Market Commentary - Week Ending 8/4/2018

Summary

Market Performance Summary

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

Notable Market Headlines

The week started off rough for stocks, technology stocks in particular, with some of the biggest names suffering meaningful selloffs as illustrated in the accompanying table. The question among investors regarding some of these market leaders is whether or not they have become too expensive and are going to stall or if this is just another normal correction in a continued upward climb. Unfortunately there is no way to know and only time will give us the answer.

Source: Standard & Poor’s Compustat

In addition to the concerns about some market leaders, the trade war with China seems to be heating up but for now is getting overshadowed by strong second quarter earnings reports. When the week came to an end U.S. large stocks were higher by +0.8% with technology stocks ending up being one of the better performing sectors along with healthcare and consumer staples. Small U.S. stocks were just behind large with a gain of +0.7% for the week. Year-to-date large and small U.S. stocks are the best performing asset class of this group we follow with gains of +6.3 and +9.1% respectively.

The gap in performance between U.S. stocks and international stocks widened further this week with international stock lower across the board. Developed country stocks lost -1.0% for the week with Eurozone, Australian, and Japanese markets all lower. The big international movers were in the emerging markets with China’s market lower by -3.0%. Concerns are growing the trade fight with the U.S. is starting to impact the economy. A positive note for emerging markets is a continued recovery in Brazil’s market gaining +2.2% for the week. Overall emerging markets were lower by -1.1% and are now down -6.2% in 2018.

Commodities and gold both last value this week down -0.5% and -0.8% respectively. The coming week’s reports on inflation could have some impact on these prices. The big story among the non-traditional asset classes this week was the surge in real estate stocks. Positive quarterly reports by some of the biggest real estate companies gave a boost to the industry with stock prices higher by a very strong +3.5% for the week. This group has been on a roller coaster ride and is once again in positive territory for the year.

Bond prices continued to inch lower this week with a fractional loss of -0.1%. Of note is that the yield on the benchmark 10-year Treasury Bond touched above 3% this week. The Federal Reserve did meet and, as expected, did not raise interest rates but did say the economy is strong signaling more rate hikes later in the year. More rate hikes are expected to keep downward pressure on bond prices.

Stock Highlights

Dish Network (DISH), a satellite TV service, reported quarterly results that were better than expected. Earnings per share came in at $0.83 versus an estimate of $0.71. The company did say it lost 192,000 subscribers which was not as bad as analyst had expected. The company is struggling to compete with Netflix but there is hope among investors that Dish’s subscriber base may be stabilizing. The stock surged this week by +13.4% but, as the accompanying graph shows, remains lower year-to-date by -28.4%.

Source: www.YahooFinance.com

Apple (AAPL) reported quarterly results that were warmly welcomed by investors pushing its stocks higher to a market value in excess of $1 trillion. Apple is the first U.S. company to reach this milestone. The strong second quarter results, including the shipment of 41.3 million iPhones contributing to a 40% growth in earnings per share, provide optimism that the gains for investors could continue. For the week the stock was higher by +8.9%, adding $83 billion in value to the company, and is now higher by +22.9% for the year.

Tesla (TSLA), the electric car company, calmed the fears of its shareholders saying that it intends to be profitable and cash flow positive in the immediate coming quarter. Investors focused on this positive outlook ignoring the fact that the company had a larger than expected loss in the second quarter. There’s no question the company is getting the benefit of the doubt as its stock jumped +17.2% for the week and is back near record highs.

IPG Photonics, a laser-maker and S&P 500 stock, reported second quarter earnings growth but below estimates. The CEO said that the quarter’s results were meaningfully impacted by the escalating trade tensions between the U.S. and other global economic powers. In particular, the company said orders from both Europe and China slowed in the quarter and have continued to do so in the current third quarter. In spite of a long-term trend of rapidly rising revenue as illustrated in the accompanying graph, investors reacted harshly with the stock falling -27.7% for the week making it the biggest loser among the S&P 500.

Source: Standard & Poor’s Compustat

Economic Indicator - Reported

The headline number for the July employment report disappointed with the economy creating only 157,000 jobs as compared to the estimate of 190,000. The headline did not tell the whole story though as the two prior months were revised higher by a combined 59,000. The unemployment rate decline to 3.9% as expected and was impacted by a drop in the number of unemployed actively looking for a job. Overall the report is an indication of a continued strong economy.

The S&P Corelogic Case-Shiller Housing Price Index suggests the relatively rapid increase in housing prices may be slowing. In the most recent month prices in the 20-city average were higher by +0.2% but slightly below forecasts. The strongest markets were Seattle, Phoenix, and San Francisco while New York City saw a small decline and prices in Washington D.C. were unchanged.

The Trade Balance, a measure of goods and services traded among countries, showed the U.S. with a larger than expected deficit of -$46.3 billion. Although this current month’s number was bigger than expected, the trend has been positive since peaking in February.

Economic Indicators – Upcoming

It’s going to be a relatively slow were for economic reports. The two that will be the most closely watched will provide reads on inflation with the Consumer Price Index (CPI) expected to show retail inflation higher by +0.2% and the Producer Price Index (PPI) forecast at +0.3% for the month. Economists expected year-over-year numbers of +2.9% and +3.4% respectively but, when excluding the volatile food and energy sectors, the year-over-year numbers should be more moderate.

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