03 Sep Capital 19 Catch-Up – Sep 3

Finally, some reprieve after a chaotic August

August on Wall St has finally come to a close, in what turned out to be a relatively chaotic, albeit exciting month for traders. Of the 22 sessions in August, the S&P500 had moves of more than 1% (in either direction) in 11 of them. This included three declines of over 2.5%.   The Dow had 16 moves of 100 points or more in the same period. It certainly wasn’t one for the faint-hearted.

The last week of the month provided a small reprieve from the previous three. We finally had a positive week, with the Dow up 3%, the S&P500 up 2.8% and the Nasdaq up 2.7%. However, it wasn’t enough to push any of the major indices back into positive for August, with the Dow down 1.7%, the S&P500 down 1.8% and the Nasdaq the worst performer of the three losing 2.6%.

The energy sector and the banks suffered the worst falls for the month, with energy down 8.7% and the financials falling 5.1%. Bank of America (BAC) was the biggest casualty of the big banks, dropping more than 10% over the four weeks. Technology also suffered under the weight of the tariff war, losing 1.7% overall. The chipmakers were the hardest hit with Skyworks (SWKS) falling 11%.

As is usual in times of volatility, safety was found in precious metals and bonds. Silver was up 11% in August, while gold gained around 6%. Bond prices were also up as yields were driven down, the 20year bond ETF TLT gained 10.8% over the 22 sessions.

Commodities linked to global production didn’t find the going as easy. Iron ore was down a whopping 28% in August. Oil lost 6% despite US Crude inventories being down 10 million barrels last week, lean hogs were down 9%, corn dropped 10%, and copper fell 4%. All a sign of continuing worries over trade wars and Brexit troubles in the UK and Europe.

Trade War Dominates Headlines

The trade war continued to dominate the headlines last week. With positive talk of getting China back to the table on Monday, a denial of this from China in the middle of the week, followed by China’s Commerce Ministry stating that they wanted to resolve the trade war with a calm attitude, and were opposed to escalation tensions. It will be interesting to see where this leads us in the coming week.

US equities paying more than long-term bonds

The other big talking point of August, bond yields, continued to be a big talking point into the final trading week as well. The 10-year and 2-year bonds continued to be inverted through the end of the month, while the 30-year bond hit all-time lows of 1.907%, well below what you can get for the shorter term 3-month and 1-month bonds.

With the yield on 30-year bills dropping below 2%, we now have a very rare instance where US equities now pay more than long-term bonds. For the first time since March 2008, the S&P500 dividend yield was higher than the 30-year bond. And according to Bespoke Investment Group 333 of the S&P500 stocks now pay higher dividends than the 5, 10, and 30-year treasuries. Ideally, it will make these dividend-paying stocks more attractive to investors.

If you’re after a dividend payer in your portfolio look for companies that continually raise their dividend each year. The following stocks have raised theirs every year for the past 25 years straight:  Target (TGT), Lowes Cos (LOW), Procter & Gamble (PG), AT&T (T), Sysco Corp (SYY), Pepsico (PEP), Hormel Foods (HRL), and Medtronic (MDT), and there’s many more.

Also look for strong performers all who have yields well over long term bonds including Home Depot (HD), Macy’s (M), Paychex (PAYX), Invesco (IVZ), and Cisco (CSCO). Or take a look at some of the ETF’s which specifically hold big dividend payers including SDY, VIG, DVY, and HDV.

New Model Portfolio to be announced shortly

If you like dividend payers you will love the new model portfolio we are about to launch. Watch this space for the new Capital 19 Dividend Income Portfolio coming soon.

Retailers Kohls and Tiffany’s both had good weeks after beating earnings estimates and rising 3.4% and 3% respectively. Kohl’s impressed after an alliance with Amazon helped push customers through their stores, While Tiffany’s (TIF) sales fell less than expected despite suffering from protests in Hong Kong, where it had to shut up shop for six trading days in its fourth-biggest market.

It was also a good week for PC maker Dell Technologies (DELL) who pulled in a record $11.75 billion in revenue in its PC division. The stock was up 10.18% on Friday, clawing back much of its August losses that have hampered much of the PC industry throughout the trade war tensions.

Cosmetic maker Ulta Beauty (ULTA) went the opposite way on Friday, dropping a hefty 29.55% after missing expectations on both revenue and profit and dropping its forecast for the rest of 2019. Management has blamed a tough environment for cosmetics in 2019 driven by a lack of innovation in the sector, while also bemoaning an increase in moves away from bricks and mortar retailers towards online stores.

What’s ahead?

So, to the week and the month ahead, we’ll be looking for a bit more stability in the markets after a rocky August. Statistically, since 1950, September has been the worst month for stocks. The good news is, however, that the last fifteen times that August has been a down month the major indices have moved higher through to the end of the year every single time. Surely a good omen.

Investors will be eagerly expecting another rate cut this month as the FOMC meet on the 21st of September. Jerome Powell is giving a speech in Switzerland on Friday so eyes and ears will be all over the Fed Chairperson for any rate hints.  We also have the non-farm payrolls coming out on the same day so it will be a big one for the Fed.

Tesla (TSLA) will be feeling a bit nervous when Porsche release their first-ever fully electric car in Germany this week. The industry will be closely watching the technology and price point for the newly named Taycan. Tesla will also reveal how their sales to Europe are coming along in the same week. We’ll also have car sales for August released on Wednesday where analysts are expecting a rise of 4.2%.

On the earnings front, we still have a few big players left to produce numbers in the last month of the quarter. We’ve mentioned clothing maker Lululemon (LULU) a few times in the past, and it’s been one of my favourites for a while now. Their products are high quality and while the price point is high, they don’t seem to have any problems shifting their merchandise. The stock is up 51% for the year to date and I’ll be expecting another earnings beat over the $0.89 per share expected.

We’ll also see results from American Eagle Outfitters (AEO), Docusign Inc (DOCU), and Slack Technologies (WORK).

Check out the list below for more earnings and the economic data due out this week.

Hope you have a great week.

Cheers, Paul.

Earnings:

• Tuesday: First National Energy Corp (FNEC), HD Supply Holdings (HDS), MongoDB (MDB), Navistar Int (NAV), Smartsheet (SMAR)
• Wednesday: ABM Industries (ABM), General Finance Corp (GFN)
• Thursday: Broadcom (AVGO), Docusign (DOCU), Fuell Cell energy (FCEL), Hovnanian Ent (HOV), Kroger Co (KR), Lululemon (LULU) Palo Alto Networks (PANW), National Beverage Corp (FIZZ).
• Friday: Arion Group (ARGC), Interdyne (ITDN), Life on Earth (LFER)

Economic Data

• Tuesday: Markit manufacturing PMI, ISM manufacturing index, Construction spending
• Wednesday: Foreign trade deficit, Motor vehicle sales
• Thursday: Weekly jobless claims, Markit services PMI, ISM non-manufacturing, Factory orders
• Friday: Nonfarm payrolls, Unemployment rate, Average hourly earnings.