Stock Market Reversal Top Reminded Investors Earnings Go Two Ways

Earnings and China, short-term and long-term influences, respectively. That’s where the action is for investors.
James Hyerczyk
Stock Market Volatility

Judging from the price action on Wall Street, the primary focus for investors on Tuesday was U.S. earnings. Just a week after better-than-expected earnings drove stocks sharply higher, yesterday’s steep break reminded traders that weaker-than-expected earnings news can drive stocks lower.

Now, investors face mounting uncertainty as Boeing reports on Wednesday. The bulls are hoping for a surprise.

U.S.-China trade news was scarce. Although many investors feel both economic powerhouses are making progress toward wrapping up phase one of the recently announced partial trade deal, the sources of tension remain how will the deal work, and when will it be signed.

The events surrounding Brexit are confusing, which may mean equity investors are trying to avoid reading the news because quite frankly, it’s difficult to follow. Furthermore, it been over three years since the Brits voted to leave the EU. The way I look at it, what’s a couple more days of waiting?

Additionally, the long-term price action in the Euro Zone and U.K. stock markets suggest that investors gave up years ago trying to make the timing of Brexit and investment issue. In my opinion, Brexit is just a blip on the economic calendar.

Since we are living in an inter-connected universe, where the proverbial butterfly flapping its wings in China could be the cause of tornadoes in Kansas, somewhere, somehow, Brexit may be influencing U.S. equity prices. However, I feel that Brexit is to the U.S. stock markets as NAFTA is to the U.K. and European markets.

Earnings and China, short-term and long-term influences, respectively. That’s where the action is for investors.

If the U.S. economy was tanking then the Fed rate cuts would be taking on added importance. However, investors realize that this time, the Fed is cutting rates to prevent the U.S. economy from tanking. The moves aren’t necessarily being made to stimulate the economy so the probability of another rate cut next week by the Fed may be underpinning stocks, but they’re not really driving them toward new highs like they were doing nearly 10 years ago.

U.S. Economic News

It was a quiet day on Tuesday because the Fed speakers are on lockdown until after next week’s interest rate announcement. However, there were two U.S. reports, Existing Home Sales and Richmond Manufacturing Index.

The Existing Home Sales report fell more than expected in September as the market continues to struggle with a dearth of properties for sale, especially for cheaper homes.

The National Association of Realtors said on Tuesday that existing home sales fell 2.2% to a seasonally adjusted annual rate of 5.38 million units last month, reversing two straight months of gains. August’s sales pace was upwardly revised to 5.50 million units.  Economists were looking for existing home sales to decline 0.7% to 5.45 million units.

The October manufacturing reading from the Richmond Fed showed surprising resiliency from September to an 8 in October, as all three components, shipments, new orders, and employment increased. Manufacturing firms also reported an increase in backlog of orders and improved local business conditions.

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