April 17, 2018.
The market breathed a sigh of relief, geopolitical fears and the drama in Trump’s scandal-laden Oval Office slinking into the background. Volumes were not high but that did not stop all of the major indexes from posting solid gains, riding the optimism from the Q1 earnings season. The Dow saw 25 of 30 component stocks ending up as it briefly traded above its 50-period EMA, only to then fall back beneath it. In turn, the S&P 500 closed a few points below its 50-period EMA. On the S&P 500, all 11 indexes up, 8 with gains of at least 1%. Volatility, too, seems to have tapered, the fear gauge – formally known as the Cboe Volatility Index (VIX) – falling 5%. In its own right, the VIX is set to see its lowest close in about a month. And according to the WSJ Market Data Group, volumes hit their lowest composite level of the year, just under 5.69 billion shares trading hands.
So what kind of earnings growth are we in for? Thomson Reuters says we’re looking at growth on the S&P 500 of 18.6%, which would be utterly fantastic. The question is the extent to which it’s already been priced in. If the projected earnings growth rate materializes, we’d be talking about the fastest clip of growth since Q1 2011.
The earnings season, as noted, was the dominating factor yesterday! After JPMorgan, Citi and Wells Fargo’s solid numbers, yesterday Bank of America (BAC) was in the spotlight. BAC bucked the trend, rising 0.4% after beating out top and bottom line expectations. Another winner was Merck (MRK) which tacked on 2.6% after showing favorable cancer drug results; MRK was one of the Dow’s biggest winners on the day. Also on the pharmaceutical front, Alkermes PLC (ALKS) surged 4.5% after the FDA accepted its depression drug application. And yet another winner was Navistar International Corp (NAV) which took off 10% after Volkswagen AG’s commercial-vehicles business said that it was weighing taking a stake larger than 17% in the U.S. truck company.
Tesla (TSLA) was also in the limelight after reports that it had halted production again. The stock ended off 3.04%. The pressing question for investors of the company is the extent to which it can ramp up production to the levels Musk has promised. The company CEO has repeatedly revised forecasts, this time the production halt being attributed to maintenance and upgrades that would ultimately speed up production. For TSLA what seems to be more the metric that traders are looking at more than anything else is the clip of production, much more so than short-term profitability numbers. The field teeming with competition, Tesla is vying for market share and a long-term competitive edge.
On the downside, NewLink Genetics Corp (NLNK) plunged 7.7%, after the company announced that it was halting its late-stage advanced melanoma drug trial. And U.S. listed shares of WPP PLC (WPP) toppled 6.5% after its CEO resigned on the heels of a probe into alleged personal misconduct.
As for what to expect from here on in, we can’t say it enough! It’s not necessarily absolute numbers, i.e. whether a company beat projections or not. Three of the four big banks released solid numbers, without the market propping up their stock values. So what should you look for? Prudential Financial, chief market strategist, Quincy Krosby, who we’ve quoted often, couldn’t have said it better: “Investors already know that earnings will be good and at this point are looking at guidance from companies. The next couple of weeks will be important because many companies from different sectors will report.”
As for the “Trump trade,” with the president’s personal lawyer, Michael Cohen, appearing in court today, we could see the market react to any developments there. Essentially, the thinking is that even though Trump has given the market a lot of scares of late – from personal scandals, threats of trade and nuclear wars – when push comes to shove, what the market likes is predictability! Trump has given companies their biggest windfall in decades with a huge cash redistribution in the form of sweeping corporate tax cuts. Likewise, the president has promised a huge infrastructure spending bill. All of these things may cause the deficit to mushroom – but for the present investors have no problem kicking the can down the road, riding the market’s gains. And that brings us to our point, anything that would seem to disturb the status quo, jeopardizing or calling into question Trump’s ability to stay president or govern, sees an immediate market backlash. Because, when push comes to shove, traders feel that they’re better off with Republicans in power than the Democrats.
Whereas with the Democrats, moneys go to social spending, from welfare to Medicaid and Medicare, and ramped up Social Security, with Republicans, they’ve historically tried to undermine entitlement payment. So the bottom line is this: Follow firm earnings, look at the top and bottom line results, but expect a monkey wrench – and know how to react, when and if it comes. Also note, that with Trump using the market as his gauge of the success of his presidency, he will – and has intervened. From tweets to comments at press parties to changing course politically and even backing away after he’s made statements that have caused the market to tank, Trump’s real baby is the stock market, and when he speaks, have your finger on the trigger because the market is likely to move!
Economic Calendar: First-off, housing starts will be released today at 8:30, followed by the Redbook at 8:55. Industrial production numbers will be released at 9:15. Outside of that, we’ll be getting a spate of Fed speakers, each with the potential to move markets as well.
Daily Summary: The blue chip Dow rose 0.87%, the S&P 500 not far behind with gains of 0.81%. The tech-leaning NASDAQ edged up 0.70% on the day.
Tuesday’s Hot Stocks: WTFC, CE, NFLX, ROKU, TSLA
Have a great trading day!