Weighing The Week Ahead: Can Earnings Season Spark A Rebound In Stocks?

We have a normal economic calendar with a focus on housing data. Earnings season will be in full swing. The background for this news will, of course, be the stock market volatility and decline of the past week. That story will command the early-week attention, especially if aggressive selling resumes. Recent earnings seasons have buoyed stocks, leaving the punditry with this question: Can earnings season spark a rebound in stocks?

Last Week Recap

In my last edition of WTWA I took note of rising interest rates asking whether they signaled the beginning of the end for the stock rally. That was a good call. The question dominated financial news on Monday and Tuesday, even though stocks barely moved. It was almost as if the news coverage was pre-planned, and events did not matter. That changed on Wednesday, when the major market decline gave legs to the story. The last edition of WTWA provided a good preview of this, but certainly no prediction of the sharp selling.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, including commentary on volume. Check it out.

The market declined 4.1% on the week. Wednesday saw the largest single-day loss since February. The weekly trading range was about 6.4%. Volatility spike higher, exceeding the long-term averages. The VIX implied volatility measure remained higher than the actual results. I summarize actual and implied volatility each week in our Indicator Snapshot section below.

Noteworthy

Have you already purchased your last car? Justin Rowlatt (BBC News) raises the provocative question and provides plenty of evidence. Internal combustion engines have 2000 parts, compared to about 20 for electric cars, which may have life spans of 500,000 miles.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

When relevant, I include expectations (E) and the prior reading (P).

The Good

Inflation data remained benign. PPI registered a gain of 0.2% up from P of -0.1% but in line with expectations. CPI gained only 0.1% P 0.2% headline and 0.1% core. E 0.2%.

High Frequency Indicators have turned positive, including the long-leading cluster. New Deal Democrat’s helpful weekly update breaks the data into two groups, providing both detail and a summary on each. The long-leading group has shifted back and for recently, and he continues to monitor it closely. For now, it is positive.

Economic growth for Q3 and forward remains strong. Calculated Risk summarizes the key sources, “It looks like GDP will be in the 3s in Q3?.

Market sentiment has turned negative – very negative. David Templeton (HORAN) updates the Fear and Greed picture, a positive contrarian factor.

The Bad

As has been the recent case, most of the “bad” news consists of indicators slightly off the best levels.

NFIB Small Business optimism was slightly off the high from last month – 107.9 vs. 108.8. Bespoke also looks at the reasons behind the headline number.

Initial jobless claims rose to 214K E 208K P 207K

Michigan sentiment declined to 99.0 E 100 P 100.1. Bespoke notes that sentiment remains near the recent highs and highlights the move in inflation expectations. Expectations for income growth were also lower. The survey period captured only part of last week’s decline, and probably none of it for most respondents.

The Ugly

Hurricane Florence led to 51 deaths and estimated damages of $30 billion to $50 billion. The events have also exposed other problems. The Bipartisan Policy Center provides a good analysis, with this comment on some needed reforms:

Hurricane Florence has, like many other recent disasters, exposed a variety of flaws in the pre-disaster and post-disaster policies of the United States. These gaps undermine the nation’s resilience, endanger residents, and further jeopardize the soundness of already aging infrastructure. For immediate recovery needs, Congress has repeatedly turned to supplemental funding as short-term fixes, but to prevent this level of destruction from reoccurring in the wake of the next disaster, there needs to be a dramatic overhaul of the national infrastructure investments and disaster framework. Spending more upfront, with a focus on increased resiliency and mitigation, saves money when a disaster hits. For every $1 spent on mitigation, an estimated $6 is saved that otherwise would have been spent in recovery costs.