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25 October, 2019 Market Commentary

Nearly everything moved higher in spite of mixed economic reports


Market Commentary for the week ending October 25th, 2019

Summary

  • Nearly every market around the world was higher with U.S. large stocks closing just a fraction away from record highs
  • Earnings season is in full gear with more companies delivering good news and not bad
  • There were mixed reports on the economy with the housing market continuing strong but business investment shrinking further

 

Market Performance Summary

Market Indexes Week Ending October 25, 2019

Source: www.YCharts.com

Notable Market Headlines

It was a good week for most investors as nearly everything in a portfolio moved higher. Better than expected earnings from more companies than not combined with a settling down, for the time being, in trade talks, as well as some progress in the U.K. with Brexit helped ease investors’ minds. Focus will shift in the coming week to the Federal Reserve’s scheduled meeting and the widely expected cut in interest rates.

At the closing bell this week U.S. large stocks, as measured by the S&P 500, were higher by +1.2%. In spite of many predictions that the strength in technology stocks is going to slow, the tech-heavy NASDAQ composite outperformed gaining +1.9% while the more economically sensitive stocks in the Dow Jones Industrials were higher by just +0.7%. The best performing sector was energy stocks, up +4.4% for the week, following what was a disappointing performance the week before.

Small U.S. stocks outperformed large for the second week up +1.6% this week following a similar gain in the prior week. Year-to-date small stocks continue to lag behind large, up +16.9% and +22.4% respectively but the gap is narrowing.

International markets climbed along with U.S. markets with developed country stocks gaining +1.1% for the week. The United Kingdom’s market was among the stronger up +1.4% with some apparent progress on Brexit. The stronger performance though was in emerging markets which were higher by +1.7% overall. The two best performing emerging markets were Brazil and Russia, up +5.3% and +4.9% respectively, as China’s lagged behind with a gain of just +0.6%.

Russia’s market is not one that gets much attention but this week’s gain of +4.9% deserves some attention. It was not only a strong week for these stocks but has been a very strong year with the market up +38.4% in 2019. In spite of such a rally, Russian stocks are at about the same level they were nearly 10 years ago while the S&P 500 has gained nearly +150% during the same time.

Russia versus U.S. market performance

Source: www.YahooFinance.com

The non-traditional asset classes all posted gains with real estate stocks up the least at +0.1%. Gold rose +1.0% while commodities jumped +2.4% on a gain in the price of oil. In spite of real estate lagging behind this week, it remains a great year-to-date performer up +25.6% compared to gold higher by +17.0% and commodities +10.8%.

Bonds were the only asset class we follow that lost value this week down -0.2%. The yield on the 10-year U.S. Treasury rose to 1.796%.

Stock Highlights

Facebook (FB) CEO Mark Zuckerberg appeared before Congress once again this time to defend the company’s planned Libra electronic payments system. It was a grueling six hours that not only included questioning about Libra but also the company’s privacy policies and protection of users data. In spite of all the attention, the stock was higher with the rest of the market gaining +1.1% and higher year-to-date by +43.3%.

Biogen (BIIB), one of the world’s biggest medical biotech companies with revenue of $14.2 billion, announced surprising news about its Alzheimer’s drug. The company had said it was abandoning the product in March of this year but, in light of additional data, has said that’s not the case. Biogen’s stock was the best performer in the S&P 500 for the week gaining +30.9% but is still lower on the year by -4.3%.

Lam Research (LRCX), a leading manufacturer of equipment used to make semiconductors, reported a better than expected quarter with revenue of $2.17 billion and earnings per share of $3.18. Both numbers were ahead of Wall Street expectations but were below prior quarter numbers. As the accompanying graph shows, revenue growth peaked in 2017 and has been slowing since. Regardless, investors were pleased, helped by management’s optimistic outlook for the future, and the stock jumped +15.6% and is higher by a whopping +98.3% in 2019.

Lam Research (LRCX) changes in 12 -month trailing revenue

Source: www.YCharts.com

Twitter (TWTR), a leading social media company, delivered a disappointing quarter for investors. The company had product issues it blamed on a software glitch as well as advertising headwinds and went on to say the headwinds will likely continue. Revenue came in at $823.7 million with earnings per share of $0.17, both below expectations. The stock was the worst performing in the S&P 500 this week down -22.3% but remains higher in 2019 by +5.4%.

Hasbro (HAS), a leading toy maker, reported earnings that it said were negatively impacted by tariffs that have added meaningfully to the company’s costs. Furthermore, management said demand is sluggish due to the trend toward more video games and away from toys and board games. Hasbro’s stock dropped -21.3% for the week but is still higher year-to-date by +18.2%.

Other earnings highlights included the following:

  • Amazon (AMZN), the online giant, reported its first decline in earnings in a couple of years due to higher costs as it invests infrastructure to speed up delivery times. The stock was volatile but closed the week nearly unchanged.
  • Microsoft (MSFT), the software and cloud computing giant, reported earnings well ahead of expectations in spite of its slowing cloud business. The stock gained +2.4% for the week and is the most valuable company in the U.S. at $1.074 TRILLION!
  • Tesla (TSLA), the popular electric car company, surprised investors with a better than expected earnings but revenue declined and fell short of estimates. Regardless the stock surged +27.7%!

Economic Indicator - Reported

Durable Goods Orders were weaker than expected falling -1.1% versus economists’ estimate of -0.8%. The decline in orders was widespread with core capital goods orders, a key measure of business investment, down for the second consecutive month and below year-ago levels. This disappointment news is generally blamed on the trade conflict between the U.S. and China.

New Home Sales dropped slightly from the month before but did come in just a fraction better than economists had expected at 701,000 annually. This is a brisk pace of building just shy of the 12-year record set just a few months ago but is only about half the rate hit in 2005 during the housing boom.

Existing Home Sales dropped -2.2% from the prior month, down across every region in the country, to an annualized rate of 5.38 million homes. This headline number really does not tell the story as buying interest remains high fueled by low interest rates but the inventory of new homes is tight and prices are rising. Expectations are for the market to remain strong with hopes that new home construction will pick up to help increase inventories.

Consumer Sentiment remains strong with the reading coming in at 95.5 down slightly from the month before. The strong jobs market is helping but they are worrying more about the outlook for the economy than they were a year ago.

Economic Indicators – Upcoming

The following economic data are expected in the coming week:

  • Gross Domestic Product (GDP)
  • Employment Report
  • Consumer Confidence Index
  • Case-Shiller Home Prices

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