Hollywood News Dominates Wall Street Today As Disney Announces Big Merger

It’s a deal. Walt Disney Co DIS announced Thursday it would buy assets of Twenty-First Century Fox Inc. FOXA for $52.4 billion in what media experts are calling a historic Hollywood merger. The merger news came the day after the Fed raised rates for the third time this year, and as the European Central Bank (ECB) held rates steady. Stocks rose slightly in pre-market trading.

The deal could give DIS more muscle to compete against companies like Facebook Inc FB, Apple Inc. AAPL, Amazon.com, Inc. AMZN, Alphabet Inc GOOG GOOGL and Netflix, Inc. NFLX in online video. Shares of DIS inched down a little in pre-market trading and are up only slightly over the last month since word of a possible deal began to hit the Street.

In a sense, the deal might be viewed as a hedge against the possibility of net neutrality. Federal regulators are expected to vote Thursday to allow Internet providers to speed up service for some apps and websites and block or slowdown others, something analysts see as a major setback for tech companies. Net neutrality could be seen as hurting DIS or potentially giving it an edge, because the company has many more distribution vehicles than NFLX or AMZN. If net neutrality prevents a consumer from watching a movie on the Internet, they could still potentially watch one on a DIS cable channel or go to a DIS movie showing at the local theater.

Whatever happens with net neutrality, the fact is NFLX and AMZN aren't likely to stand still and not compete. The net winner could be consumers of content, because everyone will have to step up their game.

Turning overseas, the European Central Bank (ECB) held rates steady, as expected, and investors awaited this morning’s press conference by ECB President Mario Draghi. Last time out, the ECB announced an extension of its bond-buying program, but also a slowdown in the amount it would buy. Nothing changed Thursday in either of those regards. The question this time around is whether Draghi might give any clarity about when the bond-buying program might end. The ECB has said it won’t consider raising interest rates until it’s done with its monetary stimulus program. Low European rates are a key factor keeping U.S. interest rates weighed down, analysts have said.

Meanwhile, the Bank of England (BOE) also met and agreed to hold rates steady. The U.K. interest rate is at 0.5% and a stimulus program continues, but inflation has heated up recently. European stocks fell Thursday as the two central banks met, and the dollar fell slightly against the euro.

Yesterday’s well-telegraphed Fed rate hike likely surprised nobody, and there weren’t any major fireworks in the Fed’s statement or in Fed Chair Janet Yellen’s press conference. The Fed’s policymaking body made clear that more hikes were on the table in 2018 and beyond, saying it expects the benchmark to stand at 2.1% by the end of 2018, 2.7% by the end of 2019 and 3.1% in 2020. That would mean three more hikes next year after three this year.

A more notable change might be the Fed’s median estimate for gross domestic product (GDP) growth to 2.5% in 2018 from 2.1%, while also upping this year’s forecast to 2.5% from 2.4%. Those numbers are still below the more optimistic estimates on Wall Street, some of which are around 3%. Time will tell if the Fed is being too conservative, or if analysts are too optimistic.

On inflation, Yellen stuck to her prediction that eventually 2% might be achieved, but she didn’t say by when, and she admitted the data continue to show an inflation “shortfall.” Again, she said “transitory” factors could be keeping prices under pressure, and she doesn’t think anything related to the broader economic outlook is at play in the current weak inflation picture.

Data kept rolling in early Thursday, with U.S. retail sales jumping 0.8% in November. That was way above Wall Street analysts’ expectations for a 0.3% rise, and could partially reflect a red-hot start to the holiday shopping season.

There’s earnings news on the way after the close today, as tech giant Oracle (ORCL) reports. The company’s cloud division could be a big focus as investors mull over results. It’s always interesting to see what ORCL says about growth around the world, not just in the U.S.

Crude oil cooled off early Thursday, with front-month U.S. futures sliding back under $57 a barrel despite a big drawdown in U.S. oil supplies last week. That was countered by another major build in gasoline stockpiles. Oil also came under pressure in part due to an OPEC report that predicted U.S. production could average close to 10 million barrels a day next year, a level last reached in the early 1970s.

The cheaper oil prices helped make energy one of the worst performing sectors Wednesday, with financials the only sector to do worse. Financials may have been hit by a “buy the rumor, sell the fact” mentality related to the Fed rate hike. But financials also could be coming under pressure due to the Fed keeping its 2018 forecast at just three rate increases. Going into this week’s meeting, some analysts had thought there was a chance for one additional increase in 2018.

That slight disappointment might have also showed up in the bond market, where a rally took place following the Fed decision and the benchmark 10-year yield fell to 2.35% by the end of the day. It had traded as much as seven basis points higher earlier Wednesday. It’s certainly interesting to see Treasury yields fall on a day when the Fed raises rates, but that’s the world we’re living in lately.

FIGURE 1: TRANSPORTS SOAR AND SMALL GUYS REGAIN FOOTING. The Dow Jones Transports (blue line) have soared over the last month, easily outpacing the broader market and most S&P 500 sectors. This could reflect, in part, hopes for lower taxes that might help domestic shipping firms, as well as a stronger economy that could encourage more orders and passenger travel. Small stocks in the Russell 2000 (RUT, represented by the candlestick here), have popped back up after a stumble earlier this month, also partly from tax reform hopes. Data source: FTSE Russell, Dow Jones & Co. Chart source: The thinkorswim^® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Sub-Sector Shuffle

You hear a lot about how the 11 S&P 500 sectors perform, but less about sub-sectors. Still, combing through sub-sector performance can often provide even better insight into the economy. So far this year, the leading sub-sector performers include security and alarm services, homebuilding, casinos and gaming, home entertainment software, and semiconductor equipment. All of these sectors have risen 50% or more year-to-date, according to research firm CFRA. On the other side of the coin, five sub-sectors have fallen 20% or more year-to-date. These laggards include oil and gas drilling, heavy electrical equipment, housewares and specialties, oil and gas equipment services, and alternative carriers.

Looking at these lists, it’s a bit of a head-scratcher trying to find any patterns, aside from the fact that the upstream energy sector appears a bit weak. For the most part, the leading sub-sectors do seem to reflect a consumer focus, meaning people spending on new homes, home entertainment, and casinos might speak toward consumers having extra cash in their pockets.

Data Download

We’re not done with numbers yet this week despite the waterfall of data to date. There’s a lot on Friday’s calendar, including November industrial production and capacity utilization, along with Empire Manufacturing. As a reminder, industrial production shot up 0.9% in October, driven in part by post-hurricane recovery. Wall Street analysts expect a more moderate reading in November, predicting a rise of just 0.3%. Industrial production growth has been all over the place in 2017, rising more than 1% in April and falling about 0.5% in August. Still, it’s a category that appears to be on better footing than it was in late 2015 and early 2016, and does play into the Fed’s view of economic performance. Watch for the manufacturing number in the report, as that metric rose 1.3% in October due to a post-hurricane bounce.

Interest Rate Nostalgia

Yesterday, the Fed raised the federal funds rate to a target range of 1.25% to 1.5%. The last time the Fed hiked rates to this range was on June 30, 2004. At the time, that was the first rate hike in more than four years, as the Fed had loosened policy between 2000 and 2003 during a recession. The rising rates in 2004 coincided — as they do now — with an improving economy. They also accompanied some decent gross domestic product (GDP) growth, with GDP rising more than 3% in both 2004 and 2005.

Of course, past isn’t precedent, and there were differences between now and then. For one thing, unemployment and inflation were both higher in 2004 than they are now at around 6% and 3%, respectively. The Fed kept raising rates back then until they hit 5.25% in mid-2006, but that seems unlikely to happen now, because Fed officials have said they believe that “normal” interest rates might peak at levels far below previous interest rate cycles. We shall see.

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