Month: September 2016

Volatility returned to the markets this week in response to the dispute between Deutsche Bank (DB) and the Department of Justice.  Nevertheless, stocks pushed higher for the third consecutive straight week.

The S&P 500 Index gained 0.17 percent on the week, finishing the third quarter up 3.31 percent. The S&P 500 technology sector climbed 10 percent over the past three months, while Utilities fell 5 percent and consumer staples slid nearly 4 percent. Healthcare was flat, although funds with biotechnology exposure such as Fidelity Healthcare (FSPHX) performed better. The remaining sectors were up 2 to 4 percent.

On Tuesday, San Francisco Federal Reserve President John Williams claimed the economy could sustain higher interest rates and that Fed inaction was a threat to the recovery. Esther George, president of the Kansas City Fed, believes it is time for the central bank to tighten monetary policy. These reports were offset Wednesday when Federal Reserve Chair Janet Yellen hinted that, with the right authority, the U.S. central bank could directly purchase stocks like the Bank of Japan. Still, the odds of a December hike finished the week above 60 percent.

There was potential progress at the recent OPEC meeting with a deal to cut oil production. Oil prices and energy stocks rallied on the news. We still don’t know if production will actually fall though. The cut itself only reduces production to early 2016 levels, Iran is exempt from the deal and OPEC countries are notorious for cheating.

New home sales fell less than expected while price gains slowed. Although the interest on fixed rate mortgages fell to yearly lows, the pace of new purchase applications decreased about 1 percent last week. The flash manufacturing Purchasing Managers Index (PMI) indicated slower growth in September. While the 51.8 reading was higher than expected, survey respondents indicated a slowdown in future hiring and new orders. Thursday’s weekly unemployment claims figures came in lower than expected, showing continued strength in the labor market. Finally, the Bureau of Economic Analysis increased its estimate of second quarter GDP growth to 1.4 percent thanks to a bump in business investment.

On the earnings front, shares of Nike (NKE) fell after the company reported fiscal first-quarter earnings. Although earnings per share (EPS) and revenues beat expectations, the athletic footwear and apparel maker forecast weaker sales growth. Shares of PepsiCo (PEP) rallied after it reported EPS and revenue numbers that beat analysts’ expectations on continued strength in its snack food operations.

BlackBerry (BBRY) reported an 89 percent year-over-year growth in software and service revenue, beating earnings and revenue expectations. Shares advanced strongly before giving up some of the gains on Thursday. Warehouse club retailer Costco (COST) announced better-than-expected earnings, but revenue growth was not as strong. Shares rebounded on the news, reversing five consecutive days of declines.

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P MidCap 400 (MDY)
iShares Russell 2000 (IWM)

The bulls have dominated the week, with only the Dow Jones Industrial Average briefly dipping into negative territory. The Russell 2000, Nasdaq and S&P 400 Midcap delivered the best returns, while the S&P 500 and Dow trailed. Dividend funds, such as SPDR S&P Dividend (SDY), outperformed the blue chip indexes as interest rates fell.

The CBOE Volatility Index has returned to the low teens and is at the ideal level for a slow and steady bull market.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
iShares iBoxx Investment Grade Bond (LQD)

Interest rate-sensitive bond funds rebounded over the past week following the Federal Reserve and Bank of Japan meetings. Corporate and investment-grade bonds led performance. Floating rate funds continued to outperform.

The 10-year and 30-year Treasury yields returned to early-September lows, fully reversing the month’s gains. The 3-month Treasury bill yield dropped more drastically, from 0.36 percent to 0.18 percent as rate hike expectations were pushed back to December.

Sector Performance

Energy followed oil prices lower last week as financials corrected with revised interest rates.  Utilities also fell, though cyclicals and industrial sectors rallied to small gains.

Subsectors performed far better last week. iShares Cohen & Steers Realty Majors (ICF) advanced as the REIT sector captured the upside from lower interest rates. First Trust Dow Jones Internet (FDN) rallied and VanEck Coal (KOL) added another small weekly gain. SPDR S&P Biotech (XBI) is almost back to its highs of 2016. SPDR S&P Regional Banking (KRE) substantially outperformed the overall financial sector with a small decline.

Fed Ex (FDX) propelled the transportation sector to gains last week, though the Dow Transportation Index, tracked by iShares Transports (IYT) remains stuck in its trading range.

Social media shares rallied this week as Google (GOOG), Disney (DIS) and Microsoft (MSFT) were all named as potential acquirers of Twitter (TWTR) this past week. Shares of the social media company rallied from a low of $18 this month up to $23.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

Oil prices have trended downward in a volatile pattern since August and is likely to remain in a bear market. OPEC is meeting this week, though any production deal is unlikely given the strained relations between Iran and Saudi Arabia.

Although commodity funds enjoyed a nice bounce last week, only coal remains in a short-term uptrend. Both SLX and COPX are below August highs and the bounce could be a counter-trend rally within a larger correction. SLX is also trading an important resistance area. Shares stabilized in the low $30s in early 2015 before plunging 50 percent. If the SLX bull rally of 2016 is going to stall or end, this is where it will happen. On the flip side, a breakout here could carry SLX up to the mid-$40s.

Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)
iShares Core Dividend (HDV)
WisdomTree U.S. Quality Dividend Growth (DGRW)
SPDR S&P Dividend (SDY)
iShares Select Dividend (DVY)

DVY and SDY, are still the best performing dividend funds in 2016 due to utilities exposure, while the more growth-oriented funds such as VIG and DGRW are still beating the broader S&P 500 Index. DGRW is leading three-month performance, however, ahead of HDV.

Dovish monetary policy paved the way for a rally last week. The Nasdaq hit a new all-time high and the Russell 2000 increased its 2016 gain to double digits. An extended rally into this week will have to overcome losses on Monday though, after trouble at Deutsche Bank (DB) weighed on global markets.

This will be a heavy week of economic data. August new home sales kicked off the week on a positive note at 609,000 last month, beating expectations by 9,000 homes. The flash services Purchasing Managers Index (PMI) data will be available on Tuesday and is expected to remain steady at 51. August U.S. durable goods orders, due out on Wednesday, are expected to fall 1.4 percent from a year ago.

Thursday’s weekly initial unemployment claims figures are expected to rise slightly while remaining near four-decade lows. August pending home sales data and the final estimate of second quarter U.S. GDP will also be released on Thursday.  Analysts anticipate a rise in September’s consumer confidence as well as the September Chicago PMI, while August personal spending numbers are expected to rise 0.1 percent, with core inflation forecast to climb 0.2 percent.

Oil market volatility is likely to continue this week with an informal meeting of OPEC oil ministers underway in Algiers. Shifts or freezes in production could dramatically impact short-term prices. With Russia and Saudi Arabia pumping at or near record levels, however, the long-term effects of a deal are in doubt.

Deutsche Bank’s financial position came into question after the United States Department of Justice’s targeted Deutsche Bank with a $14 billion fine. The move was interpreted by many as retaliation for the European Union’s $14 billion fine on Apple (AAPL). The German government has not committed to a bailout and Deutsche Bank has stated it has no intention to pay, though nervous investors sent shares to a new multi-decade low, nonetheless.

A few blue chip consumer stocks are scheduled to report this week ahead of the official October earnings season. Nike (NKE) is expected to report increased revenue, but lower earnings per share (EPS) versus the comparable year-ago period. The company is facing stiff competition and a shift in consumer trends following several recent product launches that have fallen flat. PepsiCo (PEP) will release its latest quarterly numbers Thursday before the bell. The company has seen a rise in the sales of juice and snacks, despite declining soft drink consumption. Analysts forecast EPS of $1.32, which is down slightly from the year ago period.

BlackBerry and Costco will also be reporting this week. BlackBerry (BBRY) is expected to report an EPS loss of $0.05 on revenues of approximately $394 million on Wednesday, while Costco (COST) is expected to deliver EPS of $1.73 on revenues of $36.95 billion on Thursday. Investors will focus on the company’s slower revenue growth and the impact from competitors like Wal-Mart (WMT) and online rivals.