Week of November 7, 2016
Global markets traded lower last week with all three major U.S. indices closing out the first week of November in the red. The Dow Jones Industrial Average, S&P 500 and the NASDAQ Composite ended down 1.5%, 1.94% and 2.77%, respectively. European stocks, measured by the MSCI Europe Index, also fell, dropping 1.84%. Their Japanese counterparts in the Nikkei 225 Average Index ticked 0.85% lower as well as investors moved out of equities.
This week we touch on oil and take a brief look at the current state of inventories. We follow this with a review of third quarter corporate earnings and the Federal Reserve's most recent meeting. We conclude with a fun story on candy corn.
Oil Stockpiles Jump
Crude inventories increased by a stunning 14.4 million barrels week over week against the market's estimate of 1 million barrels. It's the biggest jump in recent years and at 482.6 million barrels, stockpiles are approaching the upper limit of their average range this time of year. The record high inventories provoked skepticism about the impact of OPEC's planned production limit and renewed concerns over a global oil glut. Oil prices were down 4.7% last week with prices falling below $45 per barrel. The exaggerated hike in inventories was underscored by a rise in crude imports of approximately 2 million barrels a day. Most of the OPEC member countries continue to pump at top speed to have a higher level to negotiate from at the upcoming cartel meeting November 30 when the organization is expected to finalize production limits for its members. A positive outcome could bolster oil prices and create a firmer floor.
Chart: Change in stockpile from Jan 1, 2016
OPEC: Organization of the Petroleum Exporting Countries
Corporate Earnings Surprise
The latest earnings season continues to surprise on the positive side. Of the 423 that have reported earnings through November 3, 70% of the S&P 500 companies exceeded consensus profit estimates. The blended increase in earnings growth—an aggregate of the earnings already reported and the estimates of those to come—is 1.6% as of October 28, according to FactSet. This stands in stark contrast to the 2.2% decline projected on September 30 before earnings reporting season began. Earnings growth was led by the information technology sector while the energy sector was on the other end of the spectrum. On the revenue side, consumer discretionary companies reported higher numbers buoyed by increasing consumer spending while energy companies’ revenues were marred with lower oil prices. Is it a function of the bar being dropped too low that companies are beating both earnings and revenue expectations in large numbers and by wide margins? Investors will have to wait and see, however, according to Factset, if the S&P 500 Index reports growth in sales for the quarter, it will mark the first time the benchmark has seen year-over-year sales growth in since the fourth quarter of 2014.
Chart 1: Historical earnings beats
Chart 2: Q3 2016 beats by Industry
Fed Standing Pat Again
In its November meeting that concluded last Wednesday, the Federal Reserve kept interest rates unchanged. The committee did, however, signal a possible hike in December as the economy gathers momentum and inflation picks up. According to the Fed, economic risks appear to be roughly balanced with job gains remaining solid and household spending rising moderately. The unemployment rate was little changed, though. On the inflation side, market-based measures of longer-term inflation have moved up although still below the central bank's target. The Fed's comments on the topic seemed slightly more hawkish overall. Of the 10 voting members, eight voted to keep rates stable and two voted to raise. Despite usual market focus on the Fed, investors were not expecting a hike in November before the presidential election. The Fed funds futures remained mostly unchanged after the announcement and the December hike probability stands at 71% as of the end of last week.
Fun Story of the Week
Love them or hate them, candy corn is finally in season and probably just experienced the highest demand of all with Halloween a week or so behind us. However, one question has puzzled confectioners and it is perhaps the most important of all: what is candy-corn flavor? We all agree chocolate and vanilla have distinct flavors but candy corn is a bit nebulous like cotton candy or the generic "birthday cake". What's more, U.S. food regulators have not determined any ingredient standards for the sweet morsels. For example, ice cream isn't technically ice cream unless it has a predetermined amount of cream. For some historical perspective, George Renninger is credited by candy makers as the creator of the candy corn in the 1880s. It wasn't until Goelitz Confectionary company, now the jelly bean giant, Jelly Belly, started producing them en masse in 1898 that they gained a cult-like following. Interestingly, candy corn was also known as "buttercreams" or "chicken feed". Indeed, some of the original packaging featured a rooster with the phrase, "something worth crowing for", on the label.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
DJIA The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ COMPOSITE The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 The Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks is a price-weighted index comprised of Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange.
MSCI EUROPE INDEX The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
Energia, November 2016. https://www.energia16.com/news/u-s-crude-stocks-reach-historic-highs?lang=en
Economic Calendar, November 2016. http://www.economiccalendar.com/2016/11/02/fomc-november-decision-fed-leaves-policy-on-hold-continues-to-signal/
US Indices, November 2016. https://us.spindices.com/documents/additional-material/sp-500-eps-est.xlsx
Fact Set, October 2016. http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_10.28.16
Proper Research, November 2016. http://www.trpropresearch.com/pdf/This_Week_In_Earnings.pdf/
Wall Street Journal, October 2016. http://www.wsj.com/articles/yo-candy-corn-m-ms-and-oreos-are-all-up-in-your-flavor-1477666766