U.S. corporate earnings drive markets
Economic data and events took a back seat to U.S. corporate earnings this week as results have been a major catalyst for markets. By the end of this week 292 companies in the S&P 500 are expected to report with the index on track at time of writing for slight earnings growth from the year earlier period. If the gains hold it would mark the first time in five quarters that earnings have turned upward. Turning to U.S. economic news, consumer confidence slipped in October as did durable goods orders while jobless claims ticked down last week. In Europe, Belgium reached an agreement to back a trade deal with Canada Thursday opening the door to official approval by the EU. If the deal had fallen apart it would have thrown the bloc’s trade relationship with Canada into question along with a future, potential deal with Britain following its exit from the euro zone. In related news and also on Thursday, Great Britain released Q3 GDP data that showed the economy growing a better-than-expected 0.5%. The data was closely watched as it captured the first, three-month period after Brexit and appears to dispel recession fears fanned throughout the summer. Elsewhere, Japanese trade data released Monday showed weakness but on the plus side it wasn’t as bad as expected. Japanese exports were off 6.9% yoy while imports fell 16.3% in the 12-month period. A measure of Japanese manufacturing expectations was also positive as a survey of purchasing managers rose to 51.7 in October from September’s 50.4 – the fifth straight rise in the gauge which tracks anticipated orders among factory managers. Looking ahead, the U.S. reports Q3 GDP data today which is expected to show a pick-up in growth versus the previous three quarters.
Stocks end Thursday mixed
With one trading day left in October most major North American stock benchmarks are up for the month but down for the four days covered in this report. In the U.S., the Dow rose 24 pts. to close at 18,169, the S&P 500 fell 8 pts. to end at 2,133 and the Nasdaq shed 32 pts. to finish at 5,215. In Canada, the TSX continues to hang onto a solid, double-digit gain for the year but was down 106 pts. to settle at 14,833 through Thursday close.
Earnings season looking solid on better results, stay with cylicals
The Q3 earnings results have generally been positive so far and we continue to advocate a cyclical approach with both value and growth style biases at the expense of shunning defensives (ie. low-Vol, Staples, Telecoms, Utilities, REITs, etc.). Although we have seen early success in this view since the beginning of July, we believe that the recent underperformance of defensive stocks has further to run. With valuations at historical extremes, and positioning still overweight, a turn in inflation could prompt a further rotation. Value sectors we prefer include bank, insurance, and auto stocks, which continue to trade near P/E lows despite positive EPS revisions. Energy stocks are still favored as OPEC continues to make small steps toward a possible deal, while technology and pockets of health care would comprise our growth exposure. We also advocate an overweight to non-US regions such as Canada and Emerging Markets.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.