Earnings are beginning to show cracks
Key global data causes another Central bank to cut rates
Oil under pressure while demand surges (think plenty of supply)
So is the party over already? Bank earnings which had ‘blown the roof off’ of the estimates are leading to technology and industrial names that – on first blush- are failing to make investors happy…..as the weakness in revenues exposes the weakness in guidance and that is causing the mkt to re-think the recent highs (at least for now). Remember – we discussed this – the focus this qtr is being driven even more by future guidance as the reality of the ongoing trade war with China moves into its 19th month….along with concerns over (what they tell us) is a weakening global economy with concerns also rising about the pace of growth in the US economy.
Welcome to the ‘beauty pageant’ – the time every 90 days when companies in the S&P 500 walk the runway….reporting eps (earnings per share), top and bottom line revenues, margins, sales, costs, concerns and future expectations…. Etc…it is also a time when analysts – driven by company CFO’s (Chief Financial Officers) try to ‘guess’ what those numbers will be….and while they make predictions months in advance – they tighten them up in the weeks prior to the ‘beauty pageant’. This qtr – being one of real concern – y/y growth expected to be negative – has seen these estimates get slashed….leaving the bar very low (easier to step over) and what we have seen in the first round of reports (banks) was beat after beat after beat…..igniting a sense of “Oh, ok – maybe this won’t be so bad” kind of mood – but even those beats (which you assume is good news) have not produced outsized gains for those stocks after the reports…in fact – while the initial knee jerk reaction is up – by the end of the day – many of these names have ended lower as trader types and algo’s hit the sell button (locking in profits as these stocks have rallied into the season) and continue to trade lower with each passing day as we start to get companies that are not ‘Wowing us’….…..….And the names that MISS the earnings – oh boy – all you have to do is turn on CNBC and you will see blood in the water….. Companies that miss the already slashed estimates have a lot of explaining to do – but as you might expect – they don’t have time to explain before the algo’s and the traders punish them….and punish them hard….(and maybe rightly so) because as we discuss all the time – the mkt and mkt prices are all about expectations….and when the expectation disappoint it’s like when the cuffs and collars don’t match….Something just isn’t right…..
Look, the mkt has already priced in all of the ‘central bank’ good news – lower rates in the US, lower rates in other parts of the world – that news has not only helped the mkt make new highs – but is directly responsible (in my opinion) for the most recent surge higher , I mean the 10% surge from June 3 until now can be directly tied to the FED – yeah you can talk about US/China trade and how Treasury Sec Stevey Mnuchin keeps telling us how close we are etc….but then you have to consider what happens when Trump tells us that ‘we still have a lot of work to do’ and ‘we can still hit’ em with tariffs on another $325 bil worth of goods’….. which causes daily angst – so those two things cancel each out - while the FED is more cut and dry.
Fed Chair Jay Powell sent members of the committee out to the mkt in early June to ‘float the balloon’ to see how the mkts would react to lower rates – because think about it….rates usually go lower when the economy is struggling (or when there is some kind of black swan event) - but if the economy is humming along and unemployment is all time lows and wage growth is steady and other macro data points are not negative and he STILL wants to cut rates – he wants to take the temperature first…..will investors welcome a cut or will they question why rates are going lower in the face of a strong economy – (because rates should actually go higher in a stronger economy) and when the response was well received – it give the FED cover to make the next move. And then the bets are on – FED fund futures immediately price in a cut, then the expectations rise and then they parade many of the big money center bank strategists to help make the argument for lower rates and BOOM….you set us up for lower rates…….…..and in fact – Jay Powell all but announced a ‘price cut’ in rates last week – so investors have no choice but to celebrate….I mean a strong economy AND lower rates! BINGO!!! And you have a floor under the mkt…..
So now – when we are beginning to see some significant misses in ‘blue chip’ quality names – you then begin to see the mkt assign a new valuation to not only those individual names but to the broader mkt as well…..and so – we have seen 4 or 5 days of weakness in the broader mkt…..and by weakness I mean 1%...(not a bit deal by any stretch) unless of course you think this is only the beginning and if that’s the case then make your move…but as a long term investor – I think you sit still -and be patient….no need to rush in on a 1% pullback…..if you looking for bargains or value – I think you’re gonna get your chance…as I have been saying - the mkt felt a bit exhausted, tired really after the most recent surge….and remember – the broader indexes are up big on the year….the Dow +17%, the S&P +19%, the Nasdaq +23% and the Russell is +15%...the mkt is trading at 19 x future 12 month earnings…(a bit rich) especially if you’re concerned about weakness…..and so the investors will re-price that risk based on expectations. And so it goes…
Overnight – Asian mkts ended the day lower….Japanese exports fell by 6.7% vs the expectation of 5.6%, The WSJ reported that China/US Trade negotiations are at an impasse as Trump threatens new tariffs, and various earnings across the region from some KEY players have disappointed…..Taiwan Semiconductor for instance is Apples largest supplier or chips posted a 7.6% decline in 2Q profits – sending shivers thru the Asian tech industry. In Australia – their jobs report was well below expectations and the Bank of Korea announced that they too are CUTTING rates by 25 bps to 1.5% (suggesting weakness). In the end we saw Japan -1.97%, Hong Kong – 0.46%, China – 0.95% and ASX -0.36%.
European mkts are also off to a mixed start….as the name of the game is earnings…Yes, concerns over trade continue to simmer, but the focus is front and center on earnings. Tech continues to be under pressure as the start of tech earnings is about to hit the tape. In early trading we see FTSE – 0.29%, CAC 40 + 0.21%, DAX – 0.45%, EUROSTOXX -0.07%, SPAIN -0.61% and ITALY + 0.42%.
US futs are down again this morning on the back of weaker earnings reported post the close along with continued concerns over trade……expected lower rates at month end – is keeping the move lower at bay….meaning that the mkt, while digesting some weaker numbers knows that Jay Powell has promised to pacify investors with a kiss on July 31st……and so it goes….the calendar is full of earnings so stay awake…Eco data includes the Philly Fed Survey, Init Jobless Claims of 216k, Cont Claims of 1.7 mil, and the leading economic index of +0.1%. (Yesterday’s eco data was a bit disappointing for the housing mkts – Mortgage apps were down, Housing starts down and Building permits were down)
Dow futures are down 32 pts, S&P’s are lower by 5 pts, Nasdaq is off by 36 pts and he Russell is flat. It just feels like we want to test lower….and 2955 ish seems to be the place where we might find some temporary support….because the trendline is 2895 – and if earning reports continue to be sold – then a test of the trendline would not be out of the question and would represent a 4% move off of the highs of 3015. (Well within normal).
Oil continues to struggle to hold onto its trendline. While the EIA (energy Info Admin) did report a much larger drawdown than expected – traders instead focused on an increase in refined products – so while demand remains strong, supply is not dwindling….again – the world is awash in oil – so $55/$65 range appears to be right and that is where we are and where we have been. Remember at $55 the Saudi’s start to scream and at $65 Trump starts to scream…
Information and commentary provided by ButcherJoseph Asset Management, LLC (“BJAM”), are opinions and should not be construed as facts. The market commentary is for informational purposes only and should not be deemed as a solicitation to invest or increase investments in BJAM products or the products of BJAM affiliates. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. There can be no guarantee that any of the described objectives can be achieved. BJAM does not undertake to advise you of any change in its opinions or the information contained in this report. Past performance is not a guarantee of future results. Information provided from third parties was obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness.
Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. The price of any investment may rise or fall due to changes in the broad markets or changes in a company’s financial condition and may do so unpredictably. BJAM does not make any representation that any strategy will or is likely to achieve returns similar to those shown in any performance results that may be illustrated in this presentation. There is no assurance that a portfolio will achieve its investment objective.
Definitions and Indices
The S&P 500 Index is a stock market index based on the market capitalization of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor’s.
UNLESS OTHERWISE NOTED, INDEX RETURNS REFLECT THE REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL GAINS, IF ANY, BUT DO NOT REFLECT FEES, BROKERAGE COMMISSIONS OR OTHER EXPENSES OF INVESTING. INVESTORS CAN NOT MAKE DIRECT INVESTMENTS INTO ANY INDEX.
BJAM is an investment advisor registered in North Carolina and Arizona. Such registration does not imply a certain level of skill or training. BJAM’s advisory fee and risks are fully detailed in Part 2 of its Form ADV, available upon request.