Market Commentary - Week Ending 1/26/2019

Summary

Market Performance Summary

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

Notable Market Headlines

Stocks generally closed the week little changed but that masks some fairly meaningful ups and downs during the shortened holiday week. The first day of trading for the week saw markets selloff about -1.5% but then steadily gain ground for the remainder of the week with Friday ending strong helped by word the government shutdown was coming to, at least a temporary, end.

At the close of the week U.S. large stocks were lower by -0.3% while small U.S. stocks were unchanged. Year-to-date large stocks are higher by +6.3% and small U.S. stocks are holding on to a very impressive +10.0% surge. Technology stocks were among the better performers this week as they have been so far in 2019 with stocks such as Facebook (FB) up +13.7% and chipmaker NVIDIA (NVDA) gaining +20.0 for the year.

International stocks have also had a strong start to 2019 with developed markets higher by +0.1% for the week and +5.8% year-to-date. Emerging markets, considered riskier than others, have done even better with a gain of +1.6% for the week leaving them higher by an impressive +8.0% year-to-date. Some of the standout countries have been Brazil up +14.7%, Turkey gaining +13.0%, and Russia’s market higher by +11.3% year-to-date.

The non-traditional asset classes have also had a strong start to the year with real estate up +1.2% for the week and +7.5% for 2019. Expectations that the economy will remain relatively strong and interest may not go much higher are both helping these stocks.

Commodities, driven by the price of oil, slipped -0.7% this week but remain higher by +8.6% for the year. Gold has been among the laggards up +1.5% for the week digging it out of negative territory for the year now higher by +1.3%. This does continue to be a good diversifier in a portfolio as it does not tend to move up and down at the same time as other asset classes.

Bonds also rallied out of negative territory for the year up +0.4% for the week and +0.3% year-to-date. The yield on the 10-year U.S. Treasury stands at 2.761% which is higher since the start of the year but a sharp drop from the November 2018 high of 3.237%

Stock Highlights

Xilinx (XLNX), a semiconductor company, reported better than expected quarterly results fueling a really for the entire sector. Lam Research (LRCX), a chip equipment manufacture, also came in with strong quarterly numbers. Xilinx stock gained +19.7% for the week while Lam Research was higher by +16.7%.

Others did well. Note these stocks were all meaningfully lower YTD prior to the week’s rally.

Intel was left out of the rally.

International Business Machines (IBM), the well-known massive technology company, reported surprising strong numbers for the quarter and indicated optimism for 2019. The company’s traditional consulting business showed revenue growth for the quarter after having declined in prior periods.

Cloud business now accounts for about 25% of IBM’s total revenue and grew by 12% in 2018. As the accompanying graph shows this company has struggled to grow in recent years. IBM’s stock rallied +9.6% for the week and up just +1.1% year-to-date.

McCormick & Co. (MKC), the global spices company with more than $5 billion in annual revenue, was the worst performing stock among the S&P 500 this week. The company reported earnings per share above last year’s level but below Wall Street estimates. The higher year-over-year earnings were helped by lower tax rates while operating income fell. The stock plunged -13.6% but is only down -2.4% for the year.

Arconic (ARNC), a manufacturer of aluminum products formerly known as Alcoa, reported that its deal to be acquired by private equity firm Apollo Group fell through. One line of speculation for the failed deal is that Apollo did not want to absorb all of the pension obligations owed by the company. Others have also speculated that the cause was potential liability from an apartment fire in 2017 that used a product made by Arconic. Regardless of the reason the stock fell -8.1% for the week but does remain up +0.8% for the year.

Economic Indicator - Reported

Existing Home Sales for the most recent month came in below economists’ expectations falling to a 3-year low. Sales fell to an annualized rate of 4.99 million homes which was down -6.4% for the month and -10.3% compared to the same time a year ago. There are signs of continued slowing demand indicated by a relatively small increase in average prices.

Durable Goods Orders report and New Home Sales were delayed due to the government shutdown.

Economic Indicators – Upcoming

Expected reports this week:

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