Another FBI look at Hillary Clinton's emails rocked the Presidential election and markets on Friday. More mergers on Monday makes us wonder what CEOs are really thinking about the economy.
Clinton Emails Still Impacting ElectionIn an unprecedented move, FBI Director Comey sent a letter to Congress letting them know that the FBI is looking over new Clinton emails. The revelation shocked the markets and caused the election polls to narrow dramatically.
According to the RealClear Politics poll average, Hillary Clinton's lead over Donald Trump in the Presidential election narrowed to just 2.8%. The gap had grown to over 7 points just a couple weeks earlier.
The sudden uncertainty around the election caused volatility to jump in markets on Friday. The markets continued to be jittery on Monday morning as the election weighed and OPEC's weekend meeting failed to yield certainty on the oil market.
More Mega-mergersContinuing on what we were watching last week, more mergers hit the market on Monday. This week we see General Electric (GE) in a deal with Baker Hughes (BHI) to merge their oil and gas operations. We also are seeing a merger between CenturyLink (CTL) and Level 3 (LVLT) with combined value over $37 billion. These come on the heels of the huge AT&T (T) and Time Warner (TWX) deal last week.
One question we think about: What do these mergers mean? Usually a merger wave is a precursor to the end of an economic expansion cycle. We saw a merger spike in 2007 just before the financial crisis.
This time we wonder if the mergers are telling us that corporate executives have lost confidence in future growth? The two deals this week certainly make us think about that, especially the GE and Baker Hughes deal which is tied to an injured oil and gas industry.
Earnings CalendarToday is a huge day for earnings with Anadarko (APC), Cabot Corporation (CBT), Diamond Offshore Drilling (DO), SeaSpan (SSW) and Tesoro (TSO) among others reporting in the oil and gas space. With OPEC's lack of progress this weekend we wonder if the upward trend in oil and gas is about to stall.
Also this week, are utilities NextEra Energy (NEE), Southern Company (SO) and Dominion Resources (D) which are all navigating major structural business changes. Zimmer Biomet (ZBH), Luxottica (LUX) and Cardinal Health (CAH) are companies valued at over $20 billion who are also reporting this week.
This will likely be the make or break week to see if earnings for the S&P 500 come in positive for the quarter. The market would likely welcome breaking the five quarter losing streak on earnings. Either way, earnings growth is not terribly impressive which brings us back to our question about what executives are thinking.
Economic CalendarThe economic calendar is full this week. The unemployment rate on Friday was probably the biggest number. There are several other reports that could have a material impact on the Fed's thinking as well. On Monday we get several important numbers. A couple have already come in as of this writing:
- Personal Income narrowly missed at .3% vs median forecast of .4%.
- Consumer Spending narrowly beat at .5% vs median forecast .4%.
We find it interesting that income went up less than spending. That implies consumers went into savings to spend or used credit.
On Tuesday we see Construction Spending and Motor Vehicle Sales. Both are clear indicators of growth in the economy.
Wednesday is the November Federal Reserve Announcement. We don't expect anything with the election next week.
Thursday has a host of reports, the one we will be watching is Productivity. As we have discussed, if productivity does not improve soon, then there could be major problems ahead for the economy and markets. Is lack of productivity growth driving the wave of mergers?
Friday is the all important Nonfarm Payrolls and Unemployment Rate. If these numbers suddenly start to slip, then the Fed is really in a bind. After last month's slightly disappointing number, we're sure the Fed will be paying attention. Given the number of mergers, it would not surprise us to get a surprisingly bad employment report soon.
Tactical ThoughtsAs we conclude this week's overview of "what we are watching" we'd like to point out that each Monday we are trying to organize our thoughts for the week ahead. Usually we will find a few key topics to focus on. This week will clearly be the election, the impact of mergers and whether the employment will strengthen or weaken from last month's report that we are focused on.
From a tactical investor standpoint, we really could use "ibid" from last week because not much has changed. The election is causing some jitters in the markets now, however, we have not seen enough to tell us if there will be trend changes.
As the ETF Asset Class Quickview shows, the market remains challenged but is not in the trouble zone yet. U.S. equities, particularly technology, led winners again and are still showing strength in relative terms. Very few other asset classes have shown any gains in the past month, however, a few other asset classes are potentially starting to emerge.
We continue to be wary of the current investing environment based upon the numbers in Quickview (which you can have for free by signing up). Money market funds, (i.e. cash) remain a viable investment option versus quite a few asset classes.
Please read our quarterly letter where we discussed in-depth examination of rising risk in the markets. We will pay continued attention to the super-trends that we have identified, particularly aging demographics now that Fed officials are finally acknowledging it.