Forward March!!

Forward march!!  Stocks closed mixed yesterday with the S&P500 reaching a new all time high as investors sorted through a flood of mixed earnings.  Weak economic data and Department of Justice inquiries were ignored with a yawn by unstoppable bulls.

 

MY TWO CENTS

 

1.  What a difference an index can make.  As we wade through waist-high earnings reports and investors react to results, the differences between the makeups of the various indices becomes very clear… and that is a good thing.  There is an old Wall Street saying that all ships rise with the rising tide.  This, of course, refers to times in which markets rise taking with them even poorly performing companies.  In a broad sense, this is true as can be evidenced by the many armchair (and professional) stock pickers who claim to be superstars, having selected top stocks in 2009 and scoring amazing returns.  The fact is that if you just bought the S&P500 ETF and went on a long, long boat ride you would have earned something in the neighborhood of +350%, not including dividends.  Turn the clock forward 10 years and here we are after a long bull run and almost the largest economic expansion ever (in a few months it will be the largest) and investors are starting to wonder what the future holds, making stock picking a bit more tricky.  Earnings, company performance, and financial stability become more important to ensure that investments will hold up if the economy enters a recession.  The past two days have featured many widely held stocks announcing earnings and the results, while encouraging, were not at all uniformly solid.  Yesterday, for instance, the S&P500 and NASDAQ Composite indices both rose to all time highs while the Dow Jones Industrial Index lost -0.29%.  The S&P and NASDAQ got a boost from Technology and Semiconductors and the Dow Jones got hammered by bad results from Boeing and Caterpillar, though the Dow Jones is still just below its all time high.  The small cap Russell 2000 index tells a different story altogether.  While the NASDAQ composite hit its ninth all time high close of the year yesterday, the Russell 2000 has languished, remaining -9.2% below the all time high it hit last summer.  The moral of the story is that not all stocks behave the same, not all asset classes behave the same, and diversification in late cycle investing is critical.

 

2. PMI vs. ZIRP.  Sounds like a 1970’s monster movie in which two Kaiju slug it out destroying Tokyo.  Of course, I am referring to another epic clash, but this one is taking place on Wall Street.  PMI’s, or purchasing managers indices, are used broadly and globally to track industries and sectors by polling insiders on current activity, sentiments, and projections.  In general, PMI’s greater than 50 indicate growth while readings below represent contraction.  The EU has been struggling with sub-50 PMI’s this year and as a result will most likely have to provide fiscal stimulus (Mario Draghi will address that very issue today).  Yesterday in the US, IHS Markit released manufacturing PMI which missed estimates with a print of 50.0, down from last month’s read of 50.6.  This is the lowest the index has been since September 2009!  Sounds scary, so why are markets at all time highs?  ZIRP, of course.  ZIRP stand for Zero Interest Rate Policy.  Once thought to be impossible, the Japanese proved that it could be done and the US employed it starting in 2008 to pull the country out of the last recession.  As the Fed prepares to meet next week to make interest rate policy, many are expecting a -25 to -50 basis point cut.  If they, in fact do cut rates, history shows us that they are unlikely to change course back to hiking any time soon, which has been applauded by the stock market.  So in the battle between PMI and ZIRP, ZIRP is winning!

 

THE MARKETS

 

Stocks closed mixed yesterday as earnings continue to roll in.  The Dow Jones (down by -0.29%) was pinned down by bad reports from Boeing and Caterpillar, while the S&P 500 traded up by +0.47% to a new high, the Russell 2000 rose by +1.64%, and the NASDAQ 100 climbed by +0.70%.  Bonds advanced and 10 year treasury yields slipped by -4 basis points to 2.04%, responding to the weak economic numbers.

 

WHAT’S NXT

 

–  Preliminary Durable Goods Orders is expected to have risen by +0.7% compared to last month’s drop of -1.3%.  Excluding transportation, Orders are expected to be up +0.2% compared to last month’s +0.4%.  Transportation means Airplanes, amongst other things (think Boeing).

–  Later this morning we will get the Kansas City Fed Manufacturing Activity Index which is expected to have risen to 3 from 0.

–  The Treasury will auction $32 billion 7-year notes.

–  We have had a rash of earnings already this morning with beats coming from 3M, Southwest Airlines, KKR, Raytheon, Comcast, and American Airlines, while misses included Tractor Supply and Newmont Goldcorp.  We will hear from Amazon this morning as well.  After the bell earnings include T-mobile, Mattel, VeriSign, Google, Starbucks, Expedia, and Intel.

daily chartbook 2019-07-25