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27 July, 2019 Market Commentary

U.S. Stocks Rally to a Record High on Strong Economic Data


- President, Patton Fund Management, Inc.

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Market Commentary for the week ending July 27th, 2019

Summary

  • U.S. stocks closed at a record high while International stocks languish
  • Second quarterly GDP came in strong than expected at 2.1%
  • The Federal Reserve is expected to lower interest rates in the coming week

 

Market Performance Summary

Source: www.YCharts.com

Notable Market Headlines

U.S. stocks surged to another record high helped by stronger-than-expected economic growth in the second quarter and quarterly earnings that are generally coming in better than analysts had forecast. This good news is combined with widespread expectations that the Federal Reserve is going to lower interest in the coming week.

At the closing bell on Friday large U.S. stocks as measured by the S&P 500 were higher by +1.7% putting them higher by +20.7% year-to-date and small stocks surged +2.2%. A notable disappointment was the Dow Jones Industrial Average, often delivering a very similar return to the S&P 500, was up only +0.1% for the week. The 2 biggest losers among the 30 stocks in this index were Boeing (BA) and Dow (DOW) down -8.6% and -4.7% respectively.

The tech-heavy NASDAQ performed even better than the S&P 500, gaining +2.3% for the week, helped by generally strong earnings reports. Gains in the share prices of many large tech companies happened in spite of social media giant Facebook (FB) reaching an agreement to pay a $5 billion penalty related to user privacy issues, an agreement that many see as a warning shot for other companies. The strength in the tech sector was only topped by financials helped also by strong earnings and the anticipating of the Fed lowering interest rates which would further help these companies.

International stocks continue to lag behind U.S. stocks with developed country stocks flat on average for the week. The European Central Bank, or ECB, this week indicated its intent to attempt further efforts to stimulate the regions sluggish economy which could help the long-term performance of these markets.

Emerging markets fared worse than developed markets declining -0.4% for the week. The largest of the emerging markets, China, was off -0.6% and the Hong Kong market, often moving similar to China’s market as illustrated in the accompany graph, was down -2.4%. These two markets are among the largest in the world with total market values of $5.5 trillion and $3.8 trillion respectively.

Source: www.YahooFinance.com

Real estate was the only non-traditional asset that moved higher this week up +1.0%. Year-to-date it has been strong gaining +16.4%. Both commodities and gold were lower, down -0.5% and -0.6% respectively. Gold’s lower price would suggest investors continue to have no fears of inflation and are not interested in a safe haven investment while the U.S. markets hit record highs.

Bond prices were flat for the week. Apparently investors are sitting tight waiting to see what the Federal Reserve does with interest rates in the coming week.

Stock Highlights

United Parcel Service (UPS), the world’s largest delivery company, experienced a 30% increase in demand for its NextDay Air service resulting in strong second quarter results. The company’s CEO believes this is more than just a one-time jump in demand and more of a structural change was smaller retailers compete with Amazon. The stock got a much needed pop, surging +16.7%. As the accompanying graph shows, UPS’s stock is up +37% during the past 5 years while its biggest competitor’s stock, FedEx (FDX), has gained +22% but was much higher about 18 months ago.

Source: www.YahooFinance.com

Alphabet (GOOG), parent of search giant Google, reported better than expected second quarter sales and earnings adding $10’s billions to the company market value. The very strong results were helped by lower traffic acquisition costs as well as growth in its cloud business with revenue there reaching an annualized rate of $8 billion. Alphabet’s stock jumped +10.7% for the week and is higher by +20.7% so far in 2019 but has been unable to tops its record high hit in April of last year.

Starbucks (SBUX), with more than 30,600 company-owned and licensed stores, is growing faster than investors had expected in its two big growth markets…the U.S. and China. Both sales and earnings came in better than expected due to what management says is their “focus on enhancing the customer experience, driving new beverage innovation and accelerating the expansion of our digital customer relationship.” Wall Street was impressed sending the stock higher by +9.8% leaving the stock up an impressive +53.9% for the year!

The earnings news was not good for every company including a surprising disappointment from retailing giant Amazon (AMZN). Sales came in better than expected for the quarter but earnings per share missed the mark. As the accompanying graph shows, there are signs that the growth in earnings have flattened. Combine this quarter’s results with guidance from management that third quarter numbers are expected below analysts’ expectations and the stock dropped…just -1.1% for the week. The week’s performance is difficult for investors to complain too much about with the stock still higher year-to-date by +29.4%.

Source: www.YCharts.com

Economic Indicator - Reported

U.S. Gross Domestic Product (GDP) grew by +2.1% in the second quarter versus economists’ forecast of +1.9%. This is a slowdown from the +3.1% in the first quarter but meaningfully better than had been expected just a month or two ago. The quarter was helped by strong consumer spending while at the same time businesses reduced spending.

New Home Sales in June rebounded from two prior months’ of declines coming it an annualized rate of 646,000 homes. Although this is below forecasts by economists the number is +4.5% higher than the same period a month ago.

Existing home sales did not show the same strength as new homes coming it at 5.27 million homes annually. This was a -1.9% drop from the prior month and -2.2% below the same period a year ago in spite of a meaningful drop in mortgage rates. One explanation for slowing sales is that homes are becoming less affordable with the average price rising +4.3% for the month to $285,700. Prices have risen every month for seven years!

Durable Goods Orders rose by +2.0% in the most recent month topping estimates of just +0.7%. There was strength across many sectors with military spending being the biggest standout on the downside.

Economic Indicators – Upcoming

The following economic data is expected in the coming week:

  • July Emloyment Report with estimates of 171,000 new jobs created
  • Case-Shiller Home Price Index
  • Motor Vehicle Sales
  • Consumer Sentiment Index

Contact Mark A. Patton :

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