Market Watch for October 21, 2016

Global Portfolio Advisory Group

October 21, 2016

Market Watch

Big Picture

Growth worries resurface

Global growth worries resurfaced this week amid weak Chinese economic data and concerns over a Fed rate hike. Chinese trade was the big disappointment as data showed exports falling 10% yoy through September.
Imports were less worrisome as they didn’t slip in terms of volume but did marginally fall as measured in U.S. dollars. Concerns about the pace of Chinese growth are not new but they had taken a back seat to other events
over the past several months. Turning to the U.S., the Federal Reserve acknowledged in minutes released Wednesday that the timing of an interest rate hike could be “relatively soon.” This builds on recent comments
from central bank officials and good U.S. economic data which have both heightened expectations for a move before the end of the year. Also in the U.S., the number of Americans filing for jobless benefits remained at a
43-year low last week while Q3 corporate earnings season got started Tuesday. Companies in the S&P 500 are expected to report an earnings decline for the sixth consecutive quarter but revenues are expected to break the
pattern of declines. What will transpire is anybody’s guess at this early stage but the numbers will be closely watched with markets near record highs. Elsewhere, word that Russia would support OPEC’s attempt to curb its
collective output helped oil prices reach a one-year high Monday but crude was unable to hold the gains through Thursday. Looking ahead, U.S. retail sales numbers are reported today while central bank chief Yellen
speaks this afternoon.

Markets

U.S. stocks fall

Major U.S. stock benchmarks retreated for the four days covered in this report. In the U.S., the Dow fell 141 pts. to end at 18,098, the S&P 500 gave back 21 pts. to settle at 2,132 and the Nasdaq was off 79 pts. to finish at 5,213. In Canada, the TSX bucked the trend rising 77 pts. over the holiday shortened week to end Thursday at 14,643.

Equities

Q3 2016 Earnings Season Underway

Q3 2016 earnings expectations have once again been lowered as estimates were cut in all the GIC sectors over the past 3 months. This is a pattern we have seen this entire cycle (2009-current). With this decline in
estimates, we expect reported results to show modest upside. Looking out, earnings will be buoyed by abating macro headwinds relating to the US dollar and crude oil. As long as these macro headwinds have stabilized
and/or begin to recede (EUR/USD, WTI) we don’t see an imminent reduction in earnings as there has not been a large capex surge or an excessive hiring boom, or inventory build-up to pull forward investment. In addition,
company guidance for Q3, although negative, is coming in better than normal. Finally, sentiment remains resilient this earnings season as the market so far is rewarding companies with earnings surprises/positive guidance more so than punishing companies who disappoint.