For the week ending October 23, 2015, both the Dow and the S&P 500 had strong gains as the ECB reiterated its support for monetary easing, and China announced a surprise rate cut. The Dow gained 2.5 percent; the S&P 500 gained 2.1 percent. In other news: ECB signaled it is ready to increase its bond-buying program; China has announced a 25 basis-point rate cut; and, tech stocks are the winners in this week’s earnings reports. Below is a recap of the markets for each day of the week.
The markets were fractionally up on Monday on a strong housing market index report, which points to acceleration in new home construction. Oil dropped $0.75 to $46.50. The Dow gained fractionally to 17,230; the S&P 500 gained fractionally to 2,034.
On Tuesday, the markets were fractionally down on Wednesday despite a strong construction report indicating a big boost in multi-family units (flat for single-family units). Oil dropped $0.50 to $46.00. The Dow fell fractionally to 17,219; the S&P 500 dropped fractionally to 2,031.
The markets dropped on Wednesday on little economic news. Oil dropped $0.75 to $45.25. The Dow fell -0.30 percent to 17,168; the S&P 500 dropped -0.58 percent to 2,019.
The markets rose strongly on Thursday on very good news from the initial jobless claims report, and a statement from the ECB that it will continue its monetary easing as needed. The Dow rose 1.87 percent to 17,489; the S&P 500 rose 1.66 percent to 2,053.
On Friday, the markets again rallied on a surprise rate cut by China. Oil dropped just under $45. The Dow rose 0.90 percent to 17,646; the S&P 500 rose 1.10 percent to 2,075.
The Dow and the S&P 500 both rallied this week on good earnings reports, an easing statement by the ECB, and a surprise rate cut by China. Tech stocks rallied on excellent earnings reported by Microsoft, Google, and Amazon, soaring over 5 percent. Analysts are now predicting the S&P 500 will hit 2,100 before the end of this year.
ECB president Mario Draghi has hinted that the trillion-euro bond buying program will be reexamined in December as inflation remains stubbornly low and emerging markets remain weak. Draghi reiterated that the ECB remains committed to using whatever measures are needed to improve growth in the euro zone. December 3 is the date that inflation forecasts for 2016 and 2017 will be released. There is a strong argument for additional easing if the 2017 inflation forecast is around 1.5 percent. The options being considered for additional easing are: extending the duration of QE beyond September 2016; or, raising the ceiling for asset purchases beyond the current 60 billion euros
China’s central bank (PBOC) has cut rates for the sixth time since November. The PBOC has stated it will lower the bank lending rate by 25 basis points to 4.35 percent; and, it will lower the deposit rate by 25 basis points to 1.50 percent. Also of interest was the news that China’s yuan may soon be included in the International Monetary Fund’s (IMF) basket of reserve currencies; the final decision will be made in November by the IMF board.
Technology stocks lead rally that leaves the S&P 500 positive for the year. Microsoft, Google parent Alphabet Inc., and Amazon added more than $80 billion combined as all three stocks increased in price over 5.6 percent; technology stocks overall surged 3 percent. Internet and software stocks have been the biggest contributors to the market recovery since the selloff in August of this year. Jonathan Golub of RBC Capital Markets is forecasting that the S&P 500 will close above 2,100 before year end.
The bottom line: continued strength in housing will help offset weakness in manufacturing, but not enough to encourage a rate hike this year. The strength in the economy will continue to lie with the consumer. Globally, the big news was the surprise rate cut by China’s PBOC, and the ECB’s willingness to increase its stimulus program. Inflation remains a negative in both the UK and Eurozone.
The focus next week in the U.S. will be the FOMC statement. While there is very little chance of a rate hike this year by the FOMC, investors will be focused on any wording changes that would provide further guidance. Globally, in focus next week will be not only the FOMC but the Bank of Japan and its inflation and economic forecasts. In addition, the focus will be on the following: UK (GDP); eurozone (EC Consumer and Business Confidence, Harmonized Index of Consumer Prices, Unemployment); Germany (Ifo Business Survey, Retail Sales, Unemployment); China (nothing); and Japan (Retail Sales, Industrial Production, CPI, Unemployment).
Year-to-date the markets are mixed: Dow -1.0%; S&P500 +0.8%; Nasdaq +6.2%.
The Markets for the past week were: DJIA up 2.5%; S&P500 up 2.1%; Nasdaq COMP up 3.0%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.88%; Silver (SLV) down -1.05%; Oil (OIH) up 0.98%; Dollar (UUP) up 2.64%; 30-year Bonds (TYX) rose 4 basis points to 2.90%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 14.46% reflecting the lower probability of a rate hike this year, the rate cut by China, and the potential increase in the ECB’s QE (in either duration or ceiling).
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full:
o Monday – New Home Sales, Dallas Fed Mfg Survey
o Tuesday – Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence
o Wednesday – EIA Petroleum Status Report, FOMC Meeting Announcement
o Thursday – Weekly Jobless Claims, GDP, Pending Home Sales Index
o Friday – Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment
If you’re trading options, it is suggested trading Put Credit spreads for next week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 1992 and 2161 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.