foxex: Break Out

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Markets Rise on Strong Jobs Report

2. S&P 500 Hits New Record High

3. Earnings Winners Have Less Global Exposure

4. Long-Term Profit Forecasts Tumble

5. What to Expect Next Week

Markets Closed

Dow
27,347.36 +1.11%

S&P
3,066.91 +0.97%

Nasdaq
8,386.40 +1.13%

VIX
12.38 -6.35%

Bitcoin
$9,227.70 0.02%

US 10-Yr Yield
1.73 +2.19%

Year-to-Date

Dow
27,347.36 +17.23%

S&P
3,066.91 +21.13%

Nasdaq
8,386.40 +24.45%

Russell 2000
1,589.33 +17.85%

Crude Oil
56.33 +14.60%

US 10-Yr Yield
1.73 -35.67%

Image: Getty Images

Markets Today

U.S. and global markets all rallied hard into the first day of November as a survey of Chinese manufacturing was stronger than expected, and the U.S. nonfarm payrolls report blew out expectations. The S&P 500 closed at yet another all-time high while the DJIA and the Nasdaq both closed the day up by about 1%.

Here are some of today's biggest headlines:

Headlines

U.S. employers added 128,000 jobs in October, much higher than the forecast of 75,000. The job gains were notable given the GM autoworkers strike throughout October. The unemployment rate ticked up a bit to 3.6%, but still remains near multi-decade lows. The job gains for both September and August were revised sharply higher. For the year, monthly job creation now averages 167,000 compared with 223,000 in 2018. Job growth was strongest in the food and beverage service sector of the economy, while manufacturing and government jobs posted the worst declines.
Chinese trade officials say they have reached a consensus with their U.S. counterparts on key provisions of Phase One of the trade agreement the two sides agreed to last month. The timing of the signing of Phase One has yet to be announced, but the White House has indicated that the time and place for that will be announced soon.
The U.S. manufacturing purchasing managers index from the Institute for Supply Management came in lower than expected as the effects of the GM strike last month slowed down manufacturing activity in auto-related industries. The manufacturing sector showed its first contraction in a few years in August, ending a 35-month expansion period.
Oil majors, including ExxonMobil and Chevron report dismal earnings as oil prices continue to slide and global demand weakens.
Alphabet has agreed to acquire smartwatch maker Fitbit for $2.1 billion, gaining a foothold in the fitness and health arena. With the acquisition, Alphabet will also gain access to Fitbit's more than 25 million users and their data, although Alphabet says it won't use that data to send targeted ads to those users. (I'm a Fitbit user, so I'll let you know if Alphabet is true to its word.)

The SmartWatch Market

Smart watches and fitness trackers have surged in popularity and adoption in the last few years. They are the gateway into our personal health and habits, which is a goldmine to marketers looking for more frontiers to push their products and services. Apple (AAPL) has stated that health is the next big market for the company, and it already has a huge head start over Amazon (AMZN), Samsung, Alphabet (GOOGL), and other players. Alphabet's acquisition of Fitbit gets it into the game, but it has a long way to go.

chart courtesy Strategy Analytics

Earnings Observations: Home Cooking is Winning

The combination of the slowing global economy and the U.S.-China trade war is having a clear effect on this earning season's results. As of October 25th, the S&P 500's total earnings decline was 3.7%, however that masks a stark difference between domestic and global-focused companies. For S&P 500 firms that get more than half their revenue inside the U.S., earnings only declined 0.8%, but S&P 500 companies that get more than half their revenue outside the U.S., earnings declined 9.1%.

Corporate Profits: It Only Gets Worse From Here

While U.S. companies are reporting better than expected earnings (They always manage to do that, don't they?) the outlook for growth gets worse from here. It's not just the U.S.-China trade war that stands in the way, either. As we know, the global economy was already slowing before Trump threw the first punch. The trade war exacerbated the slowdown, but the gears were already grinding in 2017.

2017 was also the year that the U.S. Congress passed the Tax Act and Jobs Act of 2017. That reduced the top marginal corporate income tax rate from 35% to 21%, and padded the bottom lines of corporations throughout 2018. As we also know, many companies used that extra cash for stock buybacks and dividend increases, which are great for shareholders and executives, but don't necessarily set a company up for longer term success. As the benefits of those tax cuts have faded, and the global economy has slowed, profits have been steadily falling for the past 12-18 months. The decline will start to accelerate in 2020, which will put pressure on companies to continue over-delivering on earnings amid a slowing global economy.

The Global Asset Scorecard

But before we start fretting about the future, let's admire the robust gains in global assets so far this year. Interest rate cuts in the U.S. and around the world have abetted this performance. If things continue like this for the next two months, 2019 will go down as one of top performing years in history across multiple asset classes.

Global Equities: UP 20.1%
Commodities: UP 12.8%
High-Yield Bonds: UP 11.1%
Investment Grade Bonds: UP 10.2%
Government Bonds: UP 5.7%
Cash (Money Markets): UP 1.9%
U.S. Dollar: UP 1.5%

The Week Ahead:

Monday:
U.S Vehicle Sales (Oct.)
Factory Orders (Sept.)

Tuesday:

ISM Non-manufacturing Index (Oct.)
U.S. Trade Balance (Sept.)
Job Openings and Labor Turnover Survey (JOLTS) (Sept)

Wednesday:
EU Retail Sales (Sept)
Non-farm Labor Productivity (Q3)

Thursday:
U.S. Consumer Credit (Sept.)
China Trade Balance (Oct.)

Friday:
Consumer Sentiment Index (Nov.)
China Consumer Price Index (Oct.)
China Producer Price Index (Oct.)

Trade War: Dispatches From the Front

With the cancellation of the APEC summit, where Phase One of the trade deal was to be signed, the trade war drags on with no end in sight. President Donald Trump has said that a new venue for the signing of Phase One will be announced, "soon," and China state TV network Xinhua news said that they'd reached "consensus on principles." That said, investors shouldn't hold their breath without a more definite date. The cancellation of APEC shows that maybe they shouldn't even with one.

Something investors can count on is getting to see the effects of the trade war next week. The U.S. announces its monthly trade balance for September on Wednesday, and China will announce its balance for October on Thursday. We'll all get to see how tariffs, and the threat of tariffs, have affected trade between the world's two largest economies.

Autos Owned and Shared

Another thing likely to be affected by the trade war are U.S. auto sales, which are announced on Monday. With their large number of parts, autos are particularly vulnerable to trade disruption. Trade worries' effect on sales will likely be compounded by the nearly 50,000 strong General Motors (GM) strike. While it looks like the strike is winding down, it was still in effect for the entire month of October. Be on the look out for how auto sales weather these two headwinds.

Ride sharing is another trend putting pressure on auto sales, because ride sharing offers an alternative to car ownership. One of the largest ride-sharing firms, Uber Technologies (UBER), reports earnings next week, but it can't pressure the auto industry if it runs out of money. Uber has had a spectacularly high rate of cash burn. It hemorrhaged over a billion dollars in free cash flow last quarter. It remains to be seen if they can stanch the flow.

For more on Uber earnings, click here.

More News:

Disney Earnings: What to Look For

Odd Lot Trading On the Rise

Facebook Upside Appears Limited Despite Strong Quarter

(chart courtesy YCHARTS)

Semiconductor maker Qorvo rocketed up 20.6% today as it delivered not only earnings and revenue beats, but provided better than expected guidance for next quarter. Cybersecurity firm Fortinet rose 10.5% on earnings and revenue beats, and likewise provided better than expected next-quarter guidance. Despite a revenue miss and EPS losses, energy company Apache gained 10.2% today after its announcement that it will cut 10-15% of its staff.

Networking hardware company Arista Networks plunged 24.2% today. It had actually done fine this quarter, but reported cuts in orders from two major buyers, possibly Facebook and Microsoft. This caused it to dramatically lower guidance to levels far below consensus estimates. This resulted in several analysts cutting their price targets for the stock considerably.

Word of the Day

Wearable Technology
Wearable technology is a category of electronic devices that can be worn as accessories, embedded in clothing, implanted in the user's body, or even tattooed on the skin. The devices are hands-free gadgets with practical uses, powered by microprocessors and enhanced with the ability to send and receive data via the Internet.

The rapid adoption of such devices has placed wearable technology at the forefront of the Internet of things (IoT).

Today in History

November 1st, 1993

Today in 1993 the Maastricht Treaty came into effect, establishing the European Union. At that point, only 12 countries were EU members. A further 16 have been added in the intervening years. The treaty established the European Central Bank and laid the foundation for the eventually adoption of the Euro. This anniversary comes one day after the most recent missed deadline for the United Kingdom to leave the EU.

Source: https://www.ecb.europa.eu/explainers/tell-me-more/html/25_years_maastricht.en.html