Market Commentary 10-31-14

Summary:

  • Federal Reserve announces end of bond purchases
  • Consumer Confidence reaches highest level since 2007
  • Bank of Japan announces monetary stimulus program
  • Corporate earnings continue to beat
  • GDP grows at 3.5% annual rate

The Federal Reserve officially ends its Bond Buying Program:

The Federal Reserve on Wednesday announced the end of its bond purchase program that has supported U.S. economic growth since the 2008 financial crisis, marking a milestone in the five-year-old recovery.  As expected, the Fed said it will reduce the pace of bond purchases from $15 Billion per month to zero, ending its third round of bond buying.

At the same time, the Fed pledged to keep its benchmark short-term interest rate near zero for a “considerable time” after the bond buying ends. The Fed did upgrade its view of the labor market but gave no clear signal that it planned to raise its benchmark rate earlier than the mid-2015 time frame previously indicated by Fed policymakers despite the solidly performing U.S. economy.

U.S. Consumer Confidence remains high:

Consumer confidence advanced in October as Americans enjoyed further price drops at the gas pump as well as continued improvement in the job market. The Conference Board’s index climbed to 94.5 this month, the highest reading since October 2007.  In general, higher consumer confidence readings translate to increases in consumer spending.  A few months back, retailers were feeling the “pinch” as consumers were holding off on purchases.  However, a great consumer confidence reading, coupled with the upcoming holiday season, should boost spending through the end of the year.

The Bank of Japan announces large scale monetary stimulus program:

The Bank of Japan (BOJ) shocked financial markets overnight by announcing an aggressive expansion to its monetary stimulus program. In an unusual split decision, the BOJ’s board voted 5-4 to accelerate purchases of Japanese government bonds to enlarge the monetary base at an annual pace of 80 trillion yen ($725 billion). The central bank also said it would triple its purchases of exchange-traded funds and real-estate investment trusts (REITs). The BOJ said it was aiming to pre-empt any risk of a delay in ending Japan’s “deflationary mindset,” adding that it will continue easing as long as needed to achieve stable 2% inflation.

Corporate earnings continue to Impress:

As of Wednesday, approximately 80% of S&P 500 companies that reported their earnings results had beaten estimates, while 60% surpassed revenue projections.  Some notable highlights were:

Barrick Gold Corp (ABX) beat analyst expectations by $0.02, earning $0.19 per share.  The company also lowered its “all-in sustaining costs” to $880 – $920 per ounce for gold.  However, lower gold prices prompted a sell-off of ABX’s shares.  ABX noted that they will focus on cost control and operational efficiency in the next few years.

Exxon Mobil (XOM) reported results this morning, earning $1.89 per share, ahead of the average analyst estimate of $1.71.  Although falling oil prices weighed on the oil production side, the refining side of the business greatly benefited from this, as it made it cheaper to manufacture gasoline, diesel and jet fuel.

Gilead Sciences (GILD) missed analysts’ third quarter estimates as the company earned $1.84 per share.  This was 9 cents below estimates.  The company’s Hepatitis C drug, Sovaldi, did not sell as well as was anticipated.  However, the company attributed this to patients and doctors “holding out” for Harvoni, a new Hepatitis C drug that was released in early October.  The company’s earnings were also hindered by a one-time fee they paid in adherence with Obamacare regulations.

U.S. Economy up 3.5% in 3rd Quarter

The U.S. economy expanded more than forecast in the 3rd quarter as gains in government spending and a shrinking trade deficit outshined a slowdown in household purchases.  Overall, the Gross Domestic Product (GDP) grew at an annualized rate of 3.5%.  The average economist estimate was for a 3% gain.  Falling gasoline prices have boosted consumer confidence and have brightened the outlook for spending in the upcoming holiday season.  The average gas prices have dipped below $3.00/gallon for the first times since 2010.  Triple-A’s analysis asserts that, for every penny drop in the national average gas price, an additional $1 Billion of potential consumer spending is freed up.

 

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