foxex: Hop the Dip

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. US markets bounce back with best day since October

2. Apple crushes earnings estimates as iPhone sales soar

3. Investors have been buying stocks all month

4. Interest rate expectations lean towards a cut mid-year

Markets Closed

Dow
28,722.85
+187.05 (+0.66%)

S&P
3,276.24
+32.61 (+1.01%)

Nasdaq
9,269.68
+130.37 (+1.43%)

VIX
16.28
−1.95 (-10.70%)

Bitcoin
$9,067.17
+$155.12 (+1.67%)

US 10-Yr Yield
1.641
+0.036 (-4.52%)

Markets Today

Investors shook off Monday's losses and went back to the buying table today, sending the DJIA up more than 180 points to its best performance since October. It was up 280 points at its intraday high, but gave back some gains by the close. Tech stocks also showed some life as the Nasdaq posted its best day since September. The coronavirus continues to spread and claim more lives, causing global health agencies to mandate new travel restrictions. However, investors shrugged off those concerns - at least for today - and continued what has been a month long trend of buying stocks.

The coronavirus has hurt airlines, hotels, retailers, and just about every sector that has exposure to China. We saw more evidence of that today as Starbucks announced that it has closed half of its China locations due to the outbreak. (More on Starbucks earnings below). Corporate earnings in general were a big focus today as companies including 3M, Apple, Boeing, Caterpillar, eBay, and Harley Davidson reported results. Of the S&P 500 companies that have reported thus far, 67% have posted better-than-expected earnings. Past results are interesting, but forward looking guidance is what matters, and most companies are telling investors what they want to hear.

Headlines:

Consumer confidence surged to a five-month high in January amid optimism over the strong labor market. That suggests consumer spending could stay fairly strong in the near term and blunt some of the hit on the economy from weak business investment as new orders for key U.S.-made capital goods dropped in December by the most they had in eight months.
Industrial conglomerate 3M (MMM) says it will cut 1500 jobs and forecast a decline in sales and profits in 2020 as the maker of adhesive tape and air filters faces a decline in revenue from Asia, its second biggest market.
BorgWarner will acquire Delphi Technologies in an all-stock transaction that values the U.K.-based company at $3.3 billion. The acquisition will enable BorgWarner to "maintain flexibility across combustion, hybrid, and electric propulsion." BorgWarner stockholders will own 84% of the combined company.
The U.K. is allowing Chinese telecommunications giant Huawei to sell a limited supply of its technologies to help build the UK's 5G network. The move could strain relations between the U.S. and the U.K. The U.S. has tried to prevent Huawei, which has been accused of technological espionage, from entering into its market or those of its allies. The U.K. will cap sales of Huawei equipment at 35% and will not allow its technology to be used for "core functions," it said in a statement.
The U.S. Treasury yield curve, measured by the gap between yields on three-month and 10-year bonds, briefly inverted overnight for the first time since October as Treasuries rallied for a sixth day. The two-year/five-year curve already inverted on Monday, while the gap between two-year and 10-year yields - considered a recession signal - was at the flattest since Nov. 29.
Starbucks (SBUX) slightly beat earnings expectations and matched revenue expectations. Most notably its same-store sales growth was significantly higher than expected, coming in at 5% versus consensus estimates of 4.4% expected. Growth wasn't evenly spread however, with same-store sales up 6% in the U.S., but only up 3% in China.
AMD (AMD) reported slightly higher-than-expected revenue and grew its gross margin by 4 points YOY. On the other hand, its earnings according to generally accepted accounting principles were a disappointment and it projected a fall in revenue for next quarter.
Apple (AAPL) smashed earnings and revenue expectations. The only less-than-stellar news was that its services revenue didn't match expectations, showing that Apple's pivot to services is going a bit slower than expected.

A lot has happened in the news recently, Australian wildfires, an impeachment trial, a U.S.-Iran military conflict, even a 7.1 magnitude earthquake in the Caribbean today. None of it has deterred investors from buying stocks in January, and the month isn't even over yet.

According to Bank of America Research, its clients have been net buyers of stocks for the past several weeks. What are they buying?

Communication services
Financials
Real estate stocks and REITs
Energy
Materials

Note that energy was one of the worst performing sectors in 2019 along with financials. Talk about buying the dip!

What were they selling?

Consumer staples
Health care

Those two sectors are usually considered defensive since we can't do without them, but the buying activity in the other five sectors shows the confidence investors have in the trends that worked throughout 2019. That confidence belies growing concerns that the stock market feels frothy right now after 2019's gains, as well as hefty valuations - especially in technology and communications services.

Here's the CAPE Ratio (cyclically-adjusted price-to-earnings ratio) of the S&P 500, which measures real earnings per share (EPS) over a 10-year period against the actual S&P 500. As you can see, the index is way out ahead of expected profits. That's what happens in a rampant bull market.

chart courtesy YCharts

Fed-spectations

The FOMC of the Federal Reserve began a two-day meeting on monetary policy today and will announce its decision on interest rates tomorrow afternoon. No one expects the Fed to lower rates three times, as it did in 2019. Unemployment is low and inflation is below the Fed's target of 2%. Those are the two things the Fed cares about most when it comes to setting monetary policy.

There has been a growing drumbeat that the Fed may raise rates in 2020 to keep the economy from overheating on too much debt. (Low interest rates stimulate borrowing, and we've been doing a lot of borrowing at these levels). But, according to the CME's Fed Watch Tool, traders who bet on futures contracts tied to the Federal Funds Rate don't seem to be betting on a hike. In fact, they appear to be raising their bets on another cut, but not until September. According to the Fed Watch Tool, traders see around a 60% chance that the Fed will lower rates anywhere from 0.25% to 0.50%. It's hard to know what those traders are thinking, but one explanation could be that they see the U.S. economy weakening through the year, which will prompt the Fed to lower rates to jumpstart the economy.

Time will tell, but we'll hopefully get a little more intel at tomorrow's press conference with Fed Chair Jerome Powell.

chart courtesy CME

More News:

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(chart courtesy YCHARTS)

Financial holding company CIT Group rose today after earnings and revenue estimates. Restaurant operator Yum China Holdings regained some of its losses as fear of the coronavirus receded somewhat. Insurance company Brown & Brown rose today after it reported strong revenue and earnings. California utility PG&E rose after an analyst with Mizuho upgraded it from neutral to buy.

For-profit college operator Grand Canyon Education fell today after a law firm which specializes in shareholder-rights litigation announced that it is investigating claims that Grand Canyon Education violated securities law by using a subsidiary to hide liabilities. Car parts maker BorgWarner fell today after it announced it was purchasing fellow parts maker Delphi Technology. Manufacturing conglomerate 3M and pharmaceutical company Pfizer both fell after reporting weak earnings.

Word of the Day

Federal Open Market Committee

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC meets several times a year to discuss whether to maintain or change current policy. A vote to change policy would result in either buying or selling U.S. government securities on the open market to promote the growth of the national economy.

Today in History

January 28, 1958

Today in 1958 LEGO Group submitted the patent for the modern LEGO brick. LEGO bricks before then were hollow, so they didn't reliably stick together. The new brick, using what was called the "stud and tube" system, fit the studs on the top of a LEGO brick around plastic tubes in the bottom of another LEGO brick, allowing them to stick together much more firmly. This system, put into place shortly after the patent, is the same as LEGOs use today, and LEGO made over 60 years ago in the late 1950's can be used to build with LEGOS produced today.

Source: https://www.lego.com/en-us/lego-history/the-stud-and-tube-principle-001aa762568348239d659d4ffdc2dfe3