U.S. equities wilted on Monday as a rally at the open gave way to a slow, tortured decline into the red that the bulls — tired after months in a relentless uptrend — were powerless to stop. This dynamic was best seen in the way General Electric (NYSE:GE) succumbed to selling pressure today, down 6.3% undoing the ridiculousness from Friday: after initially falling 8% post-earnings before a ridiculous end-of-day melt up pushed shares back into the green for a gain of 1%.
It was a relatively quiet session as investors prepare for what will be the busiest week of the third-quarter earnings reporting season. Some 40% of S&P 500 companies are scheduled to report.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P lost 0.4%, the Nasdaq Composite lost 0.6% and the Russell 2000 lost 0.8%. Treasury bonds were stronger, the dollar gained, gold was little changed after rallying mid-day on word President Trump is near naming his choice for Federal Reserve chairman, and crude oil gained 0.1%.
Breadth was negative, with decliners outpacing advancers 2-to-1 on average volume. Utilities led the way with a 0.1% gain while telecoms were the laggards, down 1%.
PetMed Express (NASDAQ:PETS) gained 18.2% after reporting a quarterly earnings beat on a shift to higher margin items. Seagate (NASDAQ:STX) gained 12.6% after reporting better-than-expected results amid lowered expectations.
On the downside, Eldorado Gold (NYSE:EGO) lost 28.6% after noting lab tests lowering expectations for gold recovery at its mine in Turkey. Hasbro, Inc. (NASDAQ:HAS) fell 8.6% despite reporting an earnings beat as revenues were guided below expectations on headwinds from the Toys R Us bankruptcy.
Wall Street sentiment remains at a high fever, encouraged by hopes for action on tax legislation — with the Senate passing a budget resolution last week necessary to remove the filibuster threat from Democrats — and expectations that President Trump will nominate Fed governor Jerome Powell (a status quo choice) to become the next Federal Reserve Board Chair.
Fiscal policy revving up. Monetary policy still easy and likely to remain that way. Corporate profits high. Unemployment extremely low. Utopia. At least until inflation appears. Which it hasn’t. So, no reason to worry.
Click to Enlarge For now, perfection is in the air: The S&P 500 recorded a new record high every single day last week, a new weekly record for the last six weeks, and a record monthly close for the last seven months.
Yet, this is not without some hand-wringing as the bull market is already one of the longest and most powerful in history, bringing forth calls to caution. Barron’s recently worried about the rise of computer-driven investing in the “Black Monday 2.0: The Next Machine-Driven Meltdown” piece citing a number of recent “flash crashes” as possible early tremors of a larger decline coming.
The Wall Street Journal noted a trend of institutional outflows from equities this year as valuations are stretched, geopolitical tensions remain high, and the Fed continues to tighten policy. Another WSJ article focused on a lack of volatility, low volume, no catalyst, and a shift towards passive investing making trades crowded.
But the optimism in the WSJ’s “Why, Oh Why, Can’t We Have a Decent Stock Bubble?” cited the reason none of the above concerns have mattered so far: A global growth upswing, the post-oil decline earnings bounce back, and still-ample global liquidity conditions that’s fueling ongoing corporate buybacks and a “reach for yield” dynamic.
Again, outside of nuclear war with North Korea, the only thing that will change any of this will be a clear and persistent rise in inflation.
Another factor to keep an eye on — since Wall Street doesn’t seem to care at this point — is that corporate earnings growth is actually slowing now that the easy comparisons to late 2015 and early 2016 have been lapped. FactSet notes that third-quarter S&P 500 earnings growth stands at just 1.7% vs. the 3.0% expected at the end of the quarter and the 7.5% expected at the start of the quarter.
This is down from the 10.3% growth in Q2 and 14% growth in Q1 — which represented the first back-to-back quarters of double-digit growth since 2011.
Check out Serge Berger’s Trade of the Day for Oct. 24.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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