Weekly market update
The month of July lived up to its historical reputation for strength—the Dow led the major averages followed by the S&P 500, the NASDAQ and pulling up the rear was the Russell 2000, small caps.
Expectations were somewhat high heading into earnings season, but no one was expecting to see an S&P 500 EPS beat rate of 90%+ and a beat rate in the Technology sector of 100%. Despite that beat rate for tech names, investors expected solid guidance and it wasn’t there. This led to swift reversals in what people are calling a “tech-wreck”. Facebook, Twitter, Netflix and Intel fell 10%-20% following disappointing guidance. Investors were rushing to the exits in those names and they drug the NASDAQ down—but it is still up more than 12% YTD.
In other earnings news, the list of companies citing tariffs related trouble is short, so far. But it includes:
- Harley Davidson
- Constellation Brands
- Daimler
- Illinois Tool
- General Motors
- Ford
- Campbell Soup
- Coca-Cola
- Pepsi
- Caterpillar
Higher input costs from steel/aluminum tariffs now outpace Q1 tax-cut benefits.
We got a number of good data points on the economy suggesting the economy remains on solid footing. The month started off with a strong jobs report where we added another 213,000 jobs. The head-scratcher here was the lack of wage growth—it’s growing but just not as fast as in the past when the economy was doing so well. As we now have more jobs to fill than workers to fill them, economists expected to see more wage inflation, but it simply isn’t there.
And on inflation, we saw PPI rise at its fastest clip in 7 years and CPI rise at its fastest clip in 6.5 years.
We also got the first estimate for Q2 GDP and it exploded higher—rising 4.1%, but many were expecting more.
The housing market continues to disappoint as the macro data shows home prices are too high and supply is, well—there really isn’t any, unless you are to buy in the $500k-$1,000k range.
European stocks as a whole were building on previous week’s gains and that took German stocks to a five-week high. Those moves came after European Commission President Jean-Claude Juncker and U.S. President Donald Trump said they will work on tamping down trade-related tensions between the U.S. and the European Union. The two said they’ll move toward “zero tariffs” and “zero subsidies on non-auto industrial goods,” among other actions. Earnings have also come in better than expected and that’s helped lift stock as well.
Funny thing about the European markets—a few weeks ago, European stocks were lagging and boring due to lack of tech exposure. Then last week—European stocks are a great value due to lack of tech exposure. It is funny how the price can change sentiment so quickly.
So, according to the Stock Trader’s Almanac, August ranks as one of the weakest months of the year for major indexes, with steeper losses in midterm years, as the current one is. And with earnings season drawing to a close, traders and investors will be focused on the economic data such as jobs growth, inflation, housing and manufacturing. The trade wars/tariffs will also be high on the radar, but I think investors have been shrugging these off. Yet the likelihood of them is still very much alive. Finally, the political/geopolitical arena will also draw some attention. And don’t forget about rising interest rates. So stay tuned and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
August 3, 2018
