As Hurricane Roars, Market's Focus Turns To Tetons For Yellen, Draghi Remarks

Hurricane Harvey is blowing toward the Gulf Coast, but the market’s collective attention rests thousands of miles away. The Jackson Hole economic symposium continues today, with speeches by Fed Chair Janet Yellen at 10 a.m. ET and by European Central Bank President Mario Draghi at 3 p.m. ET.

Just because Jackson Hole is today doesn’t mean investors can ignore the hurricane. Watch the energy sector for the storm’s possible effect as companies shut down oil platforms. Additionally, keep an eye on airline stocks and insurance companies for possible storm impact.

Turning from Texas to Wyoming, it seems unlikely that Yellen would make any new observations about the interest rate picture or balance sheet timing. However, based on past Jackson Hole appearances, it wouldn’t be too surprising to hear Yellen opine about the economy from a big picture standpoint. Her words could be parsed for any hints about when balance sheet unwinding might begin, but remember the Fed minutes for July released last week kept that issue pretty vague.

If and when the Fed does start addressing its balance sheet, there’s concern it could cause bond yields to rise. Early Friday, 10-year yields flirted with the 2.2% mark, but remain near the low end of their recent range.

Yellen's topic is “financial stability.” Back in 2014, Yellen addressed the same subject in a speech she gave in Washington, D.C., and said she was “mindful of the potential” for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk. She said in the same speech that monetary policy is limited in its ability to promote financial stability. More remarks in the same vein might not be too surprising today, along with Yellen’s assessment of how stable she believes the economy currently might be.

Drahgi’s speech is important for any hints he might give about the ECB’s stimulus policy. Europe’s economy is improving, raising questions about how long the ECB might continue its asset purchase program at current levels. Any sign from Draghi that he’s considering an unwinding could boost the euro and weigh on bonds, as we saw earlier this summer when investors interpreted a Draghi speech as hawkish. However, it would be surprising if Draghi gave that kind of detail today. 

The S&P 500 (SPX) only fell 0.2% yesterday, but it might have felt a little worse because nearly every sector retreated. Ten of 11 sectors fell, with only health care making slight gains.

Consumer staples bore the brunt, falling more than 1% in part on news that Amazon.com, Inc. AMZN has finalized its deal to buy Whole Foods (WFM) and the deal closes Monday. Concern has been brewing for months about how that change in the grocery landscape might affect other big food market names, and now we’ll find out. The tech-heavy Nasdaq fell for the fifth time in six sessions.

If there was one positive take away Thursday, retailers performed well after a bunch of key names beat Wall Street’s earnings estimates.

Gasoline futures rose early Friday as refineries went offline in preparation for the hurricane. That could reduce demand for crude oil, which explains in part why crude prices fell Thursday before ticking a little higher Friday morning.

There weren’t many catalysts for the market’s feeble performance the last two days, but it’s possible some investors decided to simply stay cautious ahead of the Yellen speech today. Headlines about more political storms potentially brewing in Washington, D.C. (see below) could also be to blame, as could another housing report (existing home sales for July) that came in below analysts’ expectations. The question going into Friday is whether Yellen can say anything that might pull the market out of its funk. We shall see.

FIGURE 1: HARVEY HAVOC. As Hurricane Harvey spun toward the Texas coast, crude oil futures descended and gasoline futures (purple line) thundered higher. The takeaway here is concern that many refineries in the area might close due to the storm, which would potentially reduce gasoline supplies while also clamping demand for crude. Chart source: CME Group. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Another Solid Earnings Quarter

With Q2 earnings pretty much over, S&P Capital IQ consensus estimates that average S&P 500 company earnings per share rose 10.9%, easily exceeding the firm’s original expectations for 6.2% growth. All 11 sectors look like they’ll post positive results, led by energy (+314%), info tech (+20.7%), and financials (+10.6%). The weakest links include consumer discretionary (+0.9%) and industrials (+1.1%). Q3 and Q4 EPS growth is now seen at 6.5% and 11.8%, respectively, down from the firm’s initial estimates of 8.4% and 12.7%. EPS growth is now seen at 10.9% for all of 2017, and 10.7% for 2018.

Is Company Revenue Following Suit?

Though EPS results looked good in Q2, investors arguably keep a closer eye on revenue to get a better sense of how much money companies are actually pulling in. S&P 500 revenues are expected to be up 6.3% in Q2, according to S&P Capital IQ. The firm expects revenue gains of 5.7% and 6.1% for Q3 and Q4, as well as 6.5% growth for all of 2017 and 5.2% in 2018.  Considering the strong EPS and revenue results we’ve seen the last two quarters, it’s getting hard to remember the long period of weak earnings that ended in 2016. On the other hand, strong earnings and revenue one year can mean tough comparisons the following year, so be mindful of that moving forward.

Government Shutdown? Debt Ceiling?

Concerns about potential political challenges might partly explain the stock market’s recent failure to move much higher despite strong jobs growth and better than expected Q2 earnings. Next month looms large as Congress returns and faces immediate pressure to keep the government running and pass a bill to pay U.S. debt. Any sign of delays could hinder rallies or even send a chilling signal to the market. Then again, it’s worth noting that during the last government shutdown in early October 2013, the S&P 500 (SPX) actually rose about 3%. Odds of a shutdown seem low, at least based on what congressional leaders have said this week. If it does happen, however, watch shares of defense contractors, which are a bit more sensitive to government spending than many other industries. Lockheed Martin Corporation LMT had to furlough employees during the 2013 shutdown.