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Market Commentary - Week Ending 7/14/2018

Summary

  • Stock market volatility subsided as investor look forward to a strong upcoming earnings season
  • Inflation ticked up in June to the highest year-over-year rate since 2012
  • A strong rally in large tech stocks has pushed the NASDAQ 100 index to a +15.3% gain for the year

Market Performance Summary

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

Notable Market Headlines

Stocks were mostly higher for the week with investors apparently shrugging off concerns of the trade war and possibly instead looking for strong earnings as the second quarter earnings season kicks off. Leading the earnings parade were banking giants Citicorp and J.P. Morgan both posting double-digit profit increases.

U.S. large stocks were the hands-down winners for the week with a gain of +1.5% putting them back into solid positive territory year-to-date at +4.8%. The Dow Jones Industrials, which has been lagging behind in 2018, posted an even bigger gain of +2.3% putting them back in the black for 2018 with a year-to-date gain of +1.2%. The largest 100 NASDAQ stocks gained the same +2.3% and are higher by a very impressive +15.3% for the year. The accompanying graph illustrates the difference in performance in 2018 of the various U.S. market indexes.

Source: S&P Compustat

Small U.S. stocks posted a disappointing performance for the week relative to large stocks falling -0.5% as concerns about trade eased. Year-to-date small stocks continue to be some of the best performers up +9.8%.

International stocks were higher with developed country stocks, on average, moving higher by +0.3%. When drilling down the results were mixed with Australian stocks lower, Japan’s market was higher, and European markets were nearly unchanged. Emerging markets posted gains of +1.0% rebounding somewhat from recently selling pressure. Among the notable winners were India’s market up +2.5% and Brazil’s rallying +2.6%.

Following a surge higher in late June, commodity prices have retreated -4.1% from their highs as the price of oil declines. For the week, commodities were down -2.8% but remain higher for the year by +5.5%. Talks that the U.S. and its allies may release oil-reserves could put further downward pressure on prices.

Real estate stocks edged lower for the week down -0.9% for the week and are now up less than 1% for the year. Gold added to its 2018 loss down -1.1% for the week and now off -4.9% year-to-date. This week’s reports on inflation did nothing to help reverse this negative trend.

Bonds were little changed this week, up +0.1%, remaining lower for the year by -2.7%.

Stock Highlights

Broadcom (AVGO) announced plans to acquire software company CA Inc. (CA) for $18.9 billion. The two companies work in similar fields and have many overlapping customers but it is apparently not clear how this combination will benefit shareholders. CA’s stock surged to just shy of the offer price given its an all cash offer but Broadcom’s stock sank, down -18.3% for the week, resulting in a nearly $19 billion loss in market value.

Fastenal Company (FAST), a leading distributor of industrial and construction supplies, is benefiting from a strong economy reporting strong results for the most recent quarter. Sales jumped +13.1% compared to the same period last year while earnings per share topped Wall Street estimates jumping +42.6%. The company said underlying market demand is driving its strong results. The stock jumped +14.6% for the week bring it back into positive territory for the year.

Alphabet (GOOGL), parent of search engine giant Google, is scheduled to report earnings in just over a week with investors clearly optimistic results will be strong. The company remains primarily an advertising business making up 90% of total sales. The company continues to diversify with revenue from non-advertising sources increasing +38% in the prior quarter. This week the stock rallied +4.3% to an all-time record high. We’ll see if the company can deliver on the high expectations.

L Brands (LB), an operator of specialty retail of women’s intimate and other apparel, reported monthly sales results that were positive but below expectations. Total sales increased by +6% in June but was short of the +10% growth in May. The big disappointment was a drop by -1% in same-store sales for its well-known Victoria’s Secret stores. L Brands’ stock fell sharply for the week down -13.6% for the week and now off -47.3% in 2018. As the accompanying graph shows, this is a continuation of a long-term negative trend for the stock which is off more than -68% from its all-time high.

Source: www.YahooFinance.com

Twitter (TWTR) announced plans to fight fake news rattling investors. It was reported that the company suspended 70 million accounts in May and June and the pace continues in July. The company has 336 million active monthly users so a purging of 70 million accounts represents 20% of these active users. Twitter’s stock dropped on the news falling -4.6% for the week but still higher by an incredible +85.3% for the year. At least one Wall Street analyst suggested this short-term drop in price is a buying opportunity.

Economic Indicator - Reported

Inflation generally remains contained with the Consumer Price Index (CPI) up just +0.1% in the most recent month coming in below economists’ expectations. This uptick in prices did push the index to a year-over-year change of +2.9% which is the highest since 2012. Medical care and vehicle prices rose while housing and energy prices fell.

The Producer Price Index (PPI), a measure of wholesale inflation, came in higher up +0.3% for the month which was higher than forecasts. Prices for wholesalers and retailers jumped +0.7% which could pose risk for consumer inflation if these price hikes get passed along to consumers. Metals prices continue to rise sharply and energy costs also contribute to the month’s overall increase.

Consumer Sentiment, a measure published by the University of Michigan, came in at the low end of expectations. Cited by 38% of the surveyed households was a concern about a potential trade war. In spite of the report not being as strong as hoped, the numbers are solid and point to a strong summer for the economy.

Economic Indicators – Upcoming

Retails sales, a major component of the total economy, are forecast to have grown by a very strong +0.6% following the report last month showing growth of +0.8%. Strong auto sales and growth by restaurants are expected to fuel the strong monthly number.

Industrials production, measuring manufacturing, mining, and utilities, is forecast to rebound from a weak report last month to a gain of +0.6%. The manufacturing sector is expected to contribute more than to the overall growth then mining and utilities.

Other numbers that will be reported include housing starts, the housing market index, and leading indicators.

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