The Dow Jones Industrial Average emerged from correction territory this week, as investors applauded earnings in the financial sector. At the same time, markets chose to ignore the now record-long U.S. government shutdown and ongoing Brexit saga in the U.K.
Financials Start Earnings Season On Positive Note
Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS) all traded higher this week, after posting solid quarterly results. The earnings news was not all rosy however, as Morgan Stanley (MS) fell short of expectations on Thursday. Outside of the financial sector, Ford Motor (F) also cut profit expectations this week.
As the following chart shows, quarterly reporting activity will continue to pick up next week and the floodgates really open in February.
Source: Bespoke Investment Group
IBM (IBM), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Texas Instruments (TXN) are among the blue-chips and dividend aristocrats highlighting the earnings calendar next week.
Overseas News Moves Stocks at Home
With the earnings calendar still relatively light at home this week, news from overseas news captured the headlines. Theresa May suffered a sound defeat of her Brexit plan on Tuesday, but survived another “confidence” vote on Wednesday.
Elsewhere, a report from the Wall Street Journal on Thursday, suggested an easing of U.S. tariffs on China, sending markets higher back at home. Earlier in the week, China reported that December imports and exports both fell the most in two years, compared with expectations for positive growth.
Back at home, the U.S. government shutdown is set to enter a fifth week. This has caused a delay in some economic reports, but we did hear that producer prices were below expectations in December. Coupled with another low reading of weekly jobless claims on Thursday, there was little to sway the widely-held opinion that the FOMC will remain on hold with its next interest rate decision at the end of January.
Institutions Buying Bonds in Addition to Stocks
One issue that is quietly gaining more notice is the rising level of debt in the U.S. One positive reason for the increased financing on the corporate side could be that companies are rebuilding their war chests, following a record year of dividends and buybacks in the S&P 500 in 2018.
There is currently no shortage of investor demand for new debt. According to a report this week from Bloomberg, the average corporate bond deal in the U.S. has been 3.2x oversubscribed this year, up from 2.9x a year ago.
However, just as with personal balance sheets, higher amounts of debt can potentially have negative effects down the road. As a reminder, the previous record for corporate buybacks in the U.S. was in 2007, which pre-dated a very difficult time for investors.
Stocks have largely recovered from the vicious losses we experienced in late 2018, but uncertainty both from at home and overseas will likely continue to hang over investors throughout earnings season.
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