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Leigh Baldwin & Co.

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The Week In Review

10/28/16

 The stock market ended the Friday affair on a mixed note as political uncertainty ambushed participants at the end of another earnings-packed week. The Nasdaq Composite (-0.5%) extended its weekly loss to 1.3% while the S&P 500 (-0.3%; week-to-date: -0.7%) and the Dow Jones Industrial Average (-0.1%; week-to-date: +0.1%) finished closer to their flat lines.

Equity indices saw some slight selling in the opening minutes of the session, but climbed shortly thereafter as investors assessed some upbeat economic data and the latest raft of quarterly earnings reports.

The third quarter advance reading of U.S. GDP registered at 2.9%, exceeding the Briefing.com consensus of 2.5%. The data showed that real GDP accelerated in the third quarter, surpassing the 1.4% increase in the second quarter and the 0.8% increase in the first quarter. The average growth rate for the first three quarters of 2016 remains anemic, checking in at 1.7%.

On the earnings front, bellwether reports from Amazon (AMZN 776.32, -42.04, -5.1%) and Alphabet (GOOG 795.37, +0.02, 0.0%) came in on a mixed note. However, it was cautious commentary and disappointing results from the health care sector (-2.2%) that stole the show. McKesson (MCK 124.11, -36.39) plunged 22.7% after warning that price trends from pharmaceutical and biotechnology companies have resulted in lower profit contributions. The remarks took hold as investors continue to ruminate over the impact of this election cycle on the pharmaceutical industry's pricing practices.

The major averages tumbled to session lows in the afternoon, responding to reports that FBI director James Comey may re-open a probe into Democratic Presidential nominee Hillary Clinton's emails. The reports were sparked by a tweet from Republican Congressman Jason Chaffetz, indicating that the FBI has "learned of the existence of emails that appear to be pertinent" to the previously completed investigation. Reports later indicated that the newly discovered e-mails were found on a new device and were not withheld from the previous investigation.

The benchmark index ebbed towards its low in the final hour as five sectors ended in the red. Health care (-2.2%), energy (-0.5%), and financials (-0.4%) rounded out the leaderboard while industrials (+0.6%), consumer staples (+0.5%), and real estate (+0.3%) outperformed.

The health care sector (-2.2%) led the retreat as results and guidance from McKesson (MCK 124.11, -36.39, -22.7%) and Amgen (AMGN 145.18, -15.39, -9.6%) pressured the group. Dow component Merck (MRK 58.84, -2.45) finished at the bottom the price-weighted average, falling 4.0%. Meanwhile, the iShares Nasdaq Biotechnology ETF (IBB 260.49, -4.98) declined 1.9%, extending its October loss to 10.0%.

In the industrial space (+0.7%), Dow component General Electric (GE 29.22, +0.59, +2.1%) outperformed after announcing that it is exploring partnership opportunities with Baker Hughes (BHI 59.12, +4.57, +8.4%). The defense and aerospace sub-group was also able to extend its winning streak as United Technologies (UTX 101.84, +1.77, +1.8%) gained 3.2% this week. The broader sector moved higher by 0.2% over that period.

The influential technology group (UNCH) finished flat as top- and bottom-line beats from Alphabet (GOOG 795.37, +0.02, 0.0%) failed to rally the group. Facebook (FB 131.29, +1.60) managed a 1.2% gain ahead of next Wednesday's earnings report. Separately, the PHLX Semiconductor Index fell 0.6%, narrowing its weekly gain to 0.5%.

The Treasury complex settled on a mixed note with the short end of the curve outperforming. The yield on the 2-yr note slipped three basis points to 0.86% while the yield on the benchmark 10-yr note ended down one basis point (1.85%). The 30-yr bond ended little changed with its yield at 2.62%.

Today's trading volume was above the average of 850 million as 941 million shares changed hands at the NYSE floor.

Today's economic data included the advance estimate of Q3 GDP, the Q3 Employment Cost Index, and Michigan Sentiment:

Real GDP increased at a seasonally adjusted annual rate of 2.9% in the third quarter (Briefing.com consensus +2.5%), up from 1.4% in the second quarter and the highest rate since the third quarter of 2014.

The GDP Deflator rose 1.5% (Briefing.com consensus +1.4%) after a 2.3% increase in the second quarter.

On a seasonally adjusted basis, compensation costs for civilian workers increased 0.6% in the third quarter.

That was in-line with the Briefing.com consensus estimate and the third straight quarter the employment cost index has increased 0.6%.

The final reading for the University of Michigan Consumer Sentiment Index for October dipped to 87.2 in October from the preliminary reading of 87.9.

The final October reading also marked a downturn from the final reading of 91.2 for September and was the lowest reading since October 2014.

For more on these economic releases, be sure to visit Briefing.com's Economic Calendar page.

Monday's economic data will include the 8:30 ET release of Personal Income (Briefing.com consensus +0.4%), Personal Spending (Briefing.com consensus +0.5%), and Core PCE Prices (Briefing.com consensus +0.1%) for September. The day's data will be capped off with the release of Chicago PMI for October (Briefing.com consensus 54.0), which will be released at 9:45 ET.

 

Russell 2000: +4.5% YTD

Dow Jones: +4.2% YTD

S&P 500: +4.0% YTD

Nasdaq: +3.7% YTD

Week in Review: Market Maintains Narrow Range Despite Earnings Barrage

The past week was packed with earnings releases and the economic calendar also featured a few noteworthy reports, but all things considered, the S&P 500 respected a fairly narrow range. The index surrendered 0.7% for the week while the Dow Jones Industrial Average added 0.1% and the tech-heavy Nasdaq underperformed, falling 1.3%.

The underperformance in the Nasdaq was mostly due to relative weakness in biotechnology. The iShares Nasdaq Biotechnology ETF lost 2.7% for the week with Amgen falling 9.6% on Friday despite beating quarterly expectations. The Friday weakness in biotechnology was exacerbated by a poor quarterly showing from drug distributor McKesson (-22.4%). The company's report and guidance reminded that the pharmaceutical industry continues wrestling with pricing concerns that may become a regulatory issue once again, especially if Hillary Clinton wins the presidency.

However, Mrs. Clinton's chances were called into question on Friday afternoon after Congressman Jason Chaffetz tweeted that the FBI is once again looking at the presidential candidate after new pertinent information came to the forefront. The news introduced uncertainty ahead of the upcoming election, knocking the stock market from its high. Interestingly, biotech names climbed off their lows after the news began making the rounds.

Biotechnology's woes were in focus as the week drew to its close, but a couple other heavily-weighted Nasdaq components also contributed to the relative weakness in the composite. Specifically, Apple (AAPL) ended the week lower by 2.5% after releasing an underwhelming quarterly report. Similarly, Amazon (AMZN) surrendered 5.3% for the week after missing expectations.

Rate hike expectations for December firmed up after New Home Sales (593K; Briefing.com consensus 610K) and Pending Home Sales (+1.5%; Briefing.com consensus 0.6%) for September beat expectations. Third-quarter advance GDP also surprised to the upside (2.9%; Briefing.com consensus 2.5%) while September Durable Orders (-0.1%; Briefing.com consensus 0.0%) and October Consumer Confidence (98.6; Briefing.com consensus 100.8) fell short of estimates. The implied probability of a December hike increased to 74.2% from last Friday's 69.9%, as indicated by the fed funds futures market.