Week Ending 10/28/2017

Summary

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

Notable Market Headlines

U.S. stocks turned in mixed results for the week with large U.S. stocks continued their records setting streak inching further higher by +0.2% while small stocks were down fractionally at -0.1%. Providing fuel for the market’s continued move higher have been strong earnings reports with 70% of companies reporting so far topping Wall Street estimates. These strong corporate results are further reflected in better than expected economic reports as discussed below.

Overall market volatility remained low but there were some meaningful moves among the various market sectors.Technology stocks were the hands-down winners with a surge of +2.7% as some of the biggest tech names reported blowout quarterly results. The week’s gain adds to a very strong year as technology stocks have rallied +33.1%.

On the negative side were healthcare stocks losing -1.9%. When drilling deeper into this move it shows that there were a handful of big winners while the majority of healthcare stocks were lower with some individual stocks experiencing fairly significant losses. As the accompanying graph shows, technology and healthcare stocks were neck-and-neck mid-year but technology has since pulled away with a meaningful lead.

Source: www.yahoo.com/finance, Technology symbol IYW, Healthcare symbol IYH

International stocks, on average, were all lower, for the week with developed country stocks down -0.2%. One notable winner though were stocks in Japan with a gain of +1.6%. The biggest headline for developed markets was the European Central Bank (ECB) decision to leave interest rates unchanged. This was a widely expected move. The ECB did further indicate it would pull back some of its monetary stimulus beginning in January which raises questions about how this will impact European corporate bonds.

International emerging markets followed developed countries lower with a loss of -0.3%. In spite of this small loss, year-to-date they remain higher by +32.0% with South Korea’s markets among the biggest winners higher by +38.1% in 2017.

Commodities were the big winners among the alternative investments this week gaining +2.5%. This rally wipes away more than half the year-to-date loss for commodities with remains at just -1.8%. Oil prices were the big contributor to the overall gains for commodities as oil prices moved higher on the strong economic reports. Losing ground were both gold, down -0.6%, and real estate off -1.5%.

U.S. bonds slipped fractional with a loss of -0.1%. Government bonds were among those losing ground resulting in yields rising to a multi-month higher of 2.411% for 10-year treasuries.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

Amazon Inc. (AMZN) reported blowout quarterly results with sales surging +34% to $43.7 billion or $1.5 billion better than Wall Street estimates. There are multiple areas of the business driving growth with the company’s AWS, their cloud-based hosting service, growing +42%. Earnings far surpassed estimates at $0.52 cents per share. The stock surged +12.0% for the week adding $56.7 billion to its market value.

Other big tech names also reported great results including Google’s parent Alphabet, Inc. (GOOGL) earnings $9.57 per share or more than $1.00 per share better than had been expected. Fueling these strong results were the volume of clicks on Google ads driving sales higher +23.7%. As the accompany graph shows, annual sales growth has been impressive and picking up momentum since 2014’s slower growth. The stock gained +2.8% for the week to close at a record higher.

Microsoft (MSFT), a clearly dominant technology company but not among the recent big growth stories, reported much better than expected results with $24.5 billion in revenue and earnings per share of $0.84. Microsoft and Amazon are fiercely competing in the cloud-computer space with Microsoft’s annual revenue for this business reaching its goal of $20 billion. This stock jumped +6.3% for the week and year-to-date is higher by +32.1% adding $167 billion to its market value!

The stocks of these three leading tech companies have performed extremely well the past 5 years as the accompany graph illustrates. Surprising many investor may be the fact that during this time Microsoft’s stock has actually performed better than Google’s parent Alphabet Inc.

CVS Heath (CVS), the giant drugstore company, made a proposal to buy insurance company Aetna (AET) in a deal valued at $66 billion. This is seen as an effort to strengthen its long-term position in the industry by locking in a huge number of members for its pharmacy-benefits management. One looming threat, with the impact currently unknown, is Amazon’s plans to enter this business in a significant way. Aetna’s stock jumped +7.6% on this news while CVS’s was down -9.8%.

Economic Indicator - Reported

The U.S. economy demonstrated its resilience in the third quarter with the Gross Domestic Product (GDP) growing +3.0% despite the two huge hurricanes. This makes for the second quarter in a row of +3% or more and the strongest 6-month run in 3 years. This economic strength is being explained by some as simply overall optimism due to such things as the strong stock market rally that are driving consumers and businesses to spend.

On a slightly negative note, when stripping out increases in inventory, businesses producing to replace low inventories, the growth rate for the quarter was +2.3% which is more in line with the recent trends. Note also that this is the first estimate for the quarter with revisions being common.

Durable Goods Orders, orders placed with domestic manufacturers for immediate or future delivery that serves as a good measure for businesses, surged +2.2% or more than double the gain expected by economists. When excluding the +64% surge in aircraft orders, which are clearly very volatile, there was an increase of +0.7% which was still two-tenths better than expected. The year-over-year change is the best seen since 2014 at +7.5% (excluding aircraft). This is very much a good sign for the economy.

New Home Sales for September came in better than expected at an annual rate of 667,000 as compared to an estimate of 555,000. This was a gain of more than 100,000 over the August report. Surprisingly the report showed no impact from the hurricanes, as was widely expected, with the South region showing even more gains than the overall country up +26%. This is the strongest report since October 2007 and leaves the inventory of new homes tight at just 5.0 months.

Economic Indicators – Upcoming

There will be several economic reports this week with the biggest being the October Employment Report. It is expected the economy added 323,000 rebounding from the loss of 33,000 jobs in September due to hurricane impacts.

The Housing Price Index for August will be reported with home prices expected to have risen by +0.5% in August as compared to a +0.3% in July. Separately, the report of strong Gross Domestic Product reported is a good sign for third quarter productivity with it expected to have improved by +2.4% and compared to +1.5% in the prior quarter. This report has been a disappointment for multiple years as momentum in productivity has waned.

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