The narrative remains the same.
Markets continue to ponder over 4 primary factors:
- Interest Rates
- Oil Prices
- The election
Stocks finished the week down roughly 1% with worries over rising interest rates, weak corporate earnings, and the upcoming Presidential Election.
Bonds finished the week down slightly as worries over rising interest rates continue to hamper the bond market.
- Interest Rates – the odds of an interest rate hike at the December Fed meeting held a firm grip on stocks and bonds this week. As you can see from the CME FedWatch tool below, we have a 64% chance of a 25 basis point rate hike at the December 14th meeting and a 5% chance of a 50 basis point hike. The Fed raises rates to control inflation and prevent the economy from overheating.
- Earnings – The Q3 earnings season has begun and according to Fact Set, with 7% of companies in the S&P 500 reporting, 76% have reported earnings above the mean estimate and 62% of companies so far have beat their revenue estimate. As you can see from the Fact Set graphic below, earnings for Q3 2016 are expected to be roughly flat from Q2 2016 but an improvement over Q1 2016. Analysts are still estimating improved earnings in 2017 as the dollar has weakened and oil prices have increased. You can also see that earnings have been choppy and flat since 2014 which is why the stock market has also been roughly flat the last couple of years. Stock prices typically follow earnings.
- Oil Prices – one of the biggest drags on corporate earnings has been losses in the energy sector. As the price of oil has trended upward since bottoming in February, earnings from energy companies are starting to improve. Below is a two-year chart of light crude oil which closed the week just over $50 per barrel.
- The election – Many polls show a widening lead for Hillary Clinton in the November 8th Presidential Election. However, polls can be highly inaccurate as we saw with the Brexit vote earlier this year. Markets don’t like uncertainty and we will continue to see volatility heading toward election day. Please see last week’s post for a more detailed look at the election and its impact on markets. Here is a link: Market Update Election Edition
So once again, traders will try to anticipate the short term market implications of the factors above and trade accordingly. But as long term investors I believe the best approach is to patiently watch and wait. Below is a chart of the S&P 500 over the last 5 years. There have been many ups and downs, but the long term trend continues to climb after a choppy flat stretch over the last 2 years.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not an indication or guarantee of future results