Stocks Rise in Choppy Week
Stocks declined three of the five days this week, but managed to finished positive on the back of a strong Monday and Thursday. For the week the Dow and S&P 500 increased 0.5% and 0.8%, respectively.
Corporate Earnings – This was the first full week of earnings and results were mixed with companies such as Honeywell and Black & Decker exceeding expectations while Verizon, Goldman Sachs, IBM and others disappointed. Financial earnings had been pretty strong before Goldman earlier in the week, which seemed to spook investors. I was less concerned since Goldman’s trading business, a very volatile business, was responsible for much of the miss. Markets as a whole took it as a opportunity to pause and consider future economic growth. The rest of week didn’t provide much clarity as several key bellwether names reported conflicting results. Were Verizon and IBM’s results company specific or is it a message that growth isn’t as strong as people have projected? Did Honeywell’s earnings provide a positive insight into the industrial and defense markets? I think it’s too early to read too much into a handful of earnings estimates. There is always quarter-to-quarter volatility among companies, even the best companies, and it will be important to see what type of reports we see in the next 2-3 weeks.
French Elections – The first round of France’s Presidential election take place this weekend, amidst the backdrop of another terrorist attack. Marine Le Pen is the far right nationalist candidate in favor of France leaving the Euro currency. She was polling in 2nd place before the attacks, at 22%. The French elections are a two-stage process where the top two vote recipients advance to a run-off a few weeks later. The terror attack last night will presumably help Le Pen, who most expected would advance to the second round either way. What investors will be watching is how votes consolidate in the second step. For months, pundits have been saying Le Pen has no chance in the second step, but many said the same thing about Brexit and Donald Trump. A surprise Le Pen election could further weaken and endanger the European Union, the Euro currency and increase market volatility. I think the Euro currency is ultimately doomed either way. There is too much variability in the fiscal condition of each member country to make a single currency work long-term. A Le Pen victory would hasten the breakdown of the Euro and cause some short-term volatility, but I don’t view a potential Le Pen election as a long-term negative to the European economy.
Oil moved sharply lower, decreasing 6.4% to close at 49.54/barrel. The yield on the 10-yr Treasury was essentially flat, remaining at 2.24%. The average rate on a 30-yr fixed rate mortgage continued lower to 3.97% from 4.08% last week. This is the first time since November average mortgage rates have dipped below 4.0%.
|10-yr Treasury (∆ in bps)||2.24||1||(21)|