After a sharp rebound in equity markets on Friday, investors are left recalibrating their perspective on risk yet again. Whether or not the U.S. economy’s relative strength can shield corporate earnings or if the slowdown in China, Europe and Japan will give off insurmountable headwinds are two central questions facing market observers. In an interview yesterday with Institutional Investor, Howard Ward, chief investment officer for growth equities at GAMCO Investors in Rye, New York, laid out the case for third-quarter earnings and guidance announcements to remain upbeat in the coming weeks. “I think that this season is going to be very much business as usual and am highly confident that at least 70 percent of reporting S&P 500 companies will beat consensus estimates,” he said. In Ward’s view, European leadership has failed to implement badly needed structural reform and European Central Bank president Mario Draghi has begun to communicate that Europe’s ills cannot be cured by monetary policy alone. Ward also notes that Ebola and other geopolitical factors threaten economic interruptions. Despite these shadows, Ward sees the recovery in the U.S. as a big shot in the arm for U.S.-centric companies and sees a strong dollar as only a temporary headwind for firms that have a greater international reach. He also notes that the lack of yield in global bond markets can force investors to continue to hold equities. “With ten-year Treasuries at 2.2 percent, ten-year Bunds under 1 percent and Japanese Government Bonds yielding under 0.5 percent, stocks won’t have to go up very much to look attractive by comparison.”
Monday, October 20: The week kicks off with producer prices for September in Germany. With deflationary fears still very much in effect across Europe, this will be watched for any signal of prices bottoming in wholesale markets. Large-cap equities reporting quarterly earnings include IBM and Halliburton; however Apple’s announcement following New York market close stands to be the earnings report headliner.
Tuesday, October 21: China is scheduled to announce third-quarter gross domestic product, with forecasts showing a moderation in the pace of growth. Industrial production and retail sales data for September will also be released, putting speculation on growth prospects for China firmly in the market narrative spotlight. Investors are likely to see commodities markets to be particularly reactive to any surprise in production numbers. In the U.S., existing home sales for September will be released with expectations for the pace to rise modestly for the month. Companies reporting quarterly earnings include Harley Davidson and Yahoo.
Wednesday, October 22: Japan will release September trade data. With lackluster growth despite aggressive easing by the Bank of Japan, any disappointment in export and import data will weigh heavily on sentiment in Japanese markets. The Bank of England’s Monetary Policy Committee is scheduled to meet. Consensus forecasts predict no policy shift. On deck for release in the U.S. is critical CPI data. Another key data point for the day, especially with the present volatility in the oil market, is the Energy Information Administration’s stockpile data release. Among equities that will host earnings calls on Wednesday are Abbott Laboratories, GlaxoSmithKline and Wynn Resorts.
Thursday, October 23: China is again likely to be a focus of market narratives on Thursday, with the release of preliminary October HSBC manufacturing purchasing managers’ index (PMI) figures for October. Manufacturing PMI will also be released for the primary European economies as well as for U.K. retail sales for September and October consumer confidence index levels for the euro zone. U.S. initial jobless claims will be closely watched after last week’s surprise fall. On an extremely busy day for corporate earnings, Caterpillar’s earnings announcement, scheduled for 7:30 am U.S. Eastern time, will be of interest to investors looking for signals of demand from developing Asia.
Friday, October 24: September house price data in China and GfK Consumer confidence index levels in Germany are among the key data points for Friday. But preliminary third-quarter GDP for the U.K. is likely to steal the macroeconomic spotlight, however, as economists predict a modest moderation from second-quarter levels. Ford and UPS are among the large-cap equities reporting on Friday.
Portfolio Perspective: Volatility Could Stay Awhile — Robert Kavcic, BMO Financial Group
The ride got even wilder for equity markets this week, with the S&P 500 sliding to a six-month low at one point, and the Toronto Stock Exchange (TSX) diving deeper into correction territory before rebounding late in the week. The S&P 500 fell 1 percent when all was said and done, while the TSX managed to end flat. The recent sell-off beat the S&P 500 — well below its 200-day moving average in very short order. To find such a dramatic move, you’d have to go back to the 2008–’09 financial crisis or the U.S. credit rating downgrade in 2011. The excuses were all lined up this week. But one by one, they failed to justify such a dramatic move. China is softening, true. That’s been coming for ages, though and growth is still holding slightly above 7 percent. Europe is stagnating, no doubt. Hopes weren’t exactly high on this front going into October. Oil prices plunged to the low $80s per barrel. Terrible for Canadian stocks, yes, but a sizable tax cut for U.S. consumers. U.S. retail sales disappointed in September. Really? Enough to carve more than 400 points from the Dow at one point on Wednesday? All the while, the third-quarter earnings season has shifted into high gear, with better-than-expected results from the likes of GE and Goldman Sachs Group. Investors have paid little attention, however.
The main reason for the swift turn in stocks probably begins with an E. Not because Ebola’s spread is probable yet. It’s because the economic cost of it spreading in North America would not be small considering the impact on travel, holiday shopping, and just simply avoiding contact. The initial response has also done little to quell uncertainty — in fact, it’s done just the opposite. Sifting through all the possible bearish explanations above, it’s notable that the S&P 500 began to break down on October 1, two days after the first confirmed U.S. diagnosis, then slid sharply below the 200-day moving average on October 13, the first trading day after the first nurse was confirmed positive. The deep dive this past Wednesday followed news of contraction by the second nurse; it’s no coincidence. Since at least one of these patients was reportedly not properly isolated, markets could, theoretically, have to wait 21 days before getting an all-clear on the virus being contained. Each new case in the interim could reset the clock. That potentially sets up a pretty volatile few months for stocks and broader financial markets until it gets sorted out.
Robert Kavcic is a senior economist for BMO Financial Group in Toronto.
