Will Clinton, Putin and Oil Support the Markets in the Longer Term?

The debates seem to have been “won” by Clinton, which has supported stock market strength, but will this last?

On Monday, October 10, 2016 several factors, which we have written about recently, came into play to provide some strength for U.S. stocks. In an apparent attempt to join OPEC and support higher oil prices, Russian President Vladimir Putin said his country is willing to consider freezing or cutting oil output. This statement, on the back of OPEC’s preliminary deal to cut output following meetings on September 30th, helped lift oil prices by about 2% on October 10th, to one-year highs for both Brent crude and West Texas Intermediate oil. The rise in oil prices lifted shares of energy companies in the U.S. This rise, in turn, helped support the broader stock market, following the negative week for stocks of October 3 – October 7.

This improved market tone was further supported by the impression that the Sunday, October 9th debate between Donald Trump and Hillary Clinton was deemed to be not enough for Trump to improve his standing in the polls. Just like two weeks ago, the market considered that Clinton won the debate and that her chances to win the presidency improved, which would benefit stocks.

The question remains, how sustainable is this positive tone? First off, the stock market’s attention in the final weeks leading up to the Presidential election will shift to the 3rd quarter corporate earnings which began with Alcoa’s announcement on October 10th after market close. According to Yahoo! Finance, a number of leading market experts expect that corporate earnings growth in America will not be supportive of stocks going forward. RBC Capital Markets, JPMorgan, Citi, Morgan Stanley, UBS, and Bank of America Merrill Lynch, all believe that earnings growth in 2017 will be in single digits, while general market consensus remains optimistic for double-digit growth.

The respected contrarians’ opinions are based on the facts that energy companies’ and financial institutions’ bottom lines have been restrained by low oil prices and low interest rates, respectively, for quite some time now. RBC Capital Markets’ Jonathan Golub expects that American corporate earnings will grow by just 6% in 2017, as compared to 15% consensus forecast. If the next quarterly earnings, at least partly, confirm this slowing earnings growth trend, it could have a negative effect on the US stock market.

There are more cautionary voices from market followers. Bank of America-Merrill Lynch’s head of U.S. equity and quantitative strategy Savita Subramanian recently warned on CNBC’s “Fast Money” (see Yahoo! Finance) that the U.S. economy could see a recession in the second half of 2017. Many are wondering if markets are reflecting this – the S&P 500 index is currently just 2% off its historic highs that were set in August.

With respect to oil prices, OPEC’s deal to cut output is supportive of the current strength, but only time will tell whether the members will actually stick to the output cuts. Russia is showing verbal support for this deal by suggesting they too would cut production. Oil prices have risen 15% between September 27 and October 10. However, the proof will be in the pudding as they say, as the Wall Street Journal reported that Mark Waggoner, president of Excel Futures, is not convinced that Russia is serious in its intentions. He doubts that OPEC will be able to reach a deal to cut oil output in November: “We still have a glut. We still should have prices going lower,” said Waggoner.

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204

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