 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Friday's Headlines 1. Markets Flip on Iran/U.K. Tanker Tensions 2. U.S. Stocks Post Worst Week Since May 3. Leading Economic Indicators Head South 4. Borrowing our Faces Off 5. What to Expect Next Week Markets Closed
Year-to-Date
 Markets Today
An early rally for U.S. markets was stifled this afternoon just as news that Iran had seized a British owned oil tanker in the Strait of Hormuz hit the wires. Iran's Revolutionary Guard confirmed that it had seized the Stena Impero, a U.K. owned oil tanker for failing to follow international maritime regulations. Later in the afternoon, the U.K. said that Iran had seized a second tanker in the Strait. This comes after an Iranian tanker was seized by the British Royal Marines earlier this month on suspicions that it was breaking sanctions against Iran by allegedly transporting oil to Syria. Yesterday, President Trump said that the U.S. had shot down an Iranian drone just a couple weeks after Iran shot down a U.S. drone. Hostilities are escalating.
We are going to keep hearing about the Strait of Hormuz given its geopolitical significance and importance to the oil economy. According to the Energy Information Administration, 21 million barrels or 21% of liquid petroleum (oil and other petroleum related products), flows through the Strait every day.  Crude oil futures climbed just over 1% on the news, and the increased tensions may have weighed on the U.S. equity market, which was in the midst of a healthy rally to close the week. By the close, all major U.S. markets ended lower, which capped the worst week for stocks since late May. The S&P500 and the Nasdaq fell 1% in the past 5 days, failing to add on to the record highs achieved just a week ago. The Volatility Index or VIX, also known as the "Fear Index", spiked 5% today, after a relatively quiet summer.
Temperatures are rising.
Earnings Parade Microsoft, fresh off its Thursday earnings beat, rallied early Friday morning which helped lift the overall market given that it is the heaviest component of the S&P500 and the most widely held stock among both index funds and equity ETFs. But, as Microsoft faded, so did the broader market by the closing bell.
As of late Thursday afternoon 15.3% of the S&P 500's market cap reported 2Q results. Here's the early tale of the tape:
Leading Economic Indicators Tumble in June This could be just an anomaly or the first domino in an economic cascade, but the Conference Board's Leading Economic Indicators Index fell to its lowest level since December. The LEI, as people call it, measures new orders and data for things like manufacturing, housing permits and unemployment insurance claims. It's one of the key indicators that the Federal Reserve looks at in determining monetary policy, which is why today's report got people's attention.
This one month dip is not a cause for alarm, especially because the LEI's read on the consumer end of things like housing permits and unemployment insurance claims belies how well the consumer has been holding up in 2019. Housing permits dipped last month but should rebound as mortgage rates continue to decline. Similarly, employment insurance claims should remain low given how strong the U.S. job market is right now.
That said, the LEI is worth watching as the second half of the year rolls on to see it if continues to slide.  Diving into Bonds While stocks have hogged the spotlight given record highs of late, the bond market is where the money has been flowing. According to Bank of America's research, $455 billion has flowed into bonds since the beginning of the year - a record amount. To put that into perspective, in the past 10 years, $1.2 trillion has flowed into bonds, so the last six months have indeed been heavy. This is happening as yields for bonds continue to fall as investors anticipate a slowdown in the U.S. economy and a lowering of interest rates by the Fed. But remember, as yields fall for bonds, prices rise.
Read more: How Bond Yields Work
Per BofA, the flow has been across all flavors of bonds including U.S. Treasuries, corporate bonds and emerging market bonds. Despite the rich valuations for stocks, BofA says the biggest risk is in bonds, not stocks.  Borrowing like Crazy
We've noted how consumer confidence has been one of the bright spots in the U.S. economy despite concerns about the domestic and global economies, the trade war and a manufacturing slowdown. To wit, the University of Michigan Consumer Confidence Survey for June, which came out this morning, showed another uptick, indicating consumer resilience. With a strong job market, slight wage increases, low gasoline prices and a booming stock market, the confidence is not entirely unwarranted.
At the same time, consumers have been on a historical borrowing spree. While interest rates have come down for some products, banks and credit card companies have yet to adjust them for things like car loans and credit cards. Why would they since the appetite for borrowing is immense right now? Consumer borrowing has been an immeasurable help for banks and lenders like JPMorgan Chase, Bank of America and Ally Financial given the slowdown in their investment banking and trading businesses.
According to data from the Federal Reserve credit card assessed interest hit a fresh all-time high in in the second quarter, rising to more than 17% for the first time ever, and auto loans are well above their ten year average.
Here's the Fed's plot for credit card interest:  And here's the Fed's chart for all U.S. consumer owned debt over the past ten years. Money has been cheap thanks to those low interest rates, but easy money has a way of becoming a very sticky problem when things go South. We saw that movie in 2008-09.  Next Week It'll be a busy week for corporate earnings as we are in the teeth of reporting season. We are still two weeks out from the Federal Reserve's next meeting and the U.S. China trade talks have gone underground, so the focus is on companies' results and their outlooks for the remainder of the year. Here are a few notable companies we'll hear from next week:
Yahoo Finance has a great calendar for earnings in case you want to track your favorite companies.
The economic calendar is relatively quiet next week here in the U.S., apart from a few reports on home sales, durable goods orders. We will get a first estimate on second quarter GDP on Friday, which is expected to come in at 1.6%. Any lower and the drumbeat for a rate cut will get louder. Any higher, and fears of no cut will start creeping in.
Stay cool this weekend!
chart courtesy www.koyfin.com  State Street and Citizens Financial Group join the ranks of businesses that beat their Q2 earnings estimates this week, causing each financial institution's shares to rise by over 6%. While State Street's earning fell heavily from a year ago, it is cutting costs and restructuring to right-size its business. In that same vein, Kansas City Southern also beat its Q2 earnings estimates and reported record revenue, resulting in an almost 5% stock increase.  Conversely, Alliance Data missed its Q2 earnings estimates, causing its shares to fall by just over 4%. Netflix's stock fell again following its earnings results earlier in th week, dropping another 3% today.  Word of the Day DefaultGiven the borrowing craze it's important to keep this word fresh in our vocabulary. Default is the failure to repay a debt including interest or principal on a loan or security. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments. Individuals, businesses, and even countries can fall prey to default if they cannot keep up their debt obligations.
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Friday, July 19, 2019
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