Market Perspective for October 16, 2015

Equities concluded another positive week following a substantial rally on Thursday. The S&P 500 Index followed yesterday’s advanced 1.49 percent, with an additional gain of 0.46 percent today, setting the stage for an approximate 1.00 percent gain on the week.

The catalyst for the advance was a shift in sentiment regarding interest rates. Articles in Thursday’s Financial Times and the Wall Street Journal argued that the Federal Reserve is likely to wait until 2016 to raise rates. This sparked equity buying by investors, but speculators in the futures market became more hawkish, with March 2016 rate hike odds rising back above 50 percent after a brief drop.

Although J.P. Morgan (JPM) weighed on stocks when it missed revenue estimates on Tuesday and warned on fourth quarter revenues, better reports have emerged over the last few days. Bank of America (BAC) reported strong earnings on Wednesday, aided by the end of litigation costs. Earnings improved from last year’s losses to earnings of 37 cents per share in the third quarter of this year. Litigation cost the bank $6 billion last year, but in the latest quarter, those costs fell to a mere $175 million. One factor impacting revenues is a drop in trading profits; a concern that led us to favor regional banks this year.

Earlier today, General Electric (GE) fueled further optimism with reported earnings of 32 cents per share. That was 1 cent above reports from this time last year and 6 cents above consensus estimates.

Economic data remains solid, but the Atlanta Federal Reserve’s GDP Now model lowered its forecast to 0.9 percent growth for the quarter, due to retail sales ex-autos coming in weaker. The September consumer price index fell 0.2 percent, however, core inflation, which strips out food and energy, increased 0.2 percent last month, well within the Federal Reserve’s target range.

Due to delayed rate hike expectations, the 10-year Treasury yield fell below 2 percent. As a result, rate sensitive sectors such as utilities and real estate rallied. The U.S. dollar weakened as well, but foreign shares didn’t take advantage of the tailwind. iShares MSCI EAFE (EFA) and iShares MSCI Emerging Markets (EEM) both traded sideways during the week.

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