foxex: A Cut, But...

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Markets Rise on Fed Rate Cut

2. U.S. GDP Slows to 1.9%

3. Apple, Starbucks, and Facebook Earnings

4. Fiat Chrysler and Peugeot to Merge

Markets Closed

Dow
27,186.69 +0.43%

S&P
3,046.77 +0.33%

Nasdaq
8,303.98 +0.33%

VIX
12.33 -6.59%

Bitcoin
$9,221.07 -1.80%

US 10-Yr Yield
1.8 -2.02%

Image: Getty Images

Markets Today

U.S. markets shot higher today as the Federal Reserve cut interest rates for the third time since June. The S&P 500 closed at yet another all-time high. The Fed cut the overnight lending rate by 0.25% to a range of 1.50% to 1.75%, which was expected. The yield on the U.S. 10-Year Treasury fell slightly, as did gold futures and the U.S. dollar, which we should expect to happen as interest rates continue to head lower.

It was yet another very busy day full of news. Here are the highlights:

U.S. GDP for the 3rd quarter of 2019 came in at 1.9%. That was higher than most forecasts, but still trending lower from the 2% growth in the second quarter. Consumer and government spending accounted for most of the growth as business spending has slowed.
Chile announced it has cancelled the APEC Summit, scheduled for mid-November, which was supposed to be the venue for the U.S. and China to sign Phase One of the trade agreement announced earlier this month. The Chilean government cited protests in the capital city of Santiago as the reason for the cancellation.
GE shares rose more than 11% today as the company reported a lower than expected loss and an increase in revenue in its aviation business, despite the impact of the grounding of Boeing's 737 Air Max jet.
Apple posted an 8% drop in iPhone sales, but an 18% rise in overall sales as its services business, which includes its wearable devices, showed strong growth. The company says it is on track to meet or beat $88.3 billion in revenue in the final quarter of 2019. It has a few new iPhones on the market.
Facebook reported better than expected profits and revenue in the quarter that ended Sept 30th, and daily active users of 2.45 billion. That's about one third of the planet. It also managed to generate more revenue per user than expected, generating $7.26 per registered user. Total revenue grew 29%, the third straight quarter of revenue growth of less than 30%.
Starbucks posted better revenue and profit than expected, and recorded 6% same store sales growth in the U.S. and 5% globally. It's pumpkins spice latte season for the coffee chain, and that usually bodes well for the company's bottom line.
Twitter announced it is out of the political advertising business. CEO Jack Dorsey says the platform will no longer run or accept money for political ads, and said in a statement, "A political message earns reach when people decide to follow an account or retweet," Dorsey wrote. "Paying for reach removes that decision, forcing highly optimized and targeted political messages on people. We believe this decision should not be compromised by money."

What the Fed Said

The Federal Open Market Committee (FOMC) of the Federal Reserve, did what everyone expected today by cutting the overnight lending rate by 0.25%. What may have been unexpected was the Fed indicating it may pause on further rate cuts. In the prior two rate cuts, Fed Chair Jerome Powell has said that the Fed would act as appropriate to,"sustain the [economic] expansion." That language was not in today's Fed statement, and it was replaced by this:

"The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate."

In later comments to the media Powell put a finer point on the FOMC's stance:

"[We] see the current stance of monetary policy as likely to remain appropriate."

That may mean that a late December rate cut, which many investors have been counting on, may be off the table.

Here's the path of interest rates over the past three years, courtesy of YCHARTS.

While the Fed is standing back to assess new economic data as it comes in, it's worth taking stock of where the U.S. economy is right now:

The U.S. economic expansion is now 124 months old - the longest expansion in history.
There have been 108 straight months of job growth - also the longest streak in history.
The unemployment rate is 3.5% - the lowest since 1998
The S&P 500 is at yet another all-time high. I know the stock market and the economy are not the same, but even for passive investors who invest in stocks through their IRAs or 401ks, the market's ten-year bull run has been good for their personal balance sheets.

What Could Go Wrong?

Plenty, naturally. The Fed is particularly worried about the slowdown in business spending and manufacturing activity. That has been exacerbated by the U.S.-China trade war, but it was also inevitable as global growth slows in places like China and Europe.

The Fed is also worried about recent weakness in consumer spending and retail sales, which have been the strongest areas of the U.S. economy.

Another rate cut like the one we saw today makes money cheaper to borrow for both companies and consumers. Borrowing costs decrease, and the rates on everything from mortgages to car loans fall with them, which should stimulate more spending. While consumers have been spending like it's their job, companies have taken that extra money and used it for stock buybacks, boosting their dividends, and some merger activity. That helps existing shareholders and top executives, but doesn't translate into the things that help companies grow, like research and development and capital spending. When those are growing, GDP grows with it. That's just not happening.

I spoke about this dynamic on MSNBC today, in case you prefer the video version.

chart courtesy tradingeconomics.com

Fiat Chrysler and Peugeot to Merge

Ever since Fiat Chrysler was spun out from Daimler Chrysler, the automaker has been moored in 7th place in auto sales and has been seeking another partner to scale. It hasn't been easy given the turmoil at Nissan, and the sales struggles faced by automakers around the world.

Today, Fiat Chrysler and Peugeot confirmed they are in talks to create the world's fourth-largest automaker with a roughly $50 billion valuation. Fiat Chrysler had tried to tie the knot with Renault, the French automaker, but the French government, which owns 12% of Renault, blocked the merger. Peugeot may have been the next best, and only option.

The timing may be right, but the winds blowing against automakers are stiffening, to say the least. Global auto sales are down 6% from a year ago, and slowing economies in China and Europe mean 2020 will likely be even worse. We already know what this has meant for the German economy, which is very dependent on auto manufacturing and sales, but it's worth a look to see just how closely auto sales and the German stock market are tied.

chart courtesy of Schwab Research

China, which many automakers hoped would be the next explosive market for auto sales, given its rising middle class, has turned into a disappointment since car sales there peaked in 2016. If you have ever been to Beijing, Shanghai, or any other major city in China, driving around in a car is no fun at all. Traffic in those cities makes Los Angeles and New York look like the Indianapolis 500. It may just be that economic growth in China is slowing and fewer Chinese want to own vehicles given the rise of auto-sharing, or it might just be that we have hit peak auto. No matter what, Fiat Chrysler and Peugeot are hanging on to the same life raft together.

chart courtesy Schwab Research

More News:

Berkshire Hathaway Earnings: What to Look For

Nordstrom Stock Breaks Down After Analyst Downgrade

Why Stocks Will Plunge 18% by Year-End Despite Fed Rate Cuts

(chart courtesy YCHARTS)

Industrial conglomerate General Electric rose 11% today on good earnings that seem to show progress for the company's turnaround effort. Navigation equipment maker Garmin rose 9.7% on good earnings as it announced an innovative "emergency autolanding" feature for aircraft navigation systems. Centene, a managed care company, rose 8.3% after the managed care firm it is acquiring WellCare Health Plans, reported better-than expected earnings.

Transportation and logistics firm C.H. Robinson plummeted 14.9% today after its profits and revenues declined more than expected. The decline was due to low demand, caused by a combination of fear over tariffs and the slowing global economy. Pharmaceutical distributor McKesson fell 8.4% as investors were unimpressed by its buyback-inflated earnings, especially as more settlements over its role in the opioid epidemic loomed.

Word of the Day

Gross Domestic Product-GDP

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country's economic health.

Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. In the United States, for example, the government releases an annualized GDP estimate for each quarter and also for an entire year. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is, therefore, net of inflation.

Today in History

October 30, 1947

Today in 1947, the General Agreement on Tariffs and Trade (GATT) was signed by 23 countries. Going into effect in the beginning of 1948, it lowered trade barriers, such as quotas and tariffs, between signatories. Over time it was modified and refined, leading to the creation of the World Trade Organization (WTO) in 1995, which absorbed GATT into it. Today the WTO has 164 member nations and 23 "observer" nations.

Source: https://www.investopedia.com/terms/g/gatt.asp