Too much information

Too much information.  Stocks slipped slightly yesterday as investors took in mixed messages on the health of the US economy.  Signs that the consumer may be tightening up overshadowed solid earnings.

 

MY TWO CENTS

 

1.  Which way is up?  Now that we are knee-deep in earnings season, I feel compelled to say a word or two about expectations.  As one might guess, the best way to assess the health of a company is to monitor its performance.  Are sales growing?  Is the company managing expenses and remaining profitable?  One might also want to know if the company is managing its debt properly, effectively investing capital, or increasing the prospects for future growth.  These are the basis for classic fundamental stock analysis and we get a glimpse of those every quarter when companies report their earnings.  Unfortunately, a healthy company from a fundamental perspective does not always get rewarded by an increasing stock price.  This is where things start to get murky.  Sure, we can compare similar companies’ numbers and assume that the best ones, the healthiest from a financial perspective, would go up in the equity markets.  But that too would be a bad assumption.  It all comes down to expectations.  I have said time and again that investors don’t like surprises or unknowns.  Seems like a pretty high bar for a volatile, and often vagrant stock market, never mind a shifty global economy and deadlocked political system.  So where can an investor turn to get answers?  A good place to start is with a Wall Street analyst whose job it is to follow a company’s or industry’s every move.  They are taxed with making sense of all of the publicly (and not so publicly) available data and coming up with earnings estimates and buy/sell recommendations.  They are dedicated, smart folks and they rely heavily on information provided to them by the companies they watch.  As you might expect they are in a very powerful position to affect a company’s stock.  Companies are aware of this so they go through great efforts to make sure that the analyst community is not surprised when the actual numbers come out.  That said, companies often intentionally set a low expectation bar with analysts and the analysts, especially in volatile economic times (such as the current one) lower the bar even further.  So if a company beats expectations, it doesn’t necessarily mean that a company is doing well and a stock will go up.  I said it was murky.  In fact, often the exact opposite occurs!  A company may miss earnings estimates and still trade up because investors were expecting results to be much worse than estimates.  Last night, WHILE YOU COMMUTED, Netfilx announced its Q3 results and beat a low earnings estimate but missed on revenue estimates.  What’s worse is that their subscriber growth also missed analyst estimates and their own guidance.  The stock promptly traded up by by +9% in after hours trading!  Why?  With increasing competition by the likes of Disney, Apple, and Amazon, many investors expect that the company’s best days are behind it.  So when they report that they missed the mark in subscriber growth but have added an increasing number of foreign subscribers, investors cheer… for now.  Tricky thing, expectations.

 

2.  Spend those hard-earned bucks, please.  My regular readers know this is coming…wait for it… wait for it… it’s all about the consumer! In a sea of slowing and receding global economies, the US economy remains a holdout.  While US GDP growth has slowed and is forecast to slow yet further, it continues to grow nonetheless.  Economies are complex but you can bet on one thing (here it comes again, sorry): if consumers remain positive, the economy will remain healthy.  I will remind you, once again, that consumer spending makes up roughly 70% of GDP.  It has been the consumer that has largely driven the US economic expansion to a record length of time.  What is driving the consumer?  Record low unemployment for one.  When people have jobs and increased prospects for new ones, they spend more freely.  Combine that with low inflation and low interest rates and you get healthy consumption.  Now onto the numbers.  We economists look at two types of numbers.  We refer to hard numbers as those that tell what the economy is actually doing.  Soft numbers give us a glimpse into what might happen by attempting to assess what people think about conditions today and going forward (expectations).  Examples of soft numbers are Consumer Confidence, University of Michigan Sentiment, or the ISM Purchasing Managers Index.These numbers are based on surveys of the people that are doing, well, the spending.  So far this year we have witnessed the decay of Purchasing Manager sentiment.  As one might expect, purchasing managers make informed decisions based on the current state of their businesses.  Consumer sentiment, which is not only based on their current financial situation but also what they feel are their prospects going forward, has remained resilient… until recently when it showed some signs of weakening.  Now on to the hard numbers.  Yesterday, the US Census Bureau released it monthly Retail Sales  number which tracks household consumption and that number showed that sales fell -0.3% month over month missing expectations for a growth of +0.3%.  The drop is the first since February, indicating that perhaps all of news of the trade war and political turmoil may be weighing on consumer decisions.  The upcoming quarter will be the real test for consumers as we enter the holiday season.  All eyes should be on the consumer!

 

THE MARKETS

 

Stocks slipped marginally yesterday, largely in response to weaker than expected Retail Sales numbers, despite a number of solid earnings beats.  The S&P 500 fell by -0.2%, the Dow Jones Industrial Average slipped by -0.08%, the Russell 2000 advanced by +0.12%, and the NASDAQ Composite Index dropped by -0.30%.  Bonds advanced and 10-year treasury yields fell by -4 basis points to 1.73%.

 

WHAT’S NXT

 

–  Housing Starts are expected to have slipped by -3.2% month over month compared to last month’s growth of +12.3%.  Building Permits are expected to have receded by -5.3% compared to last month’s revised +8.2% growth.

–  The Philadelphia Fed Business Outlook is expected to show that the Fed regional index fell to 7.6 from 12.0.

–  Industrial Production is expected to have fallen by -0.30% compared to last month’s reported growth of +0.5%.

–  Chicago Fed President Charles Evans, Fed Governor Michele Bowman, and New York Fed Chief John Williams will all speak today.

– This morning Honeywell and Philip Morris beat expectations while SunTrust and Key Corp missed.  We will also hear from Morgan Stanley and Union Pacific before the opening bell.  After the close earnings will include Intuitive Surgical and E*Trade financial.

 

Want to learn more?

Reach out to me and set up some time if you want to learn more about what is going on in the markets or you would like me to walk you through the charts in my attached daily chartbook.

daily chartbook 2019-10-17