Deal To Reopen Govt. Boosts Wall Street As Trade, Fed News Also Help

It’s crunch time, and that doesn’t just mean the crunch of snow under boots as more snow and extreme cold blow into much of the country.

This is arguably the most crucial earnings week of the season, with names ranging from Boeing Co BA to Apple Inc AAPL to Amazon.com, Inc. AMZN opening their books. About 25% of S&P 500 companies report over the next five days. In addition, Friday brings the closely watched January payrolls report. On top of all that, a Fed meeting starts tomorrow.

Caterpillar Inc CAT kicked off the fun early Monday, missing analysts’ average earnings projections by quite a bit (see more below). That, along with new concerns about China’s economy and worries about another government shutdown, appeared to put pressure on stocks in pre-market trading. The shutdown may have ended last week, but things still aren’t settled.

Overseas, the British pound was higher to start the week, helping drag down British stocks ahead of another week of Brexit meetings.

Full Plate of Earnings On Tap

Looking at this week’s earnings schedule, both the industrial and tech sectors stand out. Results could help investors get a better sense of the economy’s path and consumer health in Q4. 

That’s only part of the story however. Investors might also want to listen and watch closely for company guidance, as well as any remarks from executives about how they see 2019 shaping up. This is always important, but probably has more impact this year considering all the geopolitical plates spinning. One question is how the government shutdown might have affected business for some firms.

CAT got things started early Monday. Earnings per share of $2.55 were well below the third-party consensus estimate. Revenue of $14.34 billion was a little above average analyst estimates. The company forecast a “modest” sales increase in 2019, but its earnings guidance range looked on the light side. Shares of CAT fell 6% in pre-market trading, and the company cited increased materials and tariff costs. Sales fell in the Asia/Pacific region.

This is a little concerning, though nothing to necessarily get too worried about. CAT is just one company, and we’ll have to see what other major industrial companies report. From a buildings and construction view, the weakness in Asia doesn’t look that great.

BA has warned that the government shutdown could end up hurting its business, as well as that of the overall airline industry. So it could be interesting to see whether company executives discuss this further, especially in light of Friday’s news of a temporary reopening. Other major companies on tap next this week include AT&T Inc T, Verizon Communications Inc VZ, Microsoft Corporation MSFT, Tesla Inc TSLA, Amazon.com, Inc. AMZN, McDonald’s Corp MCD, and Lockheed Martin Corporation LMT. 

Earnings from Apple are likely to get a very close look tomorrow afternoon after the company’s previous earnings and outlook disappointed many investors and helped send the widely-held stock into a tailspin. Another blow came earlier this month when AAPL dialed back its fiscal Q1 revenue expectations, a rare event. The company is no longer breaking out iPhone unit sales, so it might be more challenging to get a sense of exactly how that important product is performing.

AAPL and AMZN, in particular, could help investors better understand how consumer demand looked during the holiday shopping season. Some major retailers reported disappointing holiday sales stats earlier this month, and consumer confidence sagged in the latest University of Michigan sentiment report.

About 72% of the companies that had reported earnings as of Friday morning have beaten expectations, according to CNBC. In terms of revenue, however, there are just 58% that beat forecasts, down from about 70% in recent quarters. That means a fair number of companies are missing analysts’ revenue expectations, something perhaps to monitor as this week rolls along.

Ticker Tape will be running previews of a number of earnings reports starting today, so stay tuned.

Rates Not Seen Changing, But Fed Meeting Could Bring Key Insights

It’s tempting to downplay the importance of this week’s Fed meeting, considering the heavy load of earnings and data on tap in coming days. Despite all that—and the market dialing in about a 99% chance of the Fed standing pat on rates—the meeting likely deserves close scrutiny. Two reasons come to mind. 

First, the Fed could shed more light on Friday’s Wall Street Journal report saying Fed officials are closer to ending the central bank’s bond portfolio wind-down. While the Fed’s interest rate trajectory has been closely scrutinized, the unwinding of its balance sheet has also been a form of hawkish monetary policy. Perhaps we might learn additional detail about what level of balance sheet holdings the Fed might want to maintain. This could play into the path of Treasury yields and provide clues about future borrowing costs.

The other reason not to ignore the Fed meeting is the accompanying press conference from Fed Chair Jerome Powell. He’s going to speak after every Fed meeting this year, not just quarterly. 

Beyond all that, It could also be interesting to try to read the tea leaves in the language accompanying the Fed’s decision. Investors may be looking for clues about the Fed’s thinking on the impact of the trade war with China. There’s also the question of whether the Fed sees any potential economic ramifications from the recent government shutdown.

Coming Off Strength

Stocks finished the old week on a high note. Buying momentum continued amid news of a deal to temporarily reopen the U.S. government. The administration and Congress struck a deal to end the partial government shutdown for three weeks. 

As the deadline of Feb. 15 starts to draw closer, stocks might start getting a bit more volatile. However, it’s arguable that the shutdown didn’t really have a major impact on trading this time around. More shutdown fears surfaced early Monday after President Trump said over the weekend that there’s still a chance of another one.

The market also gained support Friday after Treasury Secretary Steven Mnuchin told Reuters that the United States and China were “making a lot of progress” on talks to end the ongoing trade war that has sparked worries about global economic growth and weighed heavily on companies’ outlooks. His comments served as a counterpoint to less optimistic talk earlier in the week from Commerce Secretary Wilbur Ross. 

China was in the news again early Monday. It reported industrial profits for December falling by 1.9%, the second monthly decline in a row. For all of 2018, the figure rose 10.3%, about half the level seen in 2017.

Last week was the fifth-straight week of gains for the Dow Jones Industrial Average ($DJI), marking a solid start to the new year. However, the S&P 500 (SPX) failed to achieve a fifth-consecutive winning week, falling just a few points short.

Volatility eased as the old week ended, with the VIX falling back below 18. It had been above 20 earlier in the week amid concerns about global economic data and a possible U.S.-China impasse on trade. Still, with all these earnings and the Fed meeting coming up, it seems unlikely that VIX would come down much further anytime soon. VIX was back above 18 early Monday.

Figure 1: U.S. crude futures jumped again amid ongoing political turmoil in Venezuela. The White House is reportedly considering sanctions against the South American OPEC nation after it recognized an opposition leader as the legitimate president and the incumbent broke ties with Washington. Data Source: CME Group Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Reading Between the Lines: With a bevy of large companies reporting quarterly results in coming days, including global economic bellwether Caterpillar, now may be a good time for the market to glean some solid insight into two of the highest profile issues of the day: the economic effects of the U.S.-China trade war and the partial U.S. government shutdown. The trade dispute has been going on long enough that companies may talk about it in their earnings releases. But investors may also want to pay attention to executive commentary during conference calls as they might provide what analysts call “color” on how the issue is affecting their business or how they think it might affect it in the future. And those conference calls with analysts and investors may also provide more clarity on executives’ thinking on whether the government shutdown has impacted their businesses. 

Grounded: Flying is a great way to catch the flu. Being stuck inside an aluminum tube with dozens of other people for hours on end just increases the likelihood of germ transfer. On Friday, an increase in staff calling in sick led the Federal Aviation Administration to reroute air traffic and increase the time between flights, the FAA said in a statement. FAA employees have been working without pay during the partial government shutdown. Delta Air Lines, Inc. DAL tweeted that the company during the morning was experiencing about 200 flight delays at Laguardia Airport. For those who waited for a flight in New York and want a silver lining, perhaps public pressure from the widening effects of the government shutdown helped spark a quicker resolution to the funding impasse.

GDP Forecast Lowered: With the partial U.S. government shutdown keeping the Bureau of Economic Analysis shuttered, it seems unlikely that investors will see one of the agency’s biggest reports in coming days. Originally scheduled for release on Wednesday, the bureau’s first estimate of Q4 GDP appears likely to be delayed as the agency hasn’t been funded during the shutdown. Investors and company leaders looking to fill the data vacuum may want to consider the latest 4Q GDP forecast from the Atlanta Fed. Its freshest GDPNow model estimate, released Friday, forecasts a seasonally adjusted annual rate of 2.7%, down from 2.8% on Jan. 18. The Atlanta Fed lowered the estimate after data from the National Association of Realtors showed a larger-than-expected decline in existing home sales. Now that data is trickling back in with the government reopened, investors might want to keep an eye on the Atlanta Fed’s GDP forecast for an update.

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