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Market Commentary - Week Ending 7/21/2018

Summary

  • Retail sales came in stronger than expected and suggest the economy grew rapidly in the second quarter
  • Netflix stumbled with subscriber growth coming in well below expectations
  • Big bank earnings reports were strong helping the financials sector top the winners list

Market Performance Summary

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

Notable Market Headlines

Fed Chairman Powell delivered his semiannual monetary policy testimony to congress. In his remarks he indicated the economy remains strong and inflation is relatively low. These conditions will keep the Fed on track to continue to gradually raise short-term interest rates. The market has priced in a 62% probability that the Fed will raise rates twice more in 2018.

The reaction to the Fed Chairman’s testimony as well as many earnings reports was generally positive with U.S. large stocks up fractionally for the week holding onto a +4.8% year-to-date gain. Small U.S. stocks once again took the leader’s position gaining +0.6% for the week and now higher by +10.5% for 2018. Big banks, including J.P. Morgan (JPM) and Bank of America (BAC), pushed financials to be the best performing sector gaining +1.4% for the week.

International stocks were higher with developed country stocks gaining +0.4% for the week. Among the developed markets Japan was the best performing region gaining +1.1% for the week. International emerging markets were also higher for the week by +0.3%. The picture was more mixed here with the largest of the emerging markets, China, losing -1.2% while Brazil’s market continued its recovery gaining +4.7% for the week but still lower by -11.9% year-to-date.

The accompanying graph shows the year-to-date performance of various developed country markets around the world. Clearly the U.S. markets have performed well while most others have struggled.

Source: S&P Compustat

All of the non-traditional asset classes lost value for the week. Real estate stocks performed the worst of this group losing -1.4% with higher bond yields putting downward pressure on prices. Real estate stocks have fallen back into negative territory once again year-to-date after staging a strong recovery. Both gold and commodities also lost value with gold down -0.9% for the week and -5.7% year-to-date. Commodities, due to the falling price of oil, lost -1.1% for the week but remain higher in 2018.

Bond prices fell -0.3%, a relatively sharp move, as yields moved higher likely responding to the Fed Chairman’s indication the Fed will likely continue to raise interest rates in 2018.

Stock Highlights

Netflix (NFLX), the media streaming giant, reported disappointing subscriber growth in the most recent quarter. During the second quarter the company added 674,000 domestic subscribers which was about half what had been expected. International growth was robust with 4.47 million new users but this was still more than 10% below forecasts. The accompanying graph shows the year-over-year growth in subscribers which has been relatively consistent. The company described the quarter as “strong but not stellar” but Wall Street disagreed with the stocks falling -14% for the week but is still higher year-to-date by a huge +87%.

Source: www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming-subscribers-worldwide/

United Continental (UAL), one of the nation’s largest airlines, reported revenue higher by +8% over the same period last year at $10.8 billion but with earnings per share that were below the prior year. After adjusting for what the company considered one-time items, the good news is that the adjusted earnings per share topped Wall Street estimates. The company went on to raise earnings guidance for the remainder of the year with all of this resulting in its stock price jumping +12.2% for the week.

The board of Warren Buffett’s Berkshire Hathaway (BRK.A) voted to change its stock buyback policy allowing the company to buyback more of its stock. When a company buys back its stock, it leaves the remaining shareholders with a larger percentage ownership of the company. Berkshire’s stock was higher by +3.0% for the week but still negative year-to-date.

eBay (EBAY), one of the largest e-commerce companies with nearly 200 million active buyers on the site, reported disappointing second quarter results sending its stock lower. Revenue rose +9% as compared to the same period last year to $2.64 billion and earnings were sharply higher. Disappointing investors though was earnings guidance for the third quarter below expectations. The stock fell -9.1% for the week.

Economic Indicator - Reported

June retail sales came in strong as expected up +0.5% for the month. Even bigger was a revision to the May number to a very big gain of +1.3% from an originally reported +0.8%. Sales of autos as well as restaurant sales were very strong in both May and June signaling strong consumer confidence. This is all expected to bode well for second quarterly Gross Domestic Product (GDP) which could come in a better than +5%.

Industrial Production, led by strength in the manufacturing sector, was strong in June with a gain of +0.6%. A rebound in auto manufacturing from a sharp drop the prior month combined with strength in hi-tech fueled June’s strong manufacturing sector growth. Mining activity was also very strong during the month while utilities were weak.

Economic Indicators – Upcoming

Investors will get the first look at Gross Domestic Product (GDP) for the second quarter with expectations running higher. Given multiple other strong economic reports, economists are estimating GDP grew by +4.2% driven by strong consumer spending and a build in business inventories. Such growth in the quarter would be double the rate in the prior quarter.

Durable Goods Orders, excluding the volatile transportation sector, are expected to have grown by +0.5% in June. This would be a sharp reversal from the decline of -0.3% in the prior month.

Other reports this week will include Consumer Sentiment, expected to remain high but has been drifting lower in recent months, as well as New Home Sales estimated at an annualized rate of 668,000.

Contact Mark A. Patton :