Market Watch for October 28, 2016

Global Portfolio Advisory Group

October 28, 2016

Market Watch

Big Picture

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.

Markets

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.

Equities

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.

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