Stocks Tread Water on Mixed Earnings and Economic Data

Earnings season continued in the U.S., with more than 100 members of the S&P 500 index reporting their financial results for the third quarter of 2016.

Overall, companies reported better-than-expected quarterly earnings. Technology stocks rose on strong earnings driven by investments in cloud infrastructure and online security. The notable exception in the tech sector was Apple, the U.S. market’s largest company by market capitalization, which reported soft smartphone sales. Energy companies also saw their stocks rise on stronger-than-anticipated reports from oil refiners and energy services providers.

In contrast, consumer discretionary stocks lagged last week following weak results from apparel companies and an apparent softening in home-improvement spending.

U.S. economic data released last week was mixed. For example:

  • New home sales were weaker than expected, while home sales data for the past three months was also revised lower.
  • Consumer confidence levels came in below expectations, possibly due to a recent slowdown in hiring and a more modest view of business conditions by consumers.
  • Surveys showed unexpected strength in both the manufacturing and services sectors that was well ahead of expectations, reflecting an optimistic view of the U.S. economy from corporate America.
  • Meanwhile, economic data out of Europe was better than expected across the board. Reports including UK GDP growth, Italian manufacturing confidence and Eurozone manufacturing and services activity all came in ahead of expectations. Such developments suggest that the European economy is currently operating at a higher level than many investors believe.

GAIN: Active Asset Allocation

As earnings season got into full swing last week, growth stocks came under pressure due in part to Apple’s disappointing results, while value shares held up relatively well. Overall, risk assets generally sold off in proportion to their historical levels of volatility. Thus, domestic indices outpaced international markets while large-cap stocks outperformed small-cap shares.

In the fixed-income markets, interest rates rose modestly, putting bonds under pressure (bond prices fall when bond yields rise, and vice versa). Corporate bonds softened somewhat after generating strong returns the previous week.

Market leadership may be inconsistent throughout the current earnings season, as the direction of markets and sectors tend to be driven by each day’s big earnings announcements.

PROTECT: Risk Assist

Volatility levels declined across all asset classes last week, even as the U.S. dollar appreciated and the Chinese yuan depreciated. Elections in the U.S. will come soon, and the Federal Reserve Board continues to signal that an interest rate hike in December is likely.

It’s important to note that during earnings season, volatility at the index level can be muted even as volatility among specific sectors and stocks can rise, sometimes sharply. This is a concept known as dispersion: The movement of individual stocks and sectors that follow earnings announcements often balance each other out, with some stocks and sectors rising and others falling. The ultimate effect can be that the movements experienced by a particular index remain relatively small.

SPEND: Real Spend

Real Spend holdings were somewhat choppy, but ended the week roughly where they started. Volatility remained suppressed, and all holdings have been significantly less risky recently than they historically have been over long periods.

Real Spend was designed to address the needs of retirement investors, including the need to make retirement assets last for what could be a long retirement. Real Spend remains positioned with an equity bias, with the goal of generating the long-term growth that long retirement (for example, a 30-year period) could require, while also funding current expenses. Stocks (as measured by the S&P 500) have never lost to intermediate-term government bonds over any rolling 30-year period going back to 1926. The best return for stocks over those 30-year periods was 4.9 times the best return for bonds.

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