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Market Commentary - Week Ending 6/23/2018

Summary

  • International markets experienced some heavy selling as the risks of a trade war loom
  • Small U.S. stocks, being seen as a possible safe haven in a trade war environment, continue to hold up better than the stocks of large companies
  • OPEC agreed to raise oil output and the price unexpectedly jumped

Market Performance Summary

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

Notable Market Headlines

Stocks around the world moved lower as talks of a trade war heated up. U.S. markets held up the best with U.S. large stocks down only -0.8% and small U.S. stocks were essentially unchanged. The Dow Jones Industrial average declined for 8 consecutive days with this negative trend finally broken on Friday.

Divergence of small and large stocks

International markets took a relative beating with developed markets lower by -3.1%. Since the January highs, developed markets are now off -9.9% or just a fraction from what would be consider a market correction (typically defined as a -10% loss). Germany’s market was the worst performer this week lower by -5.6% and is off -14.6% since the January highs. It’s being said that Germany’s Chancellor Angela Merkel is facing her biggest challenge in 13 years regarding immigration.

International emerging markets had another rough week, although not quite as bad as developed markets, declining -2.9%. Overall these markets are now lower by -15.7% since the January highs. China’s market was among the worst performing emerging market this week down -5.6% and is now off -18.1% since the January highs. Trump's talk on trade is certainly taking its toll at this time. As the accompanying graph shows, China’s market rallied more so that the U.S. market in January but has given it all back and more leaving it underperforming the U.S. year-to-date.

Source: www.YahooFinance.com

OPEC and their allies agreed to raise oil output but did not say by how much. The price of oil surprisingly jumped on this news and is back very near multi-year highs. The result for the Commodity index was a gain for the week of +2.2% and is higher year-to-date by +6.9%. Gold though moved the opposite direction losing -0.8%. Again this is a sign that investors are NOT searching for safe havens nor are they concerned about inflation. Real estate stocks have been volatile and had a strong week with a gain of +2.5%. These stocks have had a remarkable recovery from lows earlier this year and are now down just -0.5% year-to-date.

Bonds were little change gaining +0.1% for the week.

Stock Highlights

Dardin Restaurants (DRI), an operator of approximately 1,700 restaurants including Olive Garden, Theh Capital Grille, Seasons 52, and more, reported strong quarterly results including total revenue up +10.3% to $2.13 billion and earnings per up +17.8%. Restaurants that have been opened for more than a year experienced growth of +2.2%. This was all well received by investors with the stock having the best performance of all stocks in the S&P 500 gaining +15.7%.

Kroger Co. (KR), a leading grocery store operator, also reported strong quarterly numbers pushing its stocks sharply higher. Revenue came in at $37.5 billion resulting in earnings per share that topped Wall Street estimates by a wide margin. Online retail contributed meaningfully to this successful quarter with online sales up +66% over last year. The stock jumped +14.7% for the week but, as the accompanying graph illustrates, it is still well off its late 2015 high.

Source: www.YahooFinance.com

Red Hat, Inc. (RHAT), a software company, reported sales and earnings that both came in better than Wall Street estimates. The bad news was that guidance for the next quarter was below expectations and billings were software than expected. This news resulted in the stock being the worst performer in the S&P 500 for the week losing -18.8%. In spite of this week’s price decline, the stock remains higher year-to-date by +18.4% following a 2017 when it gained +72.3%.

Starbucks (SBUX), the giant coffer retailer with more than 28,000 locations, announced a weak sales forecast and the stock dropped. The sales forecast is being impacted by a slowdown in new store openings combined with plans to close 150 locations in 2019 or about 3 times the normal annual close rate. This company has a long history of incredible success and has produced exceptional long-term returns for investors but the stock has stalled since 2015 and fell -10.3% this week.

General Electric (GE), an iconic American company, is being removed from the Dow Jones Industrial Average after more than 100 years. This company has struggled mightily since the 2008 Financial Crisis with total sales, as illustrated in the accompany graph, still down about one-third. The stock has performed horribly with its all-time high set in 2000 just above $60 and is trading at $13.05 today.

Economic Indicator - Reported

There was good news in the housing sector with starts coming in better than expected at an annual rate of 1.35 million in May. This is expected to be further fuel for a strong economy in Q2. Housing completions were also strong helping supplies that have been very low. The housing sector has been strong and is likely bumping up against capacity constraints with a limited number of construction workers available.

Existing home sales are not showing the same strength as the new home market with existing sales coming in at 5.43 million in May. This was below forecasts and a decline compared to the prior month. Year-over-year sales have declined by -3.0%. Two factors impacting the decline in sales could be higher prices and a limited supply of homes available for sale.

Economic Indicators – Upcoming

New Home Sales are estimated to inch higher to 665,000 in the most recent month as compared to 662,000 the prior month. There is expectation that more housing completions will fuel higher sales.

S&P Corelogic Case-Shiller Housing Price Index is expected to show housing prices gaining +0.5% for the most recent month continuing a longer-term strong trend. Another strong month would put the year-over-year increase at +6.8%.

Consumer Confidence, a report from the Conference Board, is forecast by economists to show confidence remaining near multi-year highs at a reading of 128.1. The job market has been a significant contributor to confidence. Along the same lines will be a final reading from the University of Michigan on their Consumer Sentiment index which has also been near multi-year highs.

The expected report on Durable Goods Orders is forecast to show the headline number falling -0.6%. This expected decline is entirely related to aircraft orders, which are very volatile. Excluding the transportation sector the estimate is for continued growth of +0.4%.

Contact Mark A. Patton :