Mixed Bag

Mixed bag.  It was a mixed bag of information that led industrials lower and technology higher in yesterday’s session.  Earnings misses and weak forward guidance led to a punishing session for some shares while others rallied on small beats and upbeat guidance.

WHAT YOU NEED TO KNOW:

1)  The US economy continues to chug on.  Yesterday, the US Census Bureau announced its preliminary read of Durable Goods Orders for March which showed that orders grew at a greater than expected rate of +2.7% compared to the -1.1% last month.  Durable Goods is a category which has jokingly been referred to as those things that hurt when they land on your toe.  While their strict definition confines the category to items which do not wear out and last for a long time, these items are typically higher ticket items such as cars, machinery, and appliances.  A spike in higher ticket items could have a positive influence on economic growth.

2)  Earnings matter!  I have used that line many times in this very note but the fact remains that earnings DO matter.  Yesterday, 3M announced that it had missed Wall Street revenue estimates by -2.01% and earnings missed by -10.25%.  The company cut its ’19 earnings guidance and announced a corporate restructuring which includes layoffs.  That was enough to send the once stable stock down by -12.9%, which was its worst single day selloff since October 1987’s Black Monday.  On the other end of the spectrum was Microsoft who beat revenue estimates by +2.4% and exceeded earnings estimates by +13.84%.  The beat was enough to welcome Microsoft into the trillion dollar club for a brief period in yesterday’s session.  Microsoft ultimately closed up by +3.31%, just below the trillion dollar mark.

3)  The rate debate rages on.  Larry Kudlow thinks that the Fed is close to lowering rates.  Larry is also a prominent member of the Administration’s bully pulpit and jawboning team.  Many investors agree with him though as Fed funds futures handicap a 25 basis point rate cut by December at 60%. This seems at odds with all of the solid economic numbers including yesterday’s Durable Goods release.

THE MARKETS:

Yesterday’s mixed close represents the mixed earnings releases of the day.  The Dow’s -0.51% decline was due largely in part to 3M’s big selloff and the index would have closed up on gains by Microsoft, Boeing, and Merck, if not for 3M.  The S&P 500 closed down by -0.04%, the Russell 2000 traded off by -0.79%, and the NASDAQ 100 climbed by -0.42%.  Bonds remain in a holding pattern and the ten year yield to maturity climbed by +2 basis points to close at 2.53% while the yield curve remained virtually unchanged.  Notable in fixed income is that spreads of riskier corporate debt have been tightening.  That means that investors are paying up for risky bonds indicating that they are more bullish on the economy (see the blue line in the bottom panel of chart 17 in my attached daily chartbook).

WHAT TO LOOK FOR TODAY:

This morning we will get advanced 1Q GDP from the Bureau of Economic Analysis which is expected to show an annualized quarter over quarter growth of +2.3% compared to the prior read of +2.2%. Personal consumption is expected to have grown by +1.0%, down from last quarter’s +2.5%.  Later this morning we will get the University of Michigan’s final read of April Consumer Sentiment which is expected to come in at 97.0 up slightly from the last read of 96.9.  Before this morning’s opening bell we will hear from Exxon, Chevron, Archer-Daniels-Midland, American Airlines, and Goodyear Tire and Rubber, amongst others.  Trump is scheduled to speak to the NRA today, which should generate some interesting soundbites.  Next week will be jam-packed with economic releases including ISM Manufacturing , PCE Deflators, housing numbers, consumer sentiment, and the monthly employment situation.  Also next week, the Fed’s FOMC meeting will take place which will take center stage. Have a great weekend.

daily chartbook 2019-04-26