By Wallace Witkowski, MarketWatch
Volatility is near lows for the year, suggesting calm before
storm
Investors will be keeping a close eye on the first of the
presidential debates between Democrat nominee Hillary Clinton and
GOP nominee Donald Trump for signs of a momentum shift in the
heated race.
The outcome from the head-to-head matchup carries the potential
to deliver a jolt to U.S. equity markets coming off closely watched
policy decisions by central bankers.
Stocks finished the week higher
(http://www.marketwatch.com/story/stock-futures-dip-but-sp-dow-still-on-pace-for-solid-weekly-gains-2016-09-23),
even with a Friday downturn, with the Dow Jones Industrial Average
advancing 0.8%, and both the S&P 500 index and the Nasdaq
Composite Index rising 1.2%, following a widely expected move on
part of the Federal Reserve not to raise interest rates
(http://www.marketwatch.com/story/fed-holds-off-interest-rate-hike-but-only-for-the-time-being-2016-09-21)
in September.
On the heels of a mostly spirited upswing for the benchmarks,
the debate may be, outside of another important meeting of major
oil producers, the most important event of the week.
The first presidential debate between Clinton and Trump
(http://www.marketwatch.com/story/these-are-hillary-clintons-and-donald-trumps-goals-for-their-first-debate-2016-09-23)
takes place Monday night at Hofstra University.
In a recent McClatchy-Marist poll
(http://www.mcclatchydc.com/news/politics-government/election/article103597247.html),
Clinton leads Trump by 48% to 41% in a two-way race, and 45% to 39%
when including Libertarian candidate Gary Johnson and Green party
candidate Jill Stein into the mix.
Read: Why the Fed is losing credibility
(http://www.marketwatch.com/story/fed-is-perilously-close-to-losing-its-credibility-says-economist-2016-09-22)
"The market may react to a perceived shift in momentum," said
Randy Frederick, managing director of trading and derivatives at
Schwab Center for Financial Research, in an interview. "Tuesday
could see some volatility seeing the market's been a bit
complacent."
Complacent, as in, the CBOE Volatility index has spent much of
the year below its 200-day average and is currently near its lows
of the year. The VIX sitting at near its nadir suggests that stocks
will be more prone to react sharply to events like Monday evening's
debate, Frederick said.
"One thing markets will be watching is whether either of the
candidates comes across as, for lack of a better word, scary," said
Brad McMillan, chief investment officer at Commonwealth Financial
Network, in emailed comments.
"Market reaction will probably depend on how successful each
candidate is in demonizing the other's proposals, and how effective
each is in his or her own defense," McMillan said.
Outperformance by one candidate over the other could even have
sector-specific ramifications, according to Chris Zaccarelli, chief
investment officer at Cornerstone Financial Partners.
"For example, if Donald Trump is perceived to have had the
better performance then I would expect the biotech subsector to
outperform on Tuesday," Zaccarelli said. "Conversely, if Hillary
Clinton is perceived to have had the better performance then I
would expect that area of the market to underperform." The iShares
Nasdaq Biotechnology ETF (IBB) finished off 0.6% Friday and is on
track to post a 12% decline so far in 2016.
Not everyone is convinced, however, that the debates have the
potential to spook stock investors.
"Folks should not conflate the volatility we will no doubt
experience due to upcoming quarterly earnings softness with
volatility that may come with the debates--the debates will be
great TV, for sure, but nothing else with regard to markets," said
Jamie Cox, managing partner at Harris Financial Group.
Meanwhile, the expected presidential face-offs will be broken up
by a vice presidential debate between Tim Kaine and Mike Pence on
Oct. 4. The next two presidential debates are scheduled to take
place on Oct. 9 and Oct. 19.
Earnings ahead
Looking beyond the presidential contest, a peppering of
corporate quarterly results are slated for the coming week.
"Off-calendar" earnings, or notable earnings like Nike Inc.(NKE)
and PepsiCo(PEP) that don't occur within the traditional earnings
season, won't likely affect broader markets, Frederick said.
Rather, investors will be looking for the bulk of earnings season
in October where the S&P 500 is expected to make more progress
on turning the corner back to earnings growth after five
consecutive quarters of declining profits.
The expected earnings decline for the S&P 500 in the third
quarter is just within range to result in flat, rather than
"negative," growth for the quarter, considering that earnings
estimates generally average about 2 percentage points below their
actual outcome. Third-quarter earnings are expected to decline by
2.3% year-over-year for the S&P 500, according to John Butters,
senior earnings analyst at FactSet.
Notable earnings scheduled
Report date Company/ticker (FactSet EPS / revenue estimates)
Mon., Sept. 26 Carnival Corp. US:CCL ($1.89 / $5.07 billion)
Tues., Sept. 27 Nike (56 cents / $8.88 billion) Cintas Corp. US:CTAS ($1.08 / $1.28 billion)
Weds., Sept. 28 Paychex Inc. US:PAYX (57 cents / $782.6 million)
Thurs., Sept. 29 PepsiCo ($1.31 / $15.83 billion) Costco Wholesale Corp. US:COST ($1.73 / $35.7 billion) ConAgra Foods Inc. US:CAG (48 cents / $2.73 billion) Accenture PLC US:ACN ($1.30 / $8.43 billion)
Fri., Sept. 30 McCormick & Co. US:MKC (94 cents / $1.09 billion)
(END) Dow Jones Newswires
September 26, 2016 09:23 ET (13:23 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.