foxex: Brexit Rejected

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Stocks Rise but Challenges Loom as U.K. Parliament Rejects Brexit Plan

Markets Close

Dow
24,065.59 0.65%

S&P
2,610.30 +1.07%

Nasdaq
7,023.83 +1.71%

VIX
18.33 -3.88%

INV Anxiety Index
101.76 Neutral

US 10-Yr Yield
2.71 +0.04%

Brexit Rejected, Financial Stock Misses Targets, Stocks Go Up

U.S. markets ended the day higher despite a rare earnings miss from JPMorgan Chase (JPM) - its first in 15 quarters . Netflix led tech stocks as it announced a price hike, and the U.K. Parliament soundly rejected Prime Minister Theresa May's Brexit plan, sending her back to the drawing board (if she survives a no-confidence vote Wednesday).

JPMorgan's Rare Earnings Miss

JPMorgan Chase, the largest bank in the U.S., reported a profit of $1.98 per share for the fourth quarter of 2018, well below analysts' estimates of $2.20 per share, per FactSet. Weakness in trading and a write down in the company's private equity holdings were to blame.

Why it Matters

Given its exposure to the global economy, institutional and retail investors and consumers, JPMorgan is seen as a bellwether for the financial industry. Beyond that, some argue that as goes JPMorgan, so goes the stock market.

This chart from JC Parets from allstarcharts.com show just how tight that correlation actually is. If JC is right, a meaningful recovery in the U.S. stock market may well be predicated on a recovery for JPM and other financial stocks.

What's Next

We'll hear from Goldman Sachs, Bank of America and BlackRock tomorrow. Of the three, Bank of America has the most exposure to the U.S. consumer. Since U.S. consumer spending makes up two thirds of U.S. GDP, this will be a good, if imperfect, way to take the U.S. economy's temperature.

U.S. Government Shutdown Continues
The U.S. government shutdown, the longest in history at 24 days and counting, continues to drag on and may soon eat into economic growth according to the White House and various economists. 800,000 federal workers missed their first paychecks of the year last Friday and several agencies are completely shutdown amid the standoff. U.S. airports are mired in long security lines and the Delta CEO says the shutdown will cost the airline $25 million.

Beyond the absurdity of the shutdown and its impact on federal employees and government services, it is yet another pain point eroding confidence and creating more uncertainty for the economy.

This chart from LPL Financial and Baker Bloom Davis shows just how high that uncertainty is compared to other crises in the past decade.

Brexit Rejected

British Prime Minister Theresa May is now forced to come up with a Plan B for Brexit after the U.K. Parliament soundly rejected her "Withdrawal Plan" to have the UK leave the EU in late March. EU leaders had agreed to the plan back in November, but the U.K. Parliament voted against it today after five days of debate. It wasn't even close. May lost by 230 votes, the largest defeat ever for a sitting administration in Parliament. May now faces a 'no confidence' vote on Wednesday. If she survives that, May will have to present a Plan B to Parliament next Monday.

Why it Matters

Brexit has always been controversial - even before U.K. voters chose to leave the EU in June of 2016. Prime Minister May has survived intense opposition in order to stick with the "Withdrawal Plan" that she and her cabinet crafted through intense negotiations with the EU and opposition from other parties in the U.K. We'll see if she makes it through Wednesday.

What gets lost in the political fracas is the economic impact on the U.K., the fifth largest economy in the world, as measured by GDP. (See the top 20 global economies here.)

The Center for European Reform, which bills itself as a non-partisan think tank, projected the U.K.'s growth since the referendum in June 2016. While the U.K. has managed to grow at 2.5% since that fateful day, according to this think tank, it's possible that growth would have been higher, and would be higher in the future, had the U.K. voted against Brexit the first time.

However, we'll never know for sure what might have been if the UK had voted down Brexit in the first place and, in many ways, it may be too late to put the Genie back in the bottle. Businesses have already moved out of the country, taking their employees and billions of pounds with them.

The next few days may paint a clearer picture of the future of Brexit, or if it has one at all.

What's Next

Wednesday is a critical day for the Prime Minister. If she survives the no-confidence vote, she still has to put together a new plan that will satisfy all constituents by next Monday. Given the vehemence of the opposition, May should lean on famous words by another Prime Minister who faced even steeper challenges during his tenure.

"If you are going through hell, keep going."

Winston Churchill

Chart of the Day: Netflix Price Hikes Continue Boosting Stock

As we've heard all day, Netflix (NFLX) just announced that it will be raising subscription prices on its streaming service by more than it's ever raised them before. And what did investors do in response? They bought NFLX stock in droves, of course. Two days ahead of Netflix's Thursday earnings release, the company strategically announced this substantial price hike. And investors cheered the decision, assuring the company that the market will undoubtedly bear higher prices ($12.99/month) for Netflix's popular service.

In fact, NFLX stock has a history of rallying after price increases are announced. The chart above shows the last three subscriber price hikes (often announced shortly before earnings, as was the case on Tuesday), and how the stock rallied shortly after each of them. There will probably come a time when Netflix price hikes may not be so welcomed by Wall Street. But apparently, that time hasn't come yet.