Large-cap stocks rose for the seventh consecutive session on Monday, while bond markets were closed for the Columbus Day holiday, pushing down trading volumes.
In the end, the Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.1%, the Nasdaq Composite gained 0.2% and the Russell 2000 lost 0.1%. The dollar was little changed, gold gained 0.5%, and crude oil was hit with a 5.1% loss as producers start rolling over price hedges.
Asia was strong overnight, with the Shanghai Composite up 3.3%, the Shenzhen Composite up 4.2% and the Hang Seng up 1.2%.
The People’s Bank of China increased its pilot bank lending program to nine provinces, including Shanghai, from two previously. The program allows bank to pledge assets such as loans to the PBoC to secure cash. The chatter is that this is a Chinese version of the “quantitative easing” programs launched by the Bank of Japan, the Federal Reserve and the European Central Bank already.
All of this fits with the recent theme of stocks rising on hopes of renewed, or continuing, monetary policy support. In the case of the PBoC, the BoJ and the ECB, it’s about an increase in stimulus in response to weakening economic data and the drop back into deflation in Japan and Europe.
Here at home, it’s about how the Fed is responding to a weak September jobs report, as well as ongoing overseas pressure, by pushing back its rate hike timing. Chicago Fed President Charles Evans was out today, talking up his preference to wait until the middle of 2016 before lifting rates.
Utility stocks led the way today with a 0.9% gain, while energy stocks were the laggards, down 1.1%. EMC Corporation (NYSE:EMC) gained 1.8% after agreeing to be acquired by Dell Inc. (NASDAQ:DELL) for around $33.15 a share — a total deal with about $67 billion. Twitter Inc. (NYSE:TWTR) fell 6.8% after Re/Code reported the company is planning to make layoffs this week.
Walt Disney Co (NYSE:DIS) gained 0.7% for Edge subscribers, who are also focused on community banks via the KBW Regional Banking ETF (NYSEARCA:KRE), which gained 0.8%.
All eyes are on the surge of earnings coming up, with JPMorgan (NYSE:JPM) and Intel Corporation (NASDAQ:INTC) kicking things off on Tuesday. By the end of the week, the likes of Bank of America (NYSE:BAC), Netflix, Inc. (NASDAQ:NFLX), General Electric (NYSE:GE) and Citigroup (NYSE:C) will have reported results.
According to Factset, third-quarter earnings for the S&P 500 are expected to decline 5.5% in what could be the first back-to-back drop in earnings since 2009. Already, 76 S&P 500 companies have issued negative earnings per share guidance vs. 32 issuing positive guidance.
The team at Bank of America Merrill Lynch led by Savita Subramanian believe actual results won’t be as bad as analysts currently believe thanks to a relatively flat U.S. dollar during the third quarter (which will help the value of foreign earnings).
With 20% of S&P 500 stocks set to report this week, they are looking for overall results to come in roughly unchanged over the year-ago period
Also, an analysis by the Bespoke Investment Group finds that when expectations for an earnings season are low, as they are now, stock tends to outperform as actual results roll out.
They based this on the history of market gains when the gap between companies with negative analyst earnings revisions vs. those with positive revisions. When it is negative, like now, the S&P 500 finished with an average gain of 2.3% six weeks later vs. an average loss of 1.2% when expectations were high and revisions were positive.
Taken one step further, the spread between negative and positive revisions is quite large currently at -24% — a depth only seen four other times during this bull market. During those four other times, stocks rallied an average of 4.4% with gains each time.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
