Ameriprise Financial : Markets Appear to Hold Steady as Q3 Earnings are Released

Earnings are the main focus currently among those not preoccupied with the election, and those trying desperately not to be. We are a little more than one-fifth through reporting season and so far the results are better than expected, as usual. Factset now reports that a decline of just 0.3 percent is projected for the third quarter when all is said and done, but that is down from -2.0 percent when the quarter ended, as a higher than usual percentage of companies have exceeded expectations.

If the pattern holds throughout, a positive result in the aggregate may appear for the first time in six quarters. The big banks started things off by easily beating forecasts, so the remaining pace may moderate some. Nevertheless, the third quarter is shaping up to have been positive on both the top and bottom lines overall.

Can Economic Data Keep up with Earnings Growth?

Of course, for earnings growth to stay positive, economic growth needs to firm from the first half's anemic pace. This week brings the advance estimate of third quarter GDP and the Bloomberg consensus estimate is calling for a pace of 2.5 percent. The current GDP estimate from the Atlanta Fed is just 2.0 percent, due in part to weak personal consumption and construction activity in August.

A weaker than anticipated report would no doubt rekindle skepticism about the current near-consensus expectation of a Fed rate hike in December, to which the futures market currently assigns a 68 percent probability. Last week's data was mixed, but strong enough to keep forecasts of a December rate hike intact.
Housing starts in September fell well short of expectations, but building permits and existing home sales exceeded them. Core consumer prices were softer, but only fractionally, pushing the year-over-year rate to 2.2 in September from 2.3 percent in August. The headline rate, however, rose to 1.5 from 1.1 percent.

Meanwhile in the Bond Market and Overseas …

Bond yields fell sharply last week, with the yield on the ten-year note dropping to 1.74 from 1.80 the previous week. During the first two weeks of October the yield had marched steadily higher in lockstep with the firming dollar, climbing 21 basis points through last Friday as the DXY dollar index rose from 95.5 to 98.0. However, that relationship broke down somewhat last week due, in part, to the more moderate inflation data, as yields reversed while the dollar continued to firm, with the DXY ending the week at 98.7. In contrast, the yield on the more Fed sensitive two-year note declined by just one basis point on the week, closing at a yield of 0.83 percent.

Overseas, the week began with some good news for a change out of Europe. After a protracted impasse it appears that a government may be formed in Spain, and stocks are responding favorably. In midday trading Spanish equities were higher by 1.5 percent, and the EuroStoxx 50 index is higher by 0.9 percent, helped further by a strong Purchasing Managers' Index (PMI) report for October. Asian markets were strong overnight as well.

The U.S. election is now down to its final two weeks. It was at this time in 2012 that market volatility began to rise somewhat, with the VIX index climbing from 15 to 18, a level which persisted for approximately a week following the election before falling back. So far this time, for whatever reason, we have yet to see a rise in volatility. In fact, last week the VIX fell from 16 to 13. The polling average from Realclear Politics shows Clinton ahead by 6.1 percentage points in a two-way race and 5.8 points in a four-way race. Those results are down from last week, when the Clinton advantage was 7.0 and 7.1 percent respectively.

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The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.

The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
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