After The Close
Following a precipitous selloff by the major averages yesterday, most of the U.S. indexes managed to climb into positive territory in the afternoon hours. The day began in a similarly bearish fashion as Tuesday, though a strong quarterly showing from aerospace titan Boeing (BA – Free Boeing Stock Report) eventually helped to rejuvenate the bulls later in the day. The Dow, once down by roughly 200 points, rose swiftly for a time. Ultimately though, the blue chip grouping pared its best gains as the closing bell approached. The S&P 500 and NASDAQ also moved higher, though at a more moderate clip than the blue chip composite, before the latter shed its advance, wrapping up the day in the red.
Overall, this earnings season has thus far been a disappointment as far as equity prices go. We believe that the prolonged run-up through early 2018 had already factored in higher corporate profits, so sellers are likely taking advantage of a ripe opportunity to cash in on gains amidst fears over rising rates and geopolitical surprises. Moreover, it’s likely that investors are wary of pushing valuations higher than their recent levels amidst yield-related concerns. U.S. 10-year Treasury yields pushed above the symbolic 3% mark today, underscoring a willingness amongst traders to ensure stable long-term profits rather than weather the recent volatility of the equity markets.
As for earnings season, the majority of reporting companies have beaten consensus estimates. The aforementioned Boeing delivered better-than-expected earnings and increased its 2018 guidance. The aircraft manufacturer also indicated that it planned to expand further into the aircraft services market. Elsewhere, investors responded favorably to diversified telecom conglomerate Comcast (CMCSA) after reports that it offered $31 billion to takeover British satellite broadcaster Sky. This would throw a wrench into not only Twenty-First Century Fox’s (FOXA) plan to purchase the 61% of Sky that it does not already own, but also Walt Disney Company’s (DIS – Free Walt Disney Stock Report) ongoing efforts to acquire Fox’s substantial entertainment assets.
In all, Wednesday’s session was mixed. Advancing issues were most prevalent within the consumer goods sectors and, to a lesser extent, the energy industry; extended declines by technology stocks more than offset this positivity. While earnings are likely to remain encouraging, it is becoming more apparent that this spate of quarterly data from Corporate America may not have the same buoyant effect on equity prices as in previous quarters. Stay tuned.
— Robert Harrington
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
Before The Bell
Stocks stormed out of the gate quickly yesterday, as the bulls appeared to regroup following a generally lower start to the trading week on Monday. But that was a false signal, as the rally would soon fade, and stocks ended the first hour of trading yesterday with modest losses. Initially, as noted, stocks had done well, as the bulls benefited from additional earnings strength from key industrial corporations, such as Caterpillar (CAT – Free Caterpillar Stock Report), which stormed ahead. In all, the Dow Jones Industrial Average gained 131 points in the first few minutes, led by the aforementioned Caterpillar, a Dow component, which jumped some 4% early on.
However, several of the reporting companies fared less well, with fellow Dow entrant 3M Company (MMM – Free 3M Stock Report), which met forecasts while Caterpillar exceeded them, tumbled after its release, quickly falling some 7%. That setback, along with disappointment that Alphabet (GOOG), the parent company of Google did not top forecasts by even more, contributed to a reversal in the averages. So, after the first hour of trading, the aforementioned gains were given up, and the Dow and the NASDAQ both had fallen into the red modestly. Selective pockets of strength, notably among the small-caps, persisted, so the market had a mixed look to it.
Also hurting sentiment was a further rise in interest rates, with the yield on the 10-year Treasury note climbing back up to just over 3.00 for a brief few minutes. Rates had been up to just under 3.00% on Monday. But when they failed to crack 3.00%, a significant psychological point, the equity market had steadied itself. Now, though, with that fixed-income vehicle reaching 3.00%, if only for a brief span, the bears were flexing their muscles. The rise in interest rates is worrisome, as it suggests looming increases in inflation and a tighter Federal Reserve policy down the road, each of which could derail the long stock market advance.
In other news beside earnings and interest rates, the Conference Board, a New York-based research organization, reported that its survey on consumer confidence rose in April, after declining in March. In all, that core index came in at 128.7. That was up from the preceding month's reading of 127.0. The improvement came as consumers rated both business and labor market conditions more favorably than in March. Short-term expectations also improved. Not surprisingly, this solid showing coincided with the further rise in Treasury yields and the consequent drop in the stock market.
This upbeat consumer survey followed by one day a constructive reading on sales of existing homes for March. There, transactions inched up from February, despite the lack of material available housing supply. Also, yesterday, the Commerce Department reported that sales of new homes rose 4.0% in March, a solid showing. Meanwhile, after the indexes had held just south of the breakeven line, the threat of still higher interest rates and pessimism on earnings started to depress the bulls and stocks fell sharply, with the Dow's loss rising to over 150 points and the NASDAQ's deficit approaching the 50-point mark, as noon arrived on the East Coast.
The selling then intensified dramatically, as Caterpillar stock sold off, too. That reversal, and overall pessimism that earnings might not be up enough, in the aggregate, to mollify the bulls, really set the bears off, and as we moved inside the final two hours of the trading day, the Dow had plunged by more than 500 points and the NASDAQ had dropped by over 160 points, bringing that index below 7,000. In all, the Dow had again entered correction territory. The market would then continue at these markedly lower levels into the close, although we did come off modestly from the mid-session nadir.
At the conclusion of trading, the Dow's loss, once over six hundred points, ended matters off 425 points. Also, the S&P 500 closed off 36 points and the NASDAQ, earlier down 167 points, ended with a loss of 121 points, while deficits also were tallied by the smaller-cap composites. In all, it was a weak and dispiriting day for the suddenly forlorn bulls. It would seem that expectations for strong earnings are already built into the equity market, and that the recent results, while uplifting, in the aggregate, may not be enough to light a fire under the bulls. We shall see.
Meanwhile, a new day dawns and to get a hint of where we are going, we look overseas, and see that stocks were trading lower in Asia overnight, while in Europe, the early read on the stock markets is down, as well. Elsewhere, oil, which will be getting some key inventory data, is pennies higher so far this morning, while Treasury note yields, which ended matters at 2.98% yesterday on the 10-year note, are now passing hands at 3.02%. Not surprisingly, stocks, which have started the last two days to the upside, before faltering subsequently, are now showing early losses in the futures markets on concerns about rising yields.
— Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
