Trump and the Market – Wrecking Ball

I started my summer vacation last week by traveling to Cleveland to see the GOP debates live.  No matter your political party affiliation, being at something like that is really interesting and fun.  Trump really came in like a wrecking ball, but Commodities played their role in the market last week, too.  After seven straight down sessions for the Dow, which is it’s worst streak since 2011, what’s going on?

For the week, U.S. equities ended lower and there were all kinds of forces at work in the price action of all the indices. Monetary policy, (translation – “The Fed”), remained in focus with the continued back and forth over the timing of the next rate hike and the ambiguity about how much it really means for equity sentiment.

Even though there was a lot of selling off in the equity market this week, economic data continues to come in pretty strong.  Consumers are borrowing more than expected, Service industry firms reported strong demand this week, and job numbers show solid growth. Energy (not shockingly) and Consumer Discretionary were the worst performers this week, while Utilities was the only sector to finish in positive territory.  Classic defensive action in the market.

As for more details on the economic situation, we saw a solid Employment Report, continued strong auto sales, an increase in consumer credit, a huge positive ISM Services report, and pretty decent manufacturing data. While Construction Spending was off, there were solid upward adjustments to the prior months’ data, and while consumer spending didn’t crush it by any means, it was a healthy pace.

One thing to highlight is that I believe that HUGE components to the economy are Housing and Cars.  Auto sales numbers released Monday came in at 17.46 million SAAR (Seasonally Adjusted Annual Rate) versus the 17.2 million expected. We have not seen these kinds of numbers (consistently) on cars since around 2005 and that is when, according to FactSet, there were 24.8 million fewer Americans driving! Then Bespoke reported that the median car today is 11.4 years old, versus 10.0 in 2005.  That means there are more Americans today, they are driving more, and their cars are older. Auto sales should keep rising unless there is something like a 9/11 event which no one can predict or hedge against.

One last economy word: the ISM Services report.  For anyone out there who is worried about the economy slipping back into a recession … while economists were expecting the ISM Services reading to come in at 56.2, the actual level CRUSHED expectations, coming in at 60.3.  That’s not a reading you associate with an economy slipping into dark times.  We were just at a nine-year high on this reading back in September of 2014, when it was at 59.6

For those of you worried about the last seven sessions in the Dow, we have had some ups and downs this year.  Don’t get all panic-y.

Earnings

Another +1000 companies reported their second quarter (2Q) earnings and revenue last week, bringing the total to almost 2300 companies reporting with just seven days left in this earnings season.

According to Bespoke, here’s how we look:

• The percentage of companies beating their revenue estimates for the 2Q of 2015 stands at 52.7% which is currently well below the average of the 60% that we’ve seen since 2000, but better that the final 50% from the 1Q of 2015.
• Since the revenue readings bottomed out in the 4Q of 2011, quarter-over-quarter readings have ping-ponged but the trend has been positive for revenues, although the last two quarters have been poor. I’ll write more on this at the end of earnings season.
• The percentage of companies beating their earnings estimates stands at 61.1%, which is below the average of 62% dating back to 1998, and above the 60% final reading from the 1Q of 2015.

Bespoke also publishes a chart that shows the spread between companies guiding future earnings higher or lower on a percentage basis. Up until the 1Q of 2014, the spread had been negative for the TEN previous quarters, meaning there were more companies stating they would earn less in the upcoming quarter than the same quarter a year prior. That’s 2.5 years of pessimism coming out of corporate America.

After two flat quarters in the 1Q and 2Q of 2014, we saw the 3Q of 2014 revert back to a negative reading. The final reading for the 4Q of 2014 shows that the spread between companies posting negative guidance versus companies posting positive guidance in the 4Q was a whopping -9.4%! This was the worst spread reading since the last two quarters of 2008. The current reading got a little better over the week moving from -3.5% to -3.0%, which even though it is a negative reading, it’s a huge improvement from the 4Q reading of -9.4%.

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