Weekly market update
Thanks to a strong start to the earnings season, the major averages have had an impressive July, but last week, despite strong earnings, stocks took a breather. The Dow managed to rise 0.2%, the S&P 500 was only up 0.04%, but the tech-heavy NASDAQ dropped 0.07%. Still, the NASDAQ is having the best year of the bunch as it is up 13.9%.
Notable earnings reports last week included a number of financials and some tech names. Goldman Sachs absolutely knocked it out of the park and added to the strong earnings from the financial sector, but despite those earnings, financials sold off.
See, the yield curve continues to flatten and those guys borrow on the short end of the yield curve and lend on the long end, and with the spread between the 2-year U.S. Treasury and the 10-year U.S. Treasury fell as low as only 25 basis points. While we’ve made little to no changes to fixed income, we are watching fixed income closely due to the FED’s interest rate increases and the potential for an inverted yield curve. While we are not convinced an inverted yield curve is imminent; historically, an inverted yield curve means that a recession and/or severe market correction will follow within the next 10-20 months. So, we are watching this closely.
It was a light week for economic data. We did get a big snap back in manufacturing that helped to lift industrial production 0.6% higher in June, but May was revised sharply lower and this was some cause for concern. We also got retail sales which were in line with expectations. If you strip out autos, they were slightly better than May’s numbers, which were revised higher.
The sharpest rise in input costs since July 2008—and no doubt tariff related—led an overheated Philly Fed report for July. The general business conditions index, at 25.7, tops consensus forecast. But it’s the prices paid index that takes the headline, surging more than 11 points to 62.9, which is one of the very highest on record.
THIS WEEK
It is going to be a big week for earnings—and technology names will be in focus. Earnings growth is expected to top Q1 earnings, but many of these names are already up big this year. Will investors keep piling into them or will it be an opportunity to hit the sell button and take some profits?
On the economic front, the highlight of the week should be the first read on Q2 GDP and it is expected to be up 4% or more. Also, in focus will be the housing data, but to a lesser extent than GDP—still important. We will also get several regional FED reports, and I’ll be watching to see if they can keep up their strength.
We will also monitor the political/geopolitical landscape because it is concerning that we have seen no progress on trade/tariffs. I think investors are thinking that the President may be using them as a negotiation tool, but we’ll see.
We will be watching if this bull market still has some legs, but with strong earnings, momentum favorable, the sentiment is neutral and valuations reasonable—it is going to take something ugly to rattle this market too much—stay tuned and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
July 23, 2018
