Market Commentary - Week Ending 7/28/2018

Summary

Market Performance Summary

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

Worries of a trade war, at least with the European Union, eased significantly this week. President Trump met with the European Commission President at the White House resulting in an agreement that was vague with both sides agreeing to explore a range of possibilities. The market’s reaction to this was a swift move higher.

For the week U.S. stocks were mixed with large U.S. stocks gaining +0.6%, as measured by the S&P 500, and now up +5.5% year-to-date. This general rise in the market was not experienced by all stocks though as the Dow Jones Industrials jumped an impressive +1.6% while the tech-heavy NASDAQ fell -1.1%. Another notable mover was the energy sector up +1.9% as the price of oil moved higher.

U.S. small stocks did not participate in the week’s rally but instead fell relatively sharply down -1.9% for the week. Small stocks had been seen as a safe haven as it related to a possible trade war given smaller companies tend to have less sales internationally. These stocks remain the leader for the year with a gain of +8.4%.

International stocks were higher across the board with developed country stocks gaining +1.1% for the week. Japan’s market was among the strongest in the developed markets gaining +2.1%. Emerging markets were even stronger posting a weekly gain of +1.7% with China up +2.4%, India gaining +2.7%, and Brazil’s market higher by +3.0%. Year-to-date international markets continue to lag well behind U.S. markets with developed country markets down -2.1% and emerging markets lower by -5.2% for the year.

The performance of the alternative asset classes was mixed with Commodities sharply higher for the week up +1.7% helped by the price of oil. Gold continues to drop with a loss of -0.6% for the week and off -6.3% in 2018. Gold, often viewed as an inflation hedge, is suggesting investors have no concerns about inflation. Real estate stocks continued to come off their early-July highs with a loss for the week of -0.8% and now down -1.5% for the year.

Bond prices continued to fall down -0.2% for the week. The strong economic growth reported on Friday gives the Federal Reserve the support they need to continue raising interest rates which puts downward pressure on bonds. Bonds have been among the worst performing investments in 2018 with a loss of -3.1%.

Stock Highlights

Facebook (FB), the social media powerhouse, reported second quarter results that very much disappointed investors. It was nearly a perfect storm for investors in this stock with the company missing revenue forecasts for the quarter combined with slowing user growth and weak guidance for the remainder of 2018. As the accompanying graph shows Facebook’s stock fell sharply posting its worst single-day decline since going public in 2012 and losing -16.7% for the week. In spite of this terrible week the stock is roughly flat for the year and still above levels in March when the company initially faced issues regarding user privacy issues.

Source: www.YahooFinance.com

HCA Healthcare (HCA), one of our country’s hospital giants, reported better than expected second quarter results. Revenue for the quarter came in at $11.53 billion with earnings per share of $2.31. Both were ahead of Wall Street estimates. The company also raised both revenue and earnings guidance for the remainder of the year helping the stock rally sharply up +15.0% for the week. The stock had been lagging behind the market prior to this week’s rally and is now up +4.8% for the year.

Intel (INTC), the biggest computer chip maker, had a strong quarter but investors focused on other issues. Revenue came in at $16.96 billion and with earnings per share of $1.04 which were both ahead of estimates. One report says the company’s disappointing update on its highly anticipated new processor shook investors. Another report says it was the company’s data center business coming in slightly shy of estimates that was the problem. Regardless, the stock lost -8.1% of its value but does remain higher year-to-date.

Amazon (AMZN), the retail and cloud-computing giant and more, reported record quarterly results with sales of $52.9 billion, up from $38.0 billion a year ago, with earnings per share of $5.07 or more than double Wall Street estimates. The company’s non-retails business including cloud computing and advertising helped drive results. Clearly investors’ expectations were high given the stock only gained +0.2% for the week but is higher for the year by +55.4%!

Twitter (TWTR), the President’s favorite social media platform, reported a decent quarter with revenue gaining +24% compared to a year ago and adjusted earnings per share of $0.17 which was a penny ahead of Wall Street estimates. Similar to the Facebook story, user growth appears to be slowing with Twitter’s monthly user count actually falling slightly. Part of the decline is users is due to the company purging approximately 1 million fake accounts a day. Twitter’s stock was the second worst performing stock in the S&P 500 for the week down -21.4% but remains higher for the year by +42.1%.

Economic Indicator - Reported

Gross Domestic Product (GDP) grew by +4.1% in the second quarter making this the fastest pace in nearly 4 years. A jump in consumer spending combined with strong exports and nonresidential investments all contributed to this strong quarter. Had it not been for a decline in inventories, growth would have come in at +5.1% for the quarter.

As the accompanying graph shows, the economy has been steadily improving for the past couple of years, reversing what was a negative trend in 2015 and most of 2016. History would suggest there is still more room for growth but some economists will argue circumstances have changed that will hinder more progress…time will tell.

Source: https://www.bea.gov/national/index.htm#gdp

The report did show some signs of inflation with the GDP price index coming in at +3.0% which was well above economists’ forecast of just +2.2%. Rising inflation and the strong economy could both lead the Federal Reserve to raise interest rates more than has been anticipated.

New Home Sales came in much below forecasts at an annualized 631,000. This is one of multiple reports unfortunately showing signs of a slowing housing sector being impacted by higher mortgage rates. Furthermore, this drop in sales came in spite of price concessions that have resulted in the median new home price falling by -4.2% during the past year to $302,100.

Durable Goods Orders were higher by +1.0% but were well below economists’ consensus estimate of +3.2%. Aircraft orders, which are very volatile, did help the month’s numbers but nearly as much as expected. When excluding transportation, orders rose by a solid +0.4% but this was still slightly below expectations.

Consumer Sentiment, measured by the University of Michigan, came in strong at a reading of 97.9 which was better than expected. Sentiment remains near record levels. Among the positives in this report is that consumers are saying they are not concerned about inflation contrary to concerns of the Federal Reserve and many economists.

Economic Indicators – Upcoming

The employment report for July is expected to show the economy added 188,000 new jobs. This would be down slightly from the 213,000 jobs added in June. The unemployment rate, which ticked higher in June due to more workers returning to the job market in search of jobs, is expected inch lower to 3.9% from 4.0% in June.

Economists forecast that the S&P Corelogic Case-Shiller Housing Price Index will show housing prices increasing by +0.4% in the most recent month. This would be a continuation of a slowdown that started in February. Other reports on housing have been showing weakness as well due, in part, to higher mortgage rates.

Other reports will include Personal Income and Spending, Factory Orders, and information on International Trade.

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