rates unchanged at its meeting, as was widely anticipated.
Prospect of Higher Rates Drives Markets
With the possibility of a December hike in U.S. interest rates back on the table, bond yields rose last week (as prices fell), and investors continued to favor stocks, despite already high valuations. The yield on the 10-year Treasury rose from 2.09% to 2.15%, and two-year yields advanced as well. Meanwhile, stocks posted modest gains. The Dow Jones Industrial Average inched up 0.09% to close the week at 17,663, the S&P 500 Index was up 0.19% to 2,079 and the tech-heavy Nasdaq Composite Index advanced 0.44% to 5,053.
Although interest rates are little changed year-to-date and likely to remain range bound, the renewed prospect for higher rates in the U.S. and the opposite trend elsewhere in the world is once again pushing the dollar higher. However, a continued strong dollar would represent a headwind for U.S. inflation, precious metals and U.S. company earnings.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.