Investment Commentary –July 24, 2018

Year to Date Market Indices as of Market Close July 24th, 2018
Dow 25,241 (2.11%)
S&P 2,820 (5.49%)
NASDAQ 7,840 (13.58%)
Gold $1,234 (-7.13%)
OIL $68.48 16.15%)
Barclay Bond Aggregate (-1.81%)
Fed Funds Rate 2.0% (last increase was 6/13/18)

Earnings Watch: 35% of S&P 500 companies set to report in a crazy week

The busiest earnings week of the season is under way.

There are 174 S&P 500 index SPX, +0.48% companies scheduled to report earnings this week, according to FactSet analyst John Butters. Eleven of the 30 Dow Jones Industrial Average DJIA, +0.79% components are on the docket as well.

So far, this earnings season has been a rather strong one. Of the S&P 500 companies that reported before this week, 87% beat earnings expectations and 77% beat revenue expectations, Butters wrote. Both of those statistics are above the five-year average.

The current week brings earnings from chip makers Intel Corp. INTC, +0.00% and Advanced Micro Devices Inc. AMD, +0.37% car makers Ford Motor Co. F, +0.96% and General Motors Co. GM, +0.53% social-networking companies Facebook Inc. FB, +0.01% and Twitter Inc. TWTR, -0.28% and restaurants McDonalds Inc. MCD, -0.51% and Chipotle Mexican Grill Inc. CMG, -1.56% among many others.

Here are the big themes to watch this week, as 35% of the S&P 500 reports quarterly results.

Internet-ad giants

This week brings earnings from Facebook and Twitter, both of which remain under fire for their abilities to handle fake accounts and false information on their respective platforms. Facebook reports Wednesday afternoon, and Twitter reports on Friday morning.

Facebook last week said that it had suspended another data-analytics company that may have violated Facebook policies. In addition, Chief Executive Mark Zuckerberg drew criticism for his argument that Facebook shouldn’t take down posts from Holocaust deniers because they don’t intend to get that information wrong.

As for Twitter, the company said earlier in July that it would remove millions of suspected fake accounts but that reported user numbers wouldn’t see much impact given that the accounts were too new to have appeared in reported numbers anyway. Twitter shares have gained 39% over the past three months, so there will be pressure on the company to back up that performance with strong numbers.

When Alphabet Inc. GOOGL, -0.09% GOOG, +0.03% reported Monday afternoon, investors didn’t pay much attention to a $5.1 billion European Union antitrust fine levied against the company. Without the fine, Alphabet would have reported earnings of $11.75 a share, far above analyst estimates. The company also reported lower-than-expected traffic-acquisition costs. Inc. AMZN, +0.02% is on the docket for Thursday afternoon, and can also be considered an advertising giant as it pulls in billions from selling ads on its site. Stifel analyst Scott Devitt expects that AWS growth accelerated in the latest two quarters and he projects 46% revenue growth. The company is lapping price increases from last May, he wrote. On the e-commerce side, Devitt will be looking for commentary on the Prime price increase, Prime Day traction, Whole Foods progress, and the recent purchase of PillPack, an online-pharmacy service.

Fed outlook

In testimony before Congress, U.S. Federal Reserve Chairman Jerome Powell reaffirmed the Fed’s intent to continue gradually raising interest rates if economic growth remains solid. He said it was too soon to say whether rising trade tensions might disrupt the Fed’s outlook for further rate hikes.

Trump on Fed

The U.S. dollar briefly weakened against other major currencies and stocks fell on Thursday after President Donald Trump publicly questioned the U.S. Federal Reserve’s current policy of raising interest rates. The president said he hoped the central bank would stop raising rates in response to indications of positive economic momentum.

Trade tussle

President Trump said in an interview on Friday that he’s ready to ratchet up the trade tensions with China further by imposing tariffs on more than $500 billion in Chinese goods—roughly the value of all of China’s imports to the United States. So far, the United States has imposed just $34 billion in tariffs, a move that prompted China to respond with its own tariffs on a similar scale.

Other Notable Indices (YTD)

Russell 2000 (small caps) 11.33
EAFE International -2.05
Emerging Markets -3.76
Shiller Annuity Index 8.25

What is (and isn’t) on Trump’s latest China tariffs list

The Trump administration is readying tariffs on another $200 billion in Chinese imports, ranging from burglar alarms to mackerel, escalating a trade war between the world’s two biggest economies.

The Office of the U.S. Trade Representative proposed 10 percent tariffs July 10 on a list of 6,031 Chinese products. China, which officially responded Wednesday that it was “shocked” at the U.S. action, is expected to retaliate if the new tariffs take effect.

Here’s a glimpse of what is and isn’t on the list:

Off the list: some major consumer items economists had expected, like cell phones, pharmaceuticals and toys
On the list: computer components, furniture, auto parts, processed food and appliances including refrigerators
Categories here include:
Technology: network routers, computer components
Pork and other agricultural goods
A variety of fish including tilapia and some shellfish
Processed foods including pickles, cakes, breads and pastries
Grains including certain kinds of oats and millet as well as flours
Seeds for sowing including vegetables as well as plants like mint
Several kinds of dried beans
Chemicals, plastics, leather and related goods, wood and wood products, paper,
Textiles including raw wool and cotton, and processed animal hairs including goat cashmere
Some base metals including some rare-earth metals used in batteries for high-tech items like mobile phones and aircraft engines
Certain electrical equipment and appliances including refrigerators, vacuum cleaners and air conditioners
Parts for autos, trucks and agricultural equipment
Building blocks and bricks, of cement, concrete or artificial stone, whether or not reinforced
Also on the list: some odd-sounding items, such as human hair and live eels.
Categories here include:
Human hair, unworked, “whether or not washed and scoured”
Live eels
Fake guts used for sausage casing
Clothes made from reptile leather
Heads, tails, paws or other pieces or cuttings from beaver, ermine, wolf and other specified animals
Musical instrument cases, with plastic sheeting or textile surfaces
Dog leashes, collars, muzzles and harnesses
Horse, cowhide and plastic gloves made for sports
Bamboo baskets
Animal furs including rabbit

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.