foxex: Divergence

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Markets Tread Water Ahead of Fed Decision

2. Despite New Highs, Most S&P 500 Stocks Trail the Index

3. Boeing CEO Faces Lawmakers Over Fatal 737 Crashes

4. Davos in the Desert

Markets Closed

Dow
27,071.42 -0.07%

S&P
3,036.89 -0.08%

Nasdaq
8,276.85 -0.59%

VIX
13.24 +0.99%

Bitcoin
$9,240.85 -1.53%

US 10-Yr Yield
1.84 -0.97%

Image: Getty Images

Markets Today

S&P 500 falls slightly from yesterday's record high
Nasdaq falls futher, down 0.6%
Consumer confidence down
Trade deal Phase One delayed

There was a ton of news coming out today. Here are just some of the biggest headlines of the day:

U.S. consumer confidence fell in October as expected. The Conference Board reports that consumers are relatively confident about their present situation, but very uncertain about the future. October is the third straight month that consumer confidence has fallen, although spending is expected to remain strong which should help GDP remain close to, or above 2%.
The U.S. and China are not likely to sign Phase One of their trade agreement at a November summit in Chile, as was reported yesterday. Reuters reports today that the signing may be delayed as more details are worked out.
GM reported that the 40 day labor strike by the UAW that ended over the weekend wiped out $4 billion from the automakers' bottom line for the year. That represents all of its free cash flow for the year.
Aerospace firm Lockheed Martin just won a $35 billion contract from the Pentagon to build fighter jets. It's a big win for Lockheed and the latest massive contract awarded by the Pentagon. Microsoft won a $10 billion cloud computing and data storage contract from the Defense Dept. last Friday.
The NCAA (National Collegiate Athletic Association) has decided it will allow college athletes to profit from their likeness, name and image. This paves the way for college athletes to get paid and changes the economics of sports in the U.S. in a profound way.
The United Kingdom will hold a new parliamentary election on December 12th. Prime minister Boris Johnson hopes that a new election will bring in a parliament more amenable to his Brexit deal.

Stocks and Markets Diverge

A curious thing happened on the way to new record highs for the S&P 500. While the index has been gathering momentum and breaking through the key 3000 point resistance level, less than 8% of the stocks in the index made a 52-week high.

Similarly, the Nasdaq 100, which contains some of the largest tech stocks, but also holds companies like American Airlines, Kraft-Heinz, and PepsiCo, hit an all-time high on Friday, yet only 3.5% of the stocks therein made 52-week highs.

Both the S&P 500 and the Nasdaq 100 are market cap weighted, so the biggest stocks like Microsoft, Apple, and Amazon have an enormous influence on the entire index. For individual investors like us, picking stocks is very difficult and risky. Index investing is pretty simple, and there are more choices than ever for investors. We don't recommend particular stocks or securities, but the divergence we are seeing at these new record highs reminds us of the power of index investing.

Here's a good chart of the split between the S&P 500 and stocks above their 50-day moving average, courtesy of IndexInvestors.com.

Don't Fight the Fed

The Federal Reserve's FOMC (Federal Open Market Committee) will wrap up its two day meeting on interest rates tomorrow. Most investors are expecting another 0.25% rate cut, the third such cut since June.

Since last January, when Fed Chairman Jay Powell reversed course and became more dovish on interest rates, the stock market rallied out of its bear den and climbed around 20%, topping several records on the way. The theory is that low interest rates make money cheaper for companies and consumers to borrow, which they use to expand their businesses and make big ticket purchases like homes and cars.

As mentioned earlier, consumers are getting a bit less confident, and companies have been tightening their spending for the past year or more. Another interest rate cut might loosen those purse strings and prompt more business spending, which has historically translated into stronger economic growth and higher prices for stocks. That's how the economy and the stock market are connected, and that's historically what happens when the Fed cuts rates. Stocks tend to rise in the 12 months following 0.25% interest rate cuts, according to research from LPL Financial. It doesn't always happen, and it might not this time, but history is on its side.

Boeing Apologizes

Boeing CEO Dennis Muilenburg faced questions from the Senate Commerce Committee today on how the company handled, or mishandled, safety concerns surrounding the 737 Air Max jetliner. These safety issues led to two fatal crashes that killed 346 passengers and crew members.

The Seattle Times has excellent coverage of the 737 disaster if you want to read more.

Muilenberg apologized on behalf of the company, pledged to do better, and promised large scale reforms at the aerospace company, which has seen its share price drop 19% since the last fatal crash on March 10, 2019. Boeing grounded its entire 737 Air Max fleet on March 19th after several airlines refused to fly the jets, citing safety concerns.

photo courtesy Reuters

While the fatal crashes have impacted Boeing's share price, this moment captured by a Reuters photographer at today's hearing in Washington D.C., reminds us of what this corporate disaster is really all about.

It's way beyond business.

photo courtesy Future Investment Initiative

Davos in the Desert

Trillions of dollars in wealth is gathered in Riyadh, Saudi Arabia over the next two days for the Future Investment Initiative conference. The conference is being hosted by Crown Prince Mohammed bin Salman, in a bid to help drive new investment into the Kingdom. It's almost exactly a year since the murder of journalist Jamal Khashoggi, which the Crown Prince claimed he did not order, but accepted responsibility for since it came at the hands of people who work for the Saudi government. The WSJ reports that many CEOs, including Citigroup's Michael Corbat and Softbank's Masayoshi Son, are in attendance, as is U.S. Treasury Secretary Steve Mnuchin and Jared Kushner, President Trump's son-in-law and special adviser.

Saudi Arabia's economy has been beset with slowing growth as oil prices have been in decline for several years, and new investments into the Kingdom's new economic opportunities have stalled. The murder of Khashoggi turned many potential investors away from the Kingdom in the past year, but not everyone.

Banks, including JPMorgan Chase, Goldman Sachs, and HSBC all have financial stakes in Saudi Aramco, the Kingdom's oil company, which has been on the verge of going public in what is likely to be the largest IPO in history, if it happens.

Saudi's sovereign-wealth fund, the Public Investment Fund, or PIF, is also one of the largest investors in SoftBank's vision fund. The fund just took a massive loss with its investment in WeWork, which recently pulled its IPO, and Uber, among other companies.

The Public Investment Fund is committed to deploying over $400 billion in capital in 2020, and has $1.5 trillion under management (not including land assets which have oil under them, of course). So, if the Crown Prince calls you to the Kingdom, and you run a global investment bank, you go.

You can follow the conference via its video stream here.

If you want to read more about how and where the PIF puts its money to work, read this.

More News:

Starbucks Earnings: What to Look For

Grubhub Breaks Down After Earnings Miss, Lower Guidance

How China is Fueling 25% Bitcoin Rally Amid Trade War

(chart courtesy YCHARTS)

Oil and gas services company National Oilwell Varco rose 13.7% after its earnings release showed its efforts to restructure and cut costs were on track. Printer and copier maker Xerox rose 11.8% from higher-than-expected earnings. Also jumping on good earnings reports were manufacturing conglomerate Legget & Platt, which rose 11.7% and hospital operator HCA healthcare, which rose 6.4%

Laser maker IPG Photonics dropped 13.4% after it reported a substantial earnings decline. Water heater and air purifier manufacturer A.O. Smith lost 4.2% after it reported lower-than-expected earnings due to low demand for its products.

Word of the Day

Sovereign Wealth Fund

A sovereign wealth fund (SWF) is a state-owned investment fund or entity which comprises of pools of money derived from a country's reserves. Reserves are funds set aside for investment to benefit the country's economy and its citizens. The funding for an SWF comes from central bank reserves which accumulate because of budget and trade surpluses, official foreign currency operations, money from privatizations, governmental transfer payments, and revenue generated from the exporting of natural resources.

(Image source: NYT.com)

Today in History

October 29, 1929

Today in 1929 was known as "Black Tuesday." The Dow Jones Industrial Average fell 12% in one day, after having fallen 13% on the 28th. This precipitous drop helped kick off the Great Depression, the worst economic downturn in U.S. history. The market didn't bottom out until July 1932 at 41.22 points, 89% down from its high of 381.17 reached on Sept. 3, 1929. A new high wasn't reached until 1954.

Source: https://www.investopedia.com/terms/b/blacktuesday.asp