foxex: Make it 8

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Stocks Rally as Trade Talks Approach

Markets Close

Dow
25,833.25 +1.74%

S&P
2,775.60 +1.09%

Nasdaq
7,472.41 +0.61%

VIX
14.96 -7.77%

INV Anxiety Index
103.36 High

US 10-Yr Yield
2.666 +0.34%

Year-to-Date

Dow
25,883.25 +12.23%

S&P
2,775.60 +10.72%

Nasdaq
7,472.41 +12.62%

Russell 2000
1,569.25 +16.36%

Crude Oil
55.17 +19.73%

US 10-Yr Yield
2.666 -2.56%

Stocks Surge on Trade Talks and Consumer Sentiment

Make that 8 weeks in a row for stock gains, and today's rally was a big one. The DJIA climbed 1.74% with financial stocks leading the way. A positive consumer sentiment report for February also buoyed investor sentiment, which told a different tale than the poor consumer confidence report for December that we mentioned yesterday. As I mentioned, yesterday's report may have been compromised by the government shutdown last month, as well as lackluster holiday sales.

Specifically, consumers surveyed by the Univ. of Michigan, felt more confident about their ability to buy the things they want given a relatively low level of inflation and a strong job market. That's exactly what the Federal Reserve is trying to manifest through its monetary policy, and it looks like it's working, so far. Here's the Consumer Sentiment Index since 2011 on top, and the S&P 500 since 2011 below.

It's remarkable how similar the consumer confidence survey tracks against the performance of the S&P 500 over time.

But...not really, given that consumer spending is two thirds of Gross Domestic Product (GDP) in the U.S.

Consumer demand is the fuel that companies feed on to forecast demand, production and their balance sheets. Since stock prices are effectively bets on the future profitability of a company, aka its price to earnings ratio, strong demand is a good signal to raise forecasts. On the flip side, weak demand causes companies to reign in their forecasts, which causes investors to hit the SELL button, hard. We saw it with Apple in December, Coca-Cola yesterday, and Mattel today. (James has more on Mattel in our daily chart, below.)

What's Next

U.S. and Canadian markets are closed for Presidents Day on Monday. We'll also take the day off, but we have a special presidential Market Sum for you.

Trade talks between U.S. and China will resume next week in Washington, per reports. President Trump said in a press conference today that he would be open to extending the March 1st deadline if talks are moving in the right direction. The latest indications are positive. We'll see.

Earnings Season Enters the Home Stretch:

More than 85% of the companies in the S&P 500 have reported earnings to date, with 63% of them beating profit expectations. That's lower than in the previous two years, but we've been expecting that as the tax breaks fade and the global economy slows.

Next week, we'll hear from several brick and mortar retailers, including Walmart (WMT) on Tuesday. Walmart pulls in about $125 billion a quarter in revenue, which is astounding. But it makes the company a great proxy for consumer spending. The government reports on consumer spending and sentiment are interesting, but they are just that...surveys. Walmart sells real things to real people, so pay attention to that report if you really want to know what is selling and who is buying. The company has not drawn the attention of Amazon.com or the other FAANG stocks of late. It just "stacks 'em high, and lets 'em fly", as founder Sam Walton used to say.

Here's the stock over the past 5 years, good for a 10% gain per year, on average.

Theranos Documentary Trailer

I'm personally looking forward to this one. HBO just dropped the trailer for "The Inventor: Out for Blood in Silicon Valley", which is the story of the rise and fall of Theranos and its founder, Elizabeth Holmes. The documentary is produced by Jigsaw Productions, an Academy Award winning production company led by Alex Gibney.

If you aren't familiar with Theranos or Holmes, read this:

Theranos: A Fallen Unicorn

We'll be back with you next Tuesday. Have a great weekend.

Caleb

Chart of the Day: No Fun and Games for Mattel Stock

Shares of the iconic toy maker, Mattel (MAT), plunged a whopping 18% on Friday, its worst single-day loss in almost two decades. The company issued worse-than-expected full-year guidance for 2019 on Friday - flat sales for the year (when adjusted for currency) as well as EBITDA far lower than consensus analyst expectations. This disappointment comes only around a week after Mattel's stock gapped up sharply on strong earnings and sales posted for Q4 2018.

Mattel follows in the footsteps of Coca-Cola (KO), which a day earlier had its own worst single-day loss since the 2008 financial crisis. Sizable stock plummets like what Coca-Cola and Mattel experienced in the latter half of this week are especially notable because the overall market has been on a sharp extension of the rally from late December. The S&P 500 is now a full 18% above its December 24 low. Though we're in an undeniable bull market so far this year, single stock performance is not necessarily reflective of market trends at large. It's called unsystematic risk - just another reason to exercise increased caution when investing in individual stocks.