Week Ending 7/22/2017

Summary

Notable Market Headlines

Similar to the prior week, nearly everything moved higher this week with the exception being commodities. This continued strength in the market comes as second quarter earnings season kicks into high gear with numbers clearly being well-received by investors. In spite of the many earnings reports, the interesting story continues to be the low volatility. For months many market watchers have been suggesting that the market’s historic low volatility is the calm before the storm but it has yet to materialize. More volatility is certain to re-enter the market but the timing of this is anybody’s guess.

The gains in the U.S. market were very similar for both large and small stocks this week with U.S. large stocks gaining +0.5% and U.S. small stocks up +0.6%. The NASDAQ Composite, consisting of many technology and related stocks, did outperform with a gain of +0.9%. The Dow Industrials, S&P 500, NASDAQ Composite, and the Russell 2000 (small U.S. stocks) all hit record highs this week. International markets also did well with international developed markets higher by +0.3% and international emerging markets gaining +0.5%.

There is concern among some market experts that technology stocks have moved too high too fast and that a correction is imminent. Certainly if enough experts make enough predictions, one of them will eventually be right. That said, the accompanying graph shows the rolling 1-year returns, the return during the prior year on a month-by-month basis. Through Friday the NASDAQ Composite is up +23.7% during the past year. Such a return is clearly impressive and cannot be sustained indefinitely but the graph makes clear that such a return is not entirely abnormal and a drop in prices does not always follow as some are suggesting.

The two asset classes that tend to move with inflation, real estate and gold, both had strong moves this week. Real estate gained +0.8% while gold jumped +2.1%. Year-to-date real estate is flat while gold is higher by +8.8%. Commodities where the only asset class we follow that moved lower, down -0.9%, due to the price of oil.

Bonds gained +0.6% for the week and are now higher by +1.6% year-to-date. The U.S. Government 10-Year Treasury closed the week with a yield of 2.232%. Bonds have seen a couple of weeks of strength following some comments by the Federal Reserve that low inflation could result in a more gradual rise in interest rates than had originally been anticipated.

Investor Trivia Question

Harley-Davidson, the very popular motorcycle company, was a darling of Wall Street for decades as baby-boomers reached an age and income that positioned Harley for great growth. In 1985 the company had sales of $287 million that grew nearly 20-fold to $5.67 billion over the next 20 years. Sales today are only slightly higher than they were more than a decade ago as competition has increased and the demographic trends are not favorable.

How many motorcycles did Harley ship in 2016?
See below for answer.

Winners and Losers by Sector

Stock Highlights

Vertex Pharmaceuticals (VRTX) stock jumped +24.6% for the week and is now up an incredible +121.5% year-to-date. This week the company reported results for its cystic fibrosis study that were clearly better than investors were expecting. It is not always such great news for biotech stocks, often a group than experiences extreme volatility depending on the results of such studies. An example of this risk was this stock’s loss last year of -41.5%.

Netflix (NFLX), the extremely popular internet television and movie business, saw its stock jump +17.0% for the week. The company reported earnings that were generally in-line with expectations. The big surprise was the huge growth in new members, up over 10 million just in the quarter and well ahead of forecasts. The company is benefiting from many areas including its own original content as well as international growth. It’s been a great year for Netflix shareholders with a gain of more than +52% and, as the graph shows, the stock is us 2,222% in just 5 years!

Capital One Financial (COF), one of the country’s leading credit card companies, reported earnings per share of $1.96 which was 6 cents ahead of Wall Street estimates. The stock jumped +6.6% adding more than $2.6 billion of value for this company. Perhaps a sign of the economy’s health is the reduction in reserves for future losses. In spite of the strong week, this stock is only higher by a fraction of a percent year-to-date.

General Electric (GE), a global industrial giant with nearly $120 billion in annual revenue, reported disappointing quarterly results. The company reported sales and earnings that were generally as expected but had weak cash flow and did not provide earnings guidance for 2018. The company is getting a new CEO and forecasts are not yet available from the new team. The stock dropped -3.2% and is down -18% year-to-date.

Chipotle Mexican Grill (CMG), a fast food restaurant company with nearly 2,200 locations as of the end of 2016, saw its stock fall -12.8% for the week on reports of patrons getting sick. This company has a market value that is now less than $10 billion after having peaked about 2 years ago above $23 billion. The company has faced multiple setbacks as it pertains to food quality that is taking a long-term toll on the stock.

Economic Indicator - Reported

It was a quiet week on the economic front. Housing starts for June were reported at 1.215 million units which was well ahead of expectations and a jump by 8.3% for the months. It could be argued that this jump in starts is a response from home builders to strong demand.

The other noteworthy report was the Leading Economic Indicators which was also well ahead of expectations and a sharp rise from the prior month. A rise in housing permits helped push this indicator higher. This all is suggesting a strong second half of 2017 for the economy.

Economic Indicators – Upcoming

There will be several economic reports in the coming week. Consumer Confidence in July is expected to have slipped from the June reading but is still expected strong. This index has sustained strength for several months unlike has been reported in nearly 20 years.

Durable Goods Orders for June are expected to have risen by +3.2%. This would be a stark improvement as compared to declines in the prior two months. Much of this improvement is expected to have come from aircraft which, when factored out, durable goods orders are only expected to have risen +0.4%.

The big report will be the first reading of Gross Domestic Product (GDP) for the second quarter. It’s estimated that it will come in at a healthy +2.6%. This would be nearly double the first quarter number of +1.4%. According to economists helping the second quarter growth was strength in consumer spending and increased inventories in additional to other factors.

Investor Trivia ANSWER

Harley-Davidson shipped 262,221 motorcycles in 2016. That was down -1.6% from the prior year and off its recent peak in 2014 of 270,726 and its all-time high of 349,196 in 2006. This general decline in shipments has resulted in a relatively tough ride for investors with its stock off more than a third since its high in 2006. The news is not improving as the company reported quarterly results this week that were below year-ago levels.

Source: Harley-Davidson Investor Relations: http://investor.harley-davidson.com/phoenix.zhtml?c=87981&p=irol-shipments&locale=en_US&bmLocale=en_US

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