(Tuesday Market Open) As millions of Americans head to the polls today, investors can only watch and await results of the midterm election. The major indices have a weak tone early on, but it’s possible they could bounce around in low-volume trading with so much attention focused elsewhere.
Despite Tuesday’s early softness, the U.S. market appears to be on slightly better footing going into election day, with the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) both closing higher in four of the last five sessions. While we’re probably far from out of the woods, the selling pressure that kept coming in waves last month has died down a bit over the last week.
Yesterday saw super-light volume, and the same could hold true today. It seems unlikely that many investors would want to take big new positions with the election returns about to come in.
One question as voting gets underway is how results might hit different sectors. This isn’t a political column, but it can’t be denied that the makeup of Congress sometimes has an impact on corporations and the markets. Some analysts have argued that the current administration and Congress, with their emphasis on de-regulation and tax cuts, might have helped some sectors, while the administration’s tough stance on trade might have hurt others.
Two sectors to consider watching Wednesday after results are known could be financials and biotech, because these two often tend to come under the Congressional microscope. Both sides of the aisle have targeted drug pricing, while past Democratic Congresses have tried to increase bank regulation. The industrial and materials sectors also might be worth a look as there’s recently been a little renewed talk about Washington getting back into the infrastructure game. That was something that sparked interest in early 2017, after the last election, but fizzled over time.
Investors might actually be able to start getting a sense of the market’s reaction by later tonight if they feel like taking a look at the futures market after the first results start to roll in. However, it’s unlikely that markets would start pricing any results in until after 7 p.m. ET or so.
No Tech? No Problem!
Monday’s action might provide evidence that there can be a rally without much help from tech and communication services. Those sectors were two of just three to edge lower in the session, joined by consumer discretionary, the sector where Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) dwell. Both those stocks, like Apple Inc (NASDAQ:AAPL), came under pressure after their recent earnings reports. Also, some of the FAANGS might have taken a secondary punch Monday from talk out of the White House that the administration might be looking into what it said were possible antitrust violations by AMZN and Alphabet (GOOG, NASDAQ:GOOGL).
While a 3% drop in Apple (NASDAQ:AAPL)—still sputtering after a negative market reaction to earnings last week—and a 2% drop in AMZN helped drag down tech and discretionary, a lot of other sectors showed firmness Monday. Energy, financials, staples, industrials, health care and even the beaten down materials stocks posted gains. Not all the techs and communication services (can we call them “Comserves?”) fell, either. Netflix (NASDAQ:NFLX), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT) were among the big names moving higher.
What this might show is some resilience. As we noted last week, the October descent was pretty orderly, not characterized by huge panic. It looked like an asset repricing was underway, and some investors might have been searching for places to get back in. The recent more positive run doesn’t mean the downturn is over. There could be challenges ahead, and volume being on the light side Monday argues against drawing any major conclusions. Volatility is back to more normal historic levels and likely to keep things rocky for some time, at least until there’s some sort of cooling of the trade and Brexit worries. All that said, it’s arguable that resilience could continue to show up.
From a technical perspective, any close in the SPX above the 200-day moving average near 2765 would probably be viewed as a positive sign, while support now seems to rest near the psychological 2700 level. That’s an area the SPX tested last last week but didn’t close below. Sometimes a move like that can be a positive technical signal. Still, the SPX didn’t manage to recover all of Friday’s losses. That, along with the light volume, could argue against Monday’s action being too big a win for the bulls, as one analyst noted on CNBC.
In earnings action, Eli Lilly (NYSE:LLY) reported Q3 earnings per share of $1.39, four cents above third-party consensus of $1.35. Revenue of $6.06 billion compared with the consensus estimate of $6.1 billion. Shares of the company, which had risen more than 25% so far this year, barely budged after the results were posted. Analysts and investors are likely looking to hear an update on the company’s cost-cutting measures.
Checking the big picture on earnings, with about 75% of S&P 500 companies done reporting as of the end of last week, the percentage with EPS above estimates (78%) tops the five-year average, according to Factset. Also, 61% of reporting companies had sales above the five-year average. On a more negative note, the average S&P EPS estimate for Q4 fell by 1.1% during October, Factset said. That’s the most it’s fallen in the last three quarters, but a smaller decline than average for the first month of a quarter.
The main data today is the monthly Job Openings and Labor Turnover Survey (JOLTS) report, due this morning. Eyes might turn toward Washington tomorrow as the Fed begins its two-day meeting, though chances of any rate hike are slim to none, judging by futures market action. Over in fixed income, U.S. 10-year Treasury yields continue to flirt with the 3.20% level early Tuesday, only a handful of basis points below last month’s high.
Big Tech Drew Some Interest in October, Data Show
Though tech had a down day Monday, the sector apparently found interest from some retail investors last month, according to the Investor Movement Index® (IMXSM). The IMX measures what TD Ameritrade clients are actually doing and their exposure level to markets. Some of the big tech stocks attracting interest included AAPL and MSFT, along with AMZN, which sometimes gets bunched with tech despite being in consumer discretionary. At the same time, investors tracked by the IMX seemed to take a more bearish view of Twitter (TWTR) and Facebook Inc (NASDAQ:FB).
Also missing from the “buy list” in IMX last month was AT&T (NYSE:T), while Exxon Mobil (NYSE:XOM) saw selling interest among the investors tracked. There could be any number of reasons for retail investors to lose some interest in either of those stocks, but one possibility (given that some people tend to buy these two names in part for their dividends), is that maybe a few investors started to nibble at fixed income rather than seeking dividend yield. It could be an interesting trend to watch if it persists this month.
In general, the October IMX appeared to show retail investors not far from the median stock exposure they’ve had over the last six months. It fell about 2% in October even as the market took a beating. This could indicate that many retail investors might be looking to weather the storm, and could reinforce ideas that there isn’t necessarily panic in the market.
FIGURE 1: Cheek-to-Cheek: This year-to-date chart comparing crude oil (candlestick) to the S&P 500 (purple line) shows the two trading in a more correlated way over the last two months after dancing on their own at times earlier in 2018. Misery loves company, the saying goes, and recent five-month lows in the SPX were followed shortly thereafter by seven-month lows in crude. This correlation could be a pattern worth tracking in months ahead, and keep in mind that winter tends to be a weaker time for the oil market, historically. Data Sources: S&P Dow Jones Indices, CME Group (NASDAQ:CME). Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Crude Broods: After falling to seven-month lows last week, crude rebounded a bit early Monday before pulling back late despite new U.S. sanctions on Iran taking effect. One question raised by some analysts Monday is how long the current low prices—which partly stem from production increases recently made by Russia and Saudi Arabia—can last. For instance, the U.S. has granted waivers to some countries allowing them to buy Iranian oil, but on Monday issued a warning to China and India that there would be “consequences” if they keep buying from Iran. If tensions rise, prices could start to feel the heat, however much crude Russia and Saudi Arabia pump out. Speaking of them, OPEC is scheduled to hold a meeting this weekend, so investors might want to consider checking headlines. Recently the Saudis have been talking about how they want to keep markets supplied in the absence of Iranian oil. But will they adopt a different tone at the meeting after the quick descent in U.S. crude from above $76 last month to under $63 by early Tuesday? That remains to be seen.
P/Es Do Something They Haven’t In a While: For the first time since last spring, the S&P 500’s (SPX) forward price-to-earnings (P/E) ratio is under the five-year average. As of early this week, the forward P/E—which is based on analysts’ predictions for S&P 500 earnings over the next 12 months—stood at 15.6, according to Factset. That’s below the five-year average of 16.4, but above the 10-year average of 14.5. The 10-year average, of course, includes the deep bear market of 2008/09, and figures from that era will soon be out of the equation, probably raising the 10-year P/E accordingly. The lower P/E recently comes as S&P 500 companies have reported a 24% average rise in earnings per share for Q3, so far. That’s a huge number, but most analysts expect EPS growth to slow to below 10% in 2019, which probably helps explain some, though not all, of the market’s recent challenges.
Ghost of Midterms Past: It’s never a good idea to think that past market action necessarily tells us something about the future, but big events like midterm elections sometimes can play into price direction in the following months. In 2014, the SPX had climbed nearly 10% over the six months heading into the November election, reaching 2000 for the first time. During the following six months, the SPX saw its pace of gains slow, but did climb another 3%. In 2010, the SPX entered November with solid gains of about 6.4% over the previous six months, and climbed another 11.7% by May 1. Things arguably are quite different this year, in part because the economy was still emerging from recession in 2010 and had more monetary policy support propping it up in 2014. Also, trade wars weren’t raging. If a tighter lending environment and trade fears continue to be the big stories going forward, the election’s long-term impact might not be end up being a big story—however things turn out tonight.
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