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MPCA Weekly Market Update (October 19, 2015)

| October 19, 2015

Earnings Season Kicks Off

Equity returns were mostly positive last week as the S&P 500 closed up 0.9%.  As has been the market’s custom recently, lackluster economic data led to the stocks rising in price.  Investors continue to expect central banks to remain accommodative, so for now that translates to support for the markets.

Friday brought news that U.S. industrial production fell for a second straight month in September, and for the 8th time this year.  In the previous two years, industrial production was negative on a month over month basis only three times out of a total of 24 months.  Further disappointment was provided by U.S. retail sales, which edged up only 0.1%.  This meager result comes in spite of significant energy savings accruing to consumers from the fall in oil prices, which had been expected to provide a boost to consumer spending by now.

On the plus side, the University of Michigan’s preliminary consumer sentiment index rose from 87.2 in September to 92.1 in October.  The gauge of current conditions jumped from 101.2 to 106.7 as well.  The fact that consumers feel better is, at least for the time being, overruled by caution on the spending side and continuing to confound the pundits.

Earnings will be the big news item this week, with almost a quarter of the S&P 500 members slated to report.  Thus far, 56 companies have reported, with high-profile member General Electric (GE) leading the way last Friday with respectable results in spite of orders being down 26% and energy orders down a whopping 38%.  Gains in aviation, transportation, power and water helped offset the slack in energy, but overall earnings were still down 13.7% from a year ago.

According to Zacks Research, looking at the third quarter as a whole, total earnings are expected to be down 4.6% on 4.8% lower revenues.  Estimates for Q4 have started to come down as well, with total earnings for the S&P 500 now expected to be down 5.4% from the same period last year.  Only a week ago, the expected result was down 4.7%, highlighting clearly the falloff in expectations.

So far, it has been an underwhelming start to the Q3 season, with Morgan Stanley and Halliburton this morning continuing the subdued trend.  The weak earnings picture and some deterioration in MPCA’s technical indicators have caused us to raise additional cash as a tactical defensive measure in our portfolios, as we have discussed in this space recently.  We continue to stand ready to respond appropriately as our decision-making matrix dictates.  Look for further commentary in the coming days as earnings season continues to unfold.