Play Nice!

Play nice!  Stocks meandered through yesterday’s session in search of some good news, having found none they closed mixed.  Stocks could not muster the strength to move up with little in the way of political, economic, or corporate fundamental news for fuel.

WHAT YOU NEED TO KNOW:

1)  Congressional negotiators reached a tentative deal to fund the government after yesterday’s close. The markets all but gave up on a deal as news of failure circulated throughout the day and in somewhat of a surprise a compromise was reached last night.  The announcement sent stock futures up and fueled an overnight rally.  The deal still needs Presidential approval and with only $1.35 billion provisioned for a “barrier”, there is no telling how the White House will react.

2)  Lots of mixed messages continue to “leak” out of the trade talks between the US and China.  With talks underway it is still difficult to get a good handle on the tone and direction of the discussions as so many conflicting data points have been circulated.  Most recently the leaks seem to be implying that both sides are far from reaching an agreement, though Trump advisor Kellyanne Conway stated that the President wants a deal.  The leaks are most likely designed to send messages to their Chinese counterparts rather than the markets, which seem to be cautiously optimistic about prospects for success.

Equity markets appeared to be losing steam as they bounced around the break even line for much of yesterday’s session.  The market appears to be in search of positive stimulus now that the Fed card seems to have played out.  The only remaining hurdles are the US-Chinese trade dispute, another pending government shutdown, and corporate earnings.  Though a successful negotiation with China would be positive, the market has already factored in some sort of success in the talks.  The big question that remains is what type of deal would be reached.  More importantly, will the deal be enough to satisfy investors who arguably paid a heavy price in 2018 as markets were roiled in response to the trade war.  Time is running out as the March 1 deadline is rapidly approaching and failure would mean a tariff increase to 25% on $200 billion of Chinese goods.  Though the shutdown talks have been in the news, the markets didn’t seem to factor in the negative effects of the debacle.  In fact, stocks rose by around +10% through the shutdown!  A market in search of some good news will certainly respond positively if the President signs the budget, though the high will most likely not last too long.  Finally, on to corporate earnings.  Corporate earnings continue to be relatively solid on the surface with beats on par with past quarters and growth in the double digits.  Remember that earnings give us a good picture about past performance, specifically the 4th quarter of last year.  But how will stocks perform going forward?  Analysts and investors rely on corporate guidance to formulate forecasts for the future and many companies issue guidance in their earnings calls.  As reported here, an increasing number of companies have been lowering expectations for the future.  I have attached an interesting chart (entitled guidance.pdf) which shows the ratio between positive and negative guidance.  Specifically, the ratio is calculated by dividing the number of companies issuing positive financial outlooks by the number of companies issuing negative outlooks.  The ratio will increase if the positive outlooks are outpacing the negative ones, and vice versa.  By observing the attached chart, which shows the ratio going back to 2000, you will note that the ratio made new highs in 2018 as companies were highly optimistic about their future prospects in the wake of the 2017 tax package and strong consumer confidence.  With the effects of the tax package beginning to recede and confidence beginning to wane, companies have been lowering their expectations for future growth, as evidenced by the sharp decrease in the ratio.  The chart shows a monthly ratio and as of January 31, the ratio was 0.5, which means that the number of companies issuing negative guidance outpaced positive ones 2 to 1. Though the number itself is not correlated to stock market performance, the precipitous drop from mid 2018 through today should be noted by investors as an important data point… it hasn’t been yet.

TODAY:

The Bureau of Labor Statistics will release its JOLTS indicator which details the number of job vacancies and it is expected to show 6.846 million openings versus last month’s 6.888 million.  Last month’s number represented a five month low, though the number remains near its highest levels in ten years.  Earlier this morning, WHILE YOU BRUSHED YOUR TEETH, the National Federation of Independent Businesses released its Small Business Optimism Index which came in at a lower than expected level of 101.2 versus last month’s read of 104.4.  The latest reading represents a 2 year low for small business confidence.  This morning’s pre-market earnings release featured 5 beats and 5 misses.  Beats include Under Armor, which beat by +114.3% and misses included industrial materials manufacturer Martin Marietta Materials which missed its mark by -7.76%.  After the bell we will hear from Activision Blizzard, Trip Advisor, and Akamai amongst others.  Markets seems happy with the potential for a shutdown aversion as traders await the President’s response.  Jerome Powell will speak today which may yield some interesting data points but will most likely remain in the shadow of congressional progress.

daily chartbook 2019-02-12

guidance

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