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Week Ending 8/5/2017

Summary

  • The S&P 500, NASDAQ, and Dow Industrials closed at record highs but small stocks lagged behind
  • The economy remains strong demonstrated by the July employment report
  • Technology giant Apple reported better than expected second quarter results

Notable Market Headlines

Diversification in stocks around the world certainly helped investors’ portfolios this week as U.S. stocks turned in mixed results while international stocks were higher across the board.

U.S. large stocks gained +0.2% as measured by the S&P 500 (consisting of 500 stocks) to close at record highs. The index is now higher by +10.7% for the year. The Dow Jones Industrials, an index of 30 stocks, is another measure of large U.S. stocks. The Dow turned in a much stronger performance for the week, up +1.2%. As illustrated in the accompanying graph, the Dow has been pulling ahead for the week and a half due to strong gains in a handful of the 30 stocks that make up the index. This divergence is notable but relatively unusual as both indexes tend to have very similar performance in spite of the huge difference in the number of stocks in both.

U.S. small stocks fell -1.2% for the week and are now higher by only +4.0% for the year. It is widely believed that health care reform and tax reform would be better for small companies but the current status of both has resulting in the stocks of smaller companies underperforming.

International stocks continue to remain strong and turned in gains across the board. Developed country stocks rose +1.0% helped by news of a strengthening economy. Italy’s market was one of the notable winners with a gain of +2.5%. Emerging markets trailed behind but still posted a respectable gain of +0.5% for the week and are now higher by a very impressive +25.5% year-to-date. Brazil was a leader this week with a +2.4% gain.

Financials led…

Bank of America (BAC) +3.9%, Cincinnati Financial (CNF) +5.9%, Morgan Stanley (MS) +3.0%

Stocks gained but little else did as commodities fell -0.6% on a retreat in the price of oil, gold was down -0.9% but remains positive for the year by +9.2%, and real estate slipped -0.4% and is essentially flat year-to-date.

Bonds were basically unchanged after a respectable move higher the prior week.

Investor Trivia Question

Berkshire Hathaway, Warren Buffett’s company, reported earnings as discussed below. What started out as a textile company has grown into a massive conglomerate of many companies through many acquisitions throughout the years.

Approximately how many companies are owned by Berkshire Hathaway today?
See below for answer.

Winners and Losers by Sector

Stock Highlights

Apple (AAPL) reported better than expected earnings per share of $1.67 versus the Wall Street consensus estimate of $1.57 powering its stock to a +4.6% gain for the week to an all-time record high. There were concerns that consumers may have been holding out for the release of the next iPhone release but, by all measures, the company was hitting on all cylinders. Year-to-date the stock us up +35.0% or +$211 billion in value to a total of $815 billion. The accompanying table and graph shows the 5 stocks that have gained the most in market value during 2017.

Illumina Inc. (ILMN), a $28 billion genetics analysis company, reported second quarter results that beat both revenue and earnings estimates. The stock jumped +11.2% and is now higher by +51.9% for the year. Stocks like this are tempting for investors but are highly risky. The most common measure of risk is volatility, or how much the price of the stock fluctuates from month-to-month. Of the 500 stocks in the S&P 500, Illumina is the 11th most volatile. The accompanying graph shows the relative volatility of Illumina to a couple of other highly volatile stocks as well as a couple much more predictable and less volatile stocks. Investing in stocks like Illumina can have a very high payoff but come with extreme risk which is very different than investing in a stock such as Cola-Cola or Johnson & Johnson.

Berkshire Hathaway (BRK.B), legendary investor Warren Buffett’s company, gained +3.4% for the week following its earnings reports. Operating earnings, the number Mr. Buffett believes is the best representation of the business’s progress, fell -11% as compared to the same period last year. This drop in earnings came primarily from its insurance business which is expected to have lumpy results due to certain periods when payouts are higher than normal. Investors appeared to have brushed off this decline in earnings as the stock inched higher for 5 consecutive days.

Viacom Inc. (VIA.B), the media giant with operations in more than 180 countries, reported strong second quarter results but its stock fell -15.3%. Both revenue and earnings came in ahead of Wall Street estimates but operating earnings fell due to higher expenses, up +14% year-over-year, including programming expenses and marketing costs for its film business Paramount.

The losers for the week were both energy stocks and health care stocks. Energy stocks fell primarily due to the retreat in the price of oil following a fairly strong rally. Some of the notable losers were the following:

  • Range Resources Corp (RRC): -18.2% (Wed)
  • Pioneer Natural Resources (PXD): -16.2% (Wed)
  • Noble Energy Inc. (NBL): -10.6%
  • Chesapeake Energy (CHK): -10.5%

Economic Indicator - Reported

The July employment report was well received by investors showing a gain of 209,000 jobs for the month compared to an estimate of just 178,000. This strong month follows the prior month’s gain of 222,000 and is a great start for the second half of 2017. Along with the jobs gains, the unemployment rate fell by -0.1% to 4.3% and the participation rate, the percent of the working-age population either employed or seeking employment, rose by +0.1% which is another positive sign for the economy.

Auto sales were down -7.0% in July, the 7th consecutive monthly decline, with U.S. manufacturers experiencing the biggest drops. General Motors sales dropped -15.5%, Ford was down -7.4%, and Chrysler was off -11.0%. It wasn’t only U.S. manufacturers that felt the pain as sales fell for luxury brands such as Mercedes and BMW as well.

The Eurozone economyis speeding up with annualized growth of 2.3% in the second quarter.  This is contrary to the forecasts of economist at the start of the year who expected growth to be slower due to political uncertainty and higher oil prices.

Inflation, as measured by the price index for personal-consumption expenditures, the preferred measured by the Federal Reserve, was up 1.4% in June compared to last year and has fallen from a 2.2% rate 4 months earlier.  This has been contrary to expectations of prices normally rising when the economy picks up strength.

Economic Indicators – Upcoming

This week we will get two looks at inflation with reports for both the Producer Price Index (PPI) and the Consumer Prices Index (CPI) for July. The PPI is expected to have inched higher by just +0.1% for the month resulting in a year-over-year increase of +2.0%. The CPI is expected higher by +0.2% resulting in just a +1.7% compared to a year ago. Economists are disappointed that inflation is not higher than it is given the relative strength of the economy. These reports will be closely watched by the Federal Reserve and could have some impact on their decisions about interest rate policy.

The first estimate of second quarter productivity will be reported with estimates of a strong +0.8% gain. This optimism is due to the strong second quarter GDP number combined with relatively mild increases in labor costs. Gains in productivity have been disappointing since 2010.

Investor Trivia ANSWER

Warren Buffett’s Berkshire Hathaway owns more than 90 companies! Below are some of the more household names owned by Berkshire:

  • Dairy Queen (fast food)
  • Fruit of the Loom (underwear / clothing)
  • Duracell (batteries)
  • GEICO (insurance)

It also owns other giants including that are less of a household name but contribute tremendously to the company including General Re (insurance) and Burlington Northern Santa Fe (railroad).

Many investors have tried to replicate Buffett’s model and success but simply have not been able to.

Source: https://www.cnbc.com/2017/08/04/berkshire-hathaway-earnings-q2-2017.html

Contact Mark A. Patton :