Not Enough to Rally
…Stocks flounder for the week, the month, the year. Sell in May? 1Q GDP at 2.3%; consumers cut back, business picked up slack. Exxon earnings miss. Chevron beat. US Steel clobbered. AZ teacher strike Day 2.
Financial Review by Sinclair Noe for 04-27-2018
DOW – 11 = 24,311
SPX + 2 = 2669
NAS + 1 = 7119
RUT – 1 = 1556
10 Y – .03 = 2.96%
OIL – .19 = 68.00
GOLD + 6.30 = 1323.60
For the week, the Dow fell 0.6% and the Nasdaq lost 0.4%. The S&P closed down a mere 0.01%, however, that was enough for all three to post their first weekly decline of the past three. Three large-capitalization internet and technology companies (Amazon, Microsoft, and Intel) reported better-than-expected results, and while the stocks mostly gained in response, they ended well off their highs and the advances didn’t spark a broader rally. Exxon Mobil dragged energy companies lower to end an uneven week on Wall Street. So far this month, the Dow is up 0.9% while the S&P 500 is up 1.1% and the Nasdaq has gained 0.8%. Historically, April is the best month of the year for the Dow. Year-to-date, the Dow is down 1.7%, the S&P is off 0.1%, and the Nasdaq is up 3.1%. It is probably a good time to mention the theory of the best six months in the market and the worst six months. The best 6 months run from November through April; the worst 6 months are May through October. The easy way to remember is “Sell in May”. Of course, that doesn’t always work. Over the past 60 years or so, May has been negative about half the time – the other years, you would have wanted to stay invested. One caveat, years with mid-term elections are generally worse. Just probabilities, not guarantees.
The US economy grew in the first quarter at the slowest pace in a year owing to a big pullback in consumer spending, but the economy held up better than expected owing to solid business investment and a smaller trade deficit. Gross Domestic Product, or GDP, expanded at a 2.3% annual pace in the first three months of 2018, somewhat slower than the average 3% gain in the prior three quarters. Consumer spending rose a scant 1.1% to mark the smallest increase in almost five years. The slowdown followed a 4% gain in the fourth quarter that was the biggest in three years. Americans spent a bundle during the best holiday shopping season since 2010, but they took a breather to pay off their bills and rebuild their savings. Severe bouts of bad weather in early 2018 also hindered spending.
Businesses picked up the slack, however. Investment in structures such as office buildings and drilling rigs doubled to 12.3% while spending on equipment was up 6.1%. The biggest corporate tax cuts in 30 years may have helped give a lift to investment in the first quarter. The value of inventories, which adds to GDP, also increased to $33.1 billion from $15.6 billion. Investment in new housing was flat. In a surprise, the U.S. trade picture brightened. That also contributed to the higher-than-expected GDP. Exports rose 4.8% to outpace a 2.6% increase in imports. Government spending was also a bit stronger than expected, up 1.2%. Inflation as measured by the PCE price index, meanwhile, rose at a 2.7% annual rate in the first quarter. The year over year rate of Inflation edged up to 1.8% from 1.7%.
While GDP at 2.3% is not as strong as the fourth quarter, that is typical. For several years now, the first quarter has seen the economy pull back to start the year, then pick up momentum in the spring and summer. For nearly two decades GDP has grown twice as fast in the final nine months of the year vs. the first three months. What’s greasing the skids for the economy is a roaring labor market, rising pay and higher business investment. The recent Trump tax cuts have added another boost. Possible pitfalls include rising inflation (including higher oil and raw material prices), tariffs, and the possibility of a trade war.
Angela Merkel heads to the Washington. Hot on the heels of Emmanuel Macron’s glitzy White House visit, the German chancellor will sit down for a 20-minute meeting and a working lunch with Trump, in an attempt to avoid US tariffs on EU steel and aluminum.
North and South Korea made an historic announcement. In a joint statement, the countries pledged to formally end their state of war by year-end, and pursue “complete denuclearization.” At the start of the day-long summit, Kim Jong-un became the first North Korean leader to enter the South when he stepped over the military demarcation line separating the two countries.
After the closing bell Thursday, Amazon said its first-quarter profit more than doubled as consumers shopped more online and revenue from its cloud computing business continued to rise. The results were far stronger than Wall Street expected. Amazon also announced it will raise the fees for Prime membership from $99 a year to $119. Amazon’s 20 percent hike in the cost of Prime membership should deliver more than $1 billion in extra revenue this year and cover any “rational” hike in United States Postal Service delivery fees.
Exxon Mobil shares dropped almost 4% today, after first-quarter profit fell short of estimates. Exxon said it had net income of $4.6 billion, or $1.09 a share, in the quarter, up from $4.1 billion, or 95 cents a share, in the year-earlier period, but that missed estimates by a penny. Revenue rose to $68 billion from $58 billion, also missing estimates.
Chevron gained about 2% after beating profit expectations by a wide margin, offsetting a revenue miss. Net income rose to $3.6 billion, or $1.90 a share, from $2.6 billion, or $1.41 a share, in the same period a year ago. That topped estimates of $1.48 per share. Total revenue grew to $37.7 billion from $33.4 billion but was below estimates. The average sales price of crude oil per barrel rose to $56 from $45 last year.
Shares of United States Steel clobbered today – down 14%. First-quarter earnings fell short of expectations and the company warned of potential “operational volatility.” The company said it is going through “operational challenges” at its steelmaking plant at Great Lakes Works in Michigan, which hit its bottom line by about $30 million in the second quarter. The company’s earnings guidance was below estimates, even excluding the Great Lakes charge.
Expedia jumped 8.2% after the travel site late Thursday posted better-than-expected bookings. Colgate-Palmolive ended flat after the consumer goods giant reported a first-quarter profit beat and revenue miss early today. We are now about halfway through earnings reporting season, and while the numbers have been very good, it has not been enough to spur a rally.
Deutsche Bank is expected to cut around 1,000 jobs or 10 percent of its workforce in the United States. The bank has already cut 400 U.S.-based employees this week – of which around three quarters worked in its trading business and the rest in corporate finance. On Thursday, the bank announced that it would make “significant” cuts at its investment bank, scaling back its corporate finance operations in the United States and Asia, U.S. government bond trading, and equities. Today, the credit ratings agency Moody’s changed its outlook to “negative” on some of its Deutsche Bank ratings. Credit ratings agency Standard & Poors, which had placed the bank on “credit watch” after an abrupt CEO change earlier this month, said the bank’s new direction “lacks the specificity that we need to assess the credibility of this adjusted approach.”
Royal Bank of Scotland reported a rare bit of good news. The troubled state-owned bank beat expectations with pretax profit jumping 70% in the first quarter. However, the looming threat of a fine—estimated to be as much as $9 billion—by the US Department of Justice means it can’t restore dividends just yet.
T-Mobile US and its German owners are advancing toward a long-awaited telecommunications union that would value merger partner Sprint at about $24 billion. Under the terms being discussed, T-Mobile backer Deutsche Telekom would receive a 42 percent stake and 69 percent voting interest in the combined company. The latest discussions follow years of will-they-won’t-they merger deliberations between Sprint and T-Mobile. The two sides restarted talks in recent weeks, about five months after an earlier attempt collapsed.
Arizona educators are wrapping up the second day of a walkout, with protests at the state Capitol. The rally at the Capitol on Friday drew a crowd of many thousands, following the 50,000 who attended the previous day. Leaders of the state’s teacher association say they will push for a ballot initiative to boost school spending if the Arizona Legislature doesn’t provide a new dedicated funding stream. Details of the plan to boost funding weren’t immediately released Friday but some kind of tax increase is probable. Leaders of the Arizona Education Association says the ballot initiative push could begin soon. Friday’s developments came on the second day of an unprecedented statewide teacher strike as several thousand educators and supporters gathered at the state Capitol in Phoenix to push for teacher raises and more school funding. The Capitol space has been reserved for Monday as well.