11 Feb Capital 19 Catch-Up
The major indices bounced back hard last week, regaining ground from the previous week’s losses following concerns over the coronavirus. Wall Street was positive from Monday through to Thursday, hitting all-time highs yet again, and only stumbling slightly in the Friday session to take a little bit of shine off of the week. The Dow and the S&P500 finished 3% higher over the five sessions, while the Nasdaq won the week with a 4% gain.
Despite the first deaths occurring outside of China, fears over the new virus seemed to be allayed somewhat, at least until the Friday session. It was an interesting response to last week’s panic. The tech and travel sector had been the hardest hit to date, but both benefitted greatly from the change in sentiment. The chipmakers had a field day (or week), while retailers like Nike (NKE), and Apple (AAPL), and the China dependant Caterpillar (CAT) also boosted markets.
Market data certainly helped boost sentiment. The ISM manufacturing index managed a gain when economists were expecting a contraction, private payrolls had their biggest jump in five years – rising by 291,000, while non-farm payrolls smashed through expectations of 158,000 to hit 225,000 with workforce participation rising 0.2% to 63.4%, its highest level since June 2013. Jobs were boosted by unseasonably warm weather in January, but it was still an impressive effort.
The elephant in the room, of course, is that none of these results were affected by the rise of the coronavirus. We won’t see the initial effect this has had on the economy until the March numbers start dribbling out. Many pundits have already predicted that China’s growth will be stagnant in the first quarter. That will have to affect US company sales, as well as growth globally.
On the plus side, however, we’ve got central banks stepping up to the plate. China cut it’s lending through the week, as well as decreasing reserve requirement ratios for the banks, in an attempt to increase stimulus. There is also an expectation that the Fed Reserve will be willing to do the same if results show that US growth has been impacted. It’s always nice to have a backstop.
More bright news came on the earnings front, with some solid performances during the week boosting chances of a positive income quarter for components of the S&P500. We experienced three losing quarters in a row to start 2019, so it would be nice to finish with a win.
Expectations were strong for a fourth straight loss, however, with two-thirds of companies having already reported things are looking up. If you add earnings expectations for the remaining third we’re now looking at a possible 0.7% rise in profits for the final quarter of 2019. A lot is going to rest on the back of retail results which start to come in this week.
Insurers Metlife (MET) and Allstate Inc (ALL) came to the rescue in the last week, jumping 2% and 4% respectively after announcing wins on profit and revenue. The wins helped shield losses from Alphabet (GOOGL) and Disney (DIS)who both had impressive results but were slightly oversold by traders wanting to see a little more. We finally got to see the subscriber results for the Disney Plus streaming service, with 26.5 million paying for the service by the end of the quarter, rising to 28.6 million by the earnings date. This was well above expectations and will get a further boost when the service debuts in India on March 29.
Twitter (TWTR) had a brilliant earnings session, despite missing profit estimates. The share price jumped 15.1% after the social media giant beat revenue forecasts and daily average users rose 21% to $152 million. On the back of this advertising revenue increased by 12% to $885 million.
These user numbers are always crucial to social media companies like Twitter. When you’ve got an attentive audience you have advertisers throwing themselves at you to be put at the front and centre of it. Twitter’s debut was way overpriced – I’m sure we mentioned this at the time. A few tough years followed of course, but a few years on and the valuation is looking much more realistic. Especially if they keep adding and keeping users. Twitter looks to have weathered the storm and I suggest it may be a great year to be a Twitter shareholder – even after the latest bounce. A finish above $50 is well within expectations.
Speaking of overpriced IPO’s, we saw another one hit the NYSE this week in the name of Casper Sleep (CSPR). After initially wanting a debut at $17-$19 management set a more realistic opening of $12, and this seemed to pique interest on its first day of trading. The share price gained 12.5% on day one, after being up more than 30% during the session. By day two, however, the sellers had hit town and the share price closed almost $1 below the initial price at $11.05.
Flashy marketing and gimmicks, especially in the tech sector, are finding it much harder to break through the sceptical minds of shareholders these days. They’ve been fooled too many times before. Casper’s prospectus says it brings “the benefits of cutting-edge technology, data, and insights directly to consumers,” and that it is on the “cutting edge of sleep innovations”. What it really does is make mattresses. Strike that – it doesn’t even make mattresses. It’s a middleman for other mattress makers. And it still has never turned a profit. I’d give this one a wide berth for the foreseeable future.
In the week ahead we’ll be keeping a close eye on the coronavirus again, including potential outbreaks, and the pharmaceutical companies that are scrambling to find a cure such as Moderna (MRNA) and Gilead Sciences (GILD). We also have Jerome Powell, head of the Fed Reserve, testifying to congress on Tuesday and Wednesday. No doubt he’ll be covering all sorts of topics which will have an impact on markets.
On the earnings front, we’ll see reports from Under Armour (UA), Cisco (CSCO), CVS Health (CVS), Nvidia (NVDA), PepsiCo (PEP) and ride-sharing Uber rival Lyft (LYFT). Alibaba (BABA) will also report, although the Chinese version of Amazon, won’t suffer from any coronavirus losses just yet. That will come in the second quarter. The company is currently just a smidgeon away from all-time highs so they won’t want a slip-up with this one.
Samsung will unveil new products at its Samsung Galaxy Unpacked event this week, with a new Galaxy flip phone rumoured to be announced. While Netflix (NFLX) will be hoping to have a breakthrough win at the Academy Awards after being snubbed to date. The leading streamer has 24 nominations, with 10 from the Irishman alone. A win or two in some of the bigger categories could be a market mover.