Investment Commentary – January 29, 2019

Year to Date Market Indices as of Market Close January 29, 2019
Dow 24,579 (5.37%)
S&P 2,640 (5.31%)
NASDAQ 7,028 (5.92%)
Gold $1,284 (-0.02%)
OIL $52.77 (-15.19)
Barclay Bond Aggregate (-0.01%)
Fed Funds Rate 2.50% (last increase was 12/19/18)

Stocks end mostly lower on big day for earnings

Federal Reserve kicks set to provide a policy update Wednesday

The S&P 500 and the Nasdaq closed lower Tuesday as investors sorted through a fresh batch of earnings reports and awaited clarity from the Federal Reserve on its monetary policy plans. However, the Dow bucked the broader weakness, buoyed by Pfizer and 3M.

How did benchmarks fare?

The Dow Jones Industrial Average DJIA, +0.21% rose 51.74 points, or 0.2%, to 24,579.96, while the S&P 500 index SPX, -0.15% slid 3.85 points, or 0.2%, to 2,640, and the Nasdaq Composite Index COMP, -0.81% fell 57.39 points, or 0.8%, to 7,028.29.

What drove the market?

In addition to raw earnings data, investors also focused on comments from companies to glean clues on how slowing global growth and U.S.-China trade tensions will affect American corporations’ profits this year.

Meanwhile, the specter of elevated trade tensions between Beijing and Washington mounted as the Trump administration rolled out criminal charges against China’s Huawei Technologies.
In an indictment unsealed late Monday, federal prosecutors accused Huawei of violating U.S. sanctions on Iran and of stealing trade secrets from a U.S. business partner. Intellectual property theft was an issue that the Trump administration has raised with China as it attempted to resolve a protracted trade dispute with the Asian country. Huawei denied the allegations.

The Fed began its two-day policy-setting meeting with Chairman Jerome Powell scheduled to hold a news conference to discuss the central bank’s plans on Wednesday 2:30 p.m. Eastern Time.
Investors are eager for any new communication on the pace of rate increases and a reduction of the central bank’s balance sheet as the rapidity of those processes had been cause for concern in recent months.

Apple stock rises despite revenue decline, downbeat outlook

Tech giant discloses services-segment gross margin for the first time, coming in at 62.8%

Apple Inc. shares were higher in after-hours trading Tuesday, though the company issued a forecast that fell short of already lowered expectations.
The key metric in Apple’s AAPL, +5.70% fiscal first-quarter release was its March-quarter revenue outlook, which came in at $55 billion to $59 billion. The consensus forecast calls for $58.9 billion, far below the $64 billion that analysts had been projecting at the end of December.

The company reported $4.18 per share in earnings for the December quarter on revenue of $84.3 billion. Apple had preannounced the top-line number, calling for $84 billion in a letter to investors that it issued in early January. Analysts surveyed by FactSet had been calling for $4.17 in earnings per share for the quarter.

Shares were up 3.6% in after-hours trading prior to the start of the earnings call.

Chief Executive Tim Cook said in Apple’s release that while he was disappointed the company fell short of its initial revenue forecast for the holiday period, “this quarter’s results demonstrate that the underlying strength of our business runs deep and wide.” He said Apple has an installed base of 1.4 billion devices, “an all-time high.”

As expected, China proved a weak point during the quarter. Greater China accounted for $13.2 billion of the company’s revenue in the period, compared with nearly $18 billion a year earlier.
Revenue from the company’s iPhone business fell sharply as well, to $52 billion from $61.1 billion in the prior December period. The FactSet consensus called for $52.8 billion for this segment. Apple stopped disclosing unit-sales metrics or average selling prices for its devices, beginning with this quarter’s report.

Around the web:

Earnings watch: Earnings season is entering its busiest stretch, and fourth-quarter results so far have generally exceeded expectations. About 75% of the S&P 500 companies that reported quarterly earnings through Thursday had beaten analysts’ expectations, according to the research firm Refinitiv.

Fed ahead: After lifting interest rates at its December meeting, the U.S. Federal Reserve is expected to keep rates unchanged on Wednesday when it concludes a two-day meeting. The key issue is whether the Fed and Chairman Jerome Powell will provide clues about how far policymakers will go in slowing down the pace of rates hikes this year relative to 2018, when there were four increases.

Trade tensions: Chinese Vice Premier Liu He is scheduled to visit Washington on Wednesday for high-level trade talks amid growing uncertainty about prospects for a comprehensive deal between the United States and China. U.S. stocks briefly fell on Thursday after U.S. Commerce Secretary Wilbur Ross said that the two countries were “miles and miles from getting a resolution.”

Other Notable Indices (YTD)
Russell 2000 (small caps) 9.32
EAFE International 5.04
Emerging Markets 6.45
Shiller Annuity Index 2.08

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.