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30 August, 2019 Market Commentary

Markets Rebounded on Easing Trade Tensions


Market Commentary for the week ending August 30th, 2019

Summary

  • Stocks around the world posted gains for 2% or more closing what was a volatile month of August
  • Energy stocks rebounded as the price of oil bounced off of recent lows
  • Economic data remains mixed with consumers feeling confident while business are more hesitant

 

Market Performance Summary

Source: www.YCharts.com

Notable Market Headlines

It was a volatile month of August with stocks trading sharply lower during the first few days of the month followed by seesawing up and down through Friday’s close. This final week of August did see prices moving meaningfully higher off the month’s lows with signs that trade tensions may be easing combined with reports the economy is continuing to grow albeit at a slower pace than earlier in the year.

At the close of the week large U.S. stocks were higher by +2.7%, as measured by the S&P 500, having risen 4 of the 5 trading days. The NASDAQ Composite rose a similar amount while the Dow Jones Industrial Average was up +3.0% helped by stocks such as Dow Inc. (DOW), United Technologies (UTX), and Intel Corp. (INTC) all up +5% or more. U.S. small stocks rallied as well, up +2.3%, lagging behind large stocks as they generally have throughout 2019.

An interesting trend in the markets during the past 12 months has been the underperformance of some of the most popular, and once market leading, technology stocks. These stocks are often referenced as the FAANG stocks, an acronym for the first letter of each company name. As the accompanying table shows all of these stocks are off their highs by a larger percent than the overall market. Furthermore, all but one of these stocks has not hit a new high for more than a year while the S&P 500 did so just over a month ago.

Source: www.YCharts.com

International stocks also did well with developed country stocks higher by +2.0% and emerging markets rallying +2.9%. A couple of the best performing international markets where Italy up +4.5% and Brazil gaining +3.8%. The performance of international markets continue to lag well behind U.S. markets by a wide margin year-to-date.

The more non-traditional asset classes were mixed for the week. Real estate stocks continued higher adding to their strong 2019 gains up another +1.8% for the week and now +21.1% year-to-date. Commodities were also higher gaining +1.5% as the price of oil moved higher. On the downside was gold losing just -0.3% for the week. Gold has been a safe-haven for investors during the month of August gaining +7.9% for the month while U.S. large stocks declined by -1.7%.

Bond prices continued their move higher gaining +0.3% for the week with the 10-year U.S. Treasury yield closing at 1.500%. Signs of economic growth slowing worldwide and very low inflation continues to put downward pressure on yields. Furthermore, the yield curve remains inverted with shorter-term rates currently above longer-term rates signaling the possibility of a coming recession (see mid-August blog for more).

Stock Highlights

Dollar General (DG), a leading deep discount retailer with more than 15,000 stocks in 44 states, reported quarterly results that top all expectations. Sales came in for the quarter at $6.98 billion resulting in earnings that were better than Wall Street expected all helped by growth in same-store sales of +4.0%. Dollar Tree (DLTR), a major competitor to Dollar General, reported results that were a bit more mixed. As the accompanying graph shows revenue growth has slowed in 2019 for Dollar Tree while Dollar General has continued to see strong growth. For the week Dollar General’s stocks jumped +13.9% and is up +44.4% for the year while Dollar Tree’s stock was up +6.7% for the week and now +12.4% during 2019.

Source: www.YCharts.com

Costco Wholesale (COST), a leading warehouse club with 762 stores at the end of 2018, saw the opening of its first mainland China location greeted with much success. The company reported they had to close the store early due to larger than expected crowds. This store opening is an effort to expand its international revenue which currently accounts for just 28% of its total. Costco’s stock has performed exceeding well the past decade as the accompanying graph illustrates both compared to the overall market and to leading discounter Walmart (WMT). The stock added to its gains this week by +7.8% and is up year-to-date by +44.7%.

Source: www.YahooFinance.com

Ulta Beauty (ULTA), a diversified products and services company with more than $7 billion in annual revenue, reported disappointing quarterly results. Both sales and earnings were above year ago levels but came in below expectations. Management furthermore cut its outlook for the remainder of the year due to a less profitable product mix. Ulta’s stock fell -26.2% for the week and is now lower in 2019 by -2.9%.

Phillip Morris International (PM) and Altria (MO), two tobacco giants, reported they are in talks of a merger of equals. These two companies were once one but split up about a decade ago with Phillip Morris focused on international markets and Altria on U.S. markets. A merger would allow both companies to market its products worldwide resulting in possibly higher growth and more stability. The deal is not imminent and both stocks fell on the news with Phillip Morris down -11.2% for the week and Altria off -5.8%.

Other headlines and stock movers…

  • Best Buy (BBY) reported strong sales and earnings and raised its outlook for the remainder of the year. Investors were apparently disappointed with the stock down -3.9% for the week.
  • Energy stocks rallied off recent lows as the price of oil recovered some losses. Some bigger wines were Cimarex Energy (XEC) jumped +12.3%, National Oilwell Varco (NOV) rose +9.2%, and Marathon Petroleum (MPC) was higher by +7.5%.

Economic Indicator - Reported

Durable Goods Orders, when stripping out the very volatile transportation sector, dropped -0.4% while economists were expected a rise of +0.9%. A drop in non-defense capital goods contributed to the month’s disappointment.

Housing prices continue to rise but at a much slower pace than just a year ago according to the Case-Shiller Home Price Index. Prices are high by +2.1% year-over-year with 17 of the 20 cities included in the index rising in the most recent month.

Consumer Confidence remained near a 19-year high in spite of the ongoing trade war with China. The report was meaningfully better than economists had expected helped by consumers optimism about both the current economic conditions and future expectations.

Economic Indicators – Upcoming

The following economic data are expected in the coming week:

  • Employment report and unemployment rate
  • Motor vehicle sales
  • Factory Orders

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