Big Tech Rolls
…..Nasdaq record high. Tech rules. GDP at 3% in 3Q. The global equity markets are even better. Madrid says no to Catalan secession. CVS-Aetna v. Amazon. JC Penney fades. GE’s bad week. VW tries to come clean. Utah’s shrinking national monuments.
Financial Review by Sinclair Noe for 10-27-2017
DOW + 33 = 23,434
SPX + 20 = 2581
NAS + 144 = 6701 (record)
RUT + 10 = 1508
10 Y – .02 = 2.43%
OIL + 1.39 = 54.03
GOLD + 7.00 = 1274.20
For the week, the Dow rose 0.5%, the S&P 500 gained 0.2% and the Nasdaq advanced 1.1%. The S&P has notched gains for seven straight weeks, its longest weekly winning streak in three years. The Russell 2000 index was down 0.1% for the week. Who needs small caps, when the big tech stocks are going crazy? For the year to date: The S&P 500 is up 342.24 points, or 15.3%. The Dow is up 3,671.59 points, or 18.6%. The Nasdaq is up 1,318.15 points, or 24.5%. The Russell 2000 is up 151.19 points, or 11.1%.
We knew this was going to be a big day for the tech sector after several companies reported strong earnings after the closing bell yesterday. The S&P technology index led the way higher, up 2.9%. The index notched its best day since March 1, 2016 and is up nearly 35% on the year versus the 15-percent gain in the S&P 500. Google-parent Alphabet gained 4.2% as its revenue got a boost from advertising sales. Microsoft jumped 6.4% after the world’s largest software company reported further gains from its cloud computing services. Apple rose 3.5% after the company allayed concerns of muted demand for its 10th anniversary phone. The iPhone X, unsurprisingly, sold out of its pre-orders within ten minutes. Or, at least, the pre-orders it allocated to its website. Likely pre-orders are also sold out at its retail operations at this point, too. Intel soared 7.3% after its quarterly results topped estimates and the chipmaker raised its full-year forecasts. And Amazon, gained 13.2% after reporting a quarterly sales surge and better than expected earnings. Amazon of course is already ubiquitous—an estimated two-third of US households subscribe to its Prime membership program. But aside from the packages that come to your door and a few forays into hardware, the company can still grow sales by 35% in North America and their cloud business saw sales jump 42%. For Jeff Bezos, this was about a $7 billion day, meaning he may now be the world’s richest man. Both Amazon and Google now trade above $1,000. Apple, Amazon, Alphabet, Microsoft; these are the new blue chips. Maybe toss in Facebook, Netflix, and Nvidia.
Today, the FAANG stocks added $181 billion in market capitalization in just a few hours of trading. For the sake of comparison, Goldman Sachs has a market cap of $93 billion. This year so far has been a big one for these companies, which have added nearly $1 trillion in value. They might top that mark next week, when Facebook and Apple report earnings.
If you own at least a few of these stocks, and you have just been holding, you have been rewarded. Even as these stocks have grown massively they can still deliver growth that seems more like a small cap stock sprinting out the gate. That does not mean they will continue to go up in a nearly straight line – they all face certain challenges but they all remain innovative and profitable until further notice.
Trump likes to claim credit for the record highs on Wall Street, even though we have been in a bull market for more than 8 years. And what he doesn’t mention is that the rest of the world has gotten richer, faster at the same time. American equities are now worth $28.4 trillion, having swelled by almost $3 trillion since he took office in January. But they’ve lost ground against the rest of the world. All stocks across the globe are valued at $89.9 trillion. US shares make up only 31.6 percent of that total. That’s the lowest proportion since November 2011, or a few months after the U.S. flirted with default. And it’s sunk from the 11-year high of 38.3 percent set in December under then-President Obama.
Earnings growth for the third quarter is now 6.7 percent, according to Thomson Reuters data. Of the 273 companies that have posted earnings, 74 percent have topped expectations, compared with the 72 percent beat rate over the past four quarters. Not all earnings were positive, however. Chevron’s 4.14 percent fall weighed on the S&P and the Dow after the oil company’s profit missed estimates.
The nation’s gross domestic product expanded at an annual rate of 3 percent in the third quarter, according to the Commerce Department’s first estimates. Economists initially expected that Hurricanes Harvey and Irma would deal a blow to the country’s steady growth, but destruction wrought by the storms was outweighed by the continued spending of consumers and businesses. The economy is experiencing its fastest growth spurt in two consecutive quarters since 2014, but it is highly unlikely that growth for the year will reach 3 percent. The first quarter was tepid, and projections for the current quarter hover around 2.8 percent. Personal consumption, although down from the previous quarter, grew at a 2.4 percent rate, and nonresidential fixed investment, a measure of business spending, expanded at a robust rate of 3.9 percent. Spending on equipment increased at a rate of 8.6 percent, as companies poured money into capital improvements. Businesses may be investing in computers and industrial equipment in response to a tight labor market.
It can be hard to accurately measure the full effect of a natural disaster immediately after it occurs. Hurricanes Harvey and Irma left 600,000 to one million vehicles needing replacement. Car sales spiked in September, reaching their highest level since 2005. Those car purchases are counted toward GDP growth, but the destruction of all those cars is not subtracted. The 3% GDP growth figure released was the government’s first estimate of economic output for the quarter, and it will be revised twice.
The government in Madrid, Spain sacked Catalonia’s president and dismissed its parliament, hours after the region declared itself an independent nation. A new regional election will be held in Catalonia on Dec. 21. As well as removing Carles Puigdemont as head of the autonomous region, Prime Minister Mariano Rajoy also fired its police chief and said central government ministries would take over the Catalan administration. Several European countries, including France and Germany, and the United States also rejected the independence declaration and said they supported efforts to preserve Spain’s unity. The crisis has now reached a new and possibly dangerous level as independence supporters have called for a campaign of disobedience. The main secessionist group, the Catalan National Assembly, called on civil servants not to follow orders from the Spanish government and urged them to follow “peaceful resistance”.
CVS Health has made an offer to acquire Aetna for more than $200 per share, or over $66 billion, making it the biggest deal of the year. Yesterday Amazon.com has received wholesale pharmacy licenses in several states and is planning to move into online prescription drug sales, potentially posing an existential threat to brick-and-mortar pharmacies. That possibility has hit shares of most drugstore operators on fears that the online retailer would leverage its vast ecommerce platform in prescription drug sales. A CVS-Aetna deal could create a one-stop shop for customers’ health care needs – ranging from employer healthcare and government plans to managing benefits and running drug stores.
This has not been an easy year for brick and mortar retailers and today, JC Penney took a hard hit, down 15% after warning of a deeper-than-expected loss in the third quarter. The retailer is trying to revamp its apparel inventory by liquidating less popular items. While the effort will lead to a comparable-store sales gain, it was a costly endeavor, resulting in a loss last quarter. The move spotlighted key problems for the department-store field: hard-to-sell inventory and a reliance on deep discounts to move stock. J.C. Penney also has been shuttering poor-performing stores in a bid to better match supply with demand.
It has been a very bad week for General Electric. GE cut cash and profit forecasts while reporting earnings that fell well short of Wall Street estimates. Investors are also bracing for a possible dividend cut. Shares dropped every day this week pushing the stock down 13% on the week. That was GE’s worst weekly drop since March 2009. With about $26 billion of market value wiped out over the past five days, the loss for GE shareholders this year has now reached $100 billion
Volkswagen reported net profit in the third quarter fell about 50 percent, to 1.1 billion euros, or $1.3 billion, after the company set aside €2.6 billion to cover the unexpectedly high cost of repairing diesel cars in the United States that contained illegal, emissions-cheating software. VW had warned last month that the emissions scandal would cut into earnings. After VW admitted to the scandal, the company vowed it will make electric cars affordable for the masses. One way that Volkswagen was able to still report a profit in the quarter, though, was by cutting spending on research and development. So, in a twisted sort of way, the cost of the scandal is hurting the transition to clean electric cars.
National monuments in Utah are shrinking. The Trump administration has decided to reduce the size of the Bears Ears National Monument and Grand Staircase-Escalante National to make way for more industrial activity on the land they occupy. A coal deposit lies beneath Grand Staircase, but an archeological site where two dozen new species of dinosaurs have been discovered is located there, too, and paleontologists are now worried it could be destroyed if the monument’s size is reduced. Navajo Nation Attorney General Ethel Branch, said: “The Navajo Nation stands ready to defend the Bears Ears National Monument. We have a complaint ready to file upon official action by the President.”