Stock Market Outlook for April 17, 2017
Treasury yields breaking down as investors become risk averse.
**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates. Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities. As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.
Stocks Entering Period of Seasonal Strength Today:
Stocks closed lower on Thursday as investors reacted to news that the US had dropped a mega-bomb in Afghanistan. The S&P 500 Index shed almost seven-tenths of one percent, closing at the lows of the session. Financial stocks were among the laggards, despite better than expected quarterly reports from JP Morgan and Citigroup. The move follows another leg lower in treasury yields, which are now sitting at the lowest levels of the year after breaking a trading range that spanned the past few months. Looking at the 10-year Treasury Yield, the breakdown projects a calculated move back towards support at 2.00%. Long-term moving average support at the 200-day presently hovers around 2.05%. Seasonally, yields typically rise in the month of April as investors adopt a risk-on bias within cyclical assets.
On the economic front, a report on retail trade raised concerns pertaining to consumer spending, despite upbeat sentiment data released in recent months. The headline print indicated that retail sales declined by 0.2% in March, missing estimates calling for no change (0.0%). Excluding gas and autos, sales were higher by a tenth of a percent, still two-tenths of a percent below the consensus forecast. Stripping out the seasonal adjustments, total retail trade was higher by 15.3%, much more than the average increase for March of 12.6%. This is the largest March increase since 2010 when the economy began to rebound following the recession. Year-to-date, the change in retail trade is slightly above average (-12.4% vs. –13.1%), a rebound from the below average level recorded in February. Isolating the impact of autos, retail trade and foods services is trending 3.2% above average, exceeding the pace set this time last year. The impact of autos was certainly a negative on the aggregate result, emphasizing a trend that we have argued previously, away from spring purchases and towards end of year holiday buying as consumers take advantage of the deals in the month of December. Auto sales are presently 13.2% below the 20 year average trend through the first three months of the year. Turning to the strength in the report, furniture, building material, electronic, health, and miscellaneous stores all recorded above average results in March, overcoming the negative effects of winter storms that hit the US northeast. An above average increase in the most discretionary category, food services and drinking places, also adds to the sense that consumer spending is still alive and well. While the various reports are now speculating upon the impact that this report will have on first quarter GDP based on the headline contraction, it is difficult to look at the details of retail trade as being anything other than solid. Typically April, and arguably March as well, tend to see economic data that is highly distorted due to the seasonal adjustment factor failing to properly account for the “roving holiday” of Easter, which can have a positive impact on sales leading up to the event. This may account for the difference between the good non-adjusted results and the lacklustre seasonally adjusted headline, which analysts are concluding is the result of delayed tax refunds. We shall see how the adjustment factor resolves itself in the month ahead.
Friday also saw the release of the latest consumer price index (CPI) report, the result of which also failed to garner any enthusiasm. The headline print indicated that CPI declined by 0.3% last month, missing estimates for no change (0.0%). Less food and energy, the decline was more muted at 0.1%, but still less than forecasts calling for a 0.2% rise. Stripping out the seasonal adjustments, the All Items Consumer Price Index for All Consumers increased by 0.1%, less than the average increase for March of 0.5%. Excluding the more volatile components of food and energy, the increase was the same as the aggregate result at 0.1%, still firmly below the average increase of 0.4% for the third month of the year. This is the lowest March increase in the 20 year history that was studied. The result has weakened the year-to-date change to below the seasonal average trend, placing at risk the 2% annual threshold that has become average for the calendar year. The average is also inline with the Fed’s target inflation rate, a target they’ve struggled to sustain throughout the recovery. Inflationary pressures are typically the greatest in the first half of the year, but March’s report is certainly not reflective of this average tendency.
Sentiment on Thursday, as gauged by the put-call ratio, ended close to neutral at 0.98.
Sectors and Industries entering their period of seasonal strength:
Seasonal charts of companies reporting earnings today:
S&P 500 Index