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Capital 19 Catch-Up – Aug 20

In last week’s Catch-Up, I mentioned that I had needed motion sickness tablets to deal with the markets from the previous week. Well, there was no reason to put them away during last week’s action either, as investors continued to be confused by mixed messages coming out of the White House, from economic data, and from bond prices.

The week started out in regular fashion with a steady session on Monday, before jumping on Tuesday after the US announced they would be delaying tariffs on certain products coming in from China, while completely cancelling others. The lucky companies who import footwear and clothing, electronics such as cell phones, laptops, computer monitors, video game consoles, and certain toys were thanking their lucky stars.

Apple (AAPL), one of the heaviest weighted companies in both the S&P500 and the Dow gained more than 4% on the news. Best Buy (BBY), an electronics retailer, did better than that, rising by more than 6%. Footwear retailer Nike (NKE) was also up 2%, while fashion retailer Nordstrum (JWN) was just behind.

 

One step forward, two steps back

The move raised hopes of a China-US deal, or at least an improvement of the current situation. The two parties held phone discussions on Tuesday and have agreed to get back together in two weeks.  Surely a silver cloud in what has otherwise been a cloudy couple of months. Don’t be fooled however, we are still a long way from any sort of agreement. The one step forward, two steps back game the two have been playing is likely to continue for a while longer.

The good mood was short-lived, however, as Wednesday saw the Dow have its worst trading day of 2019, and the major indices fall back to 2-month lows. The culprit was the dastardly inverted yield curve. You may remember we went into detail about this back in March when the 3 month and 10-year bonds inverted. This time around it was the 10-year and 2-year, which has also been a reliable indicator of a coming recession.

As we discussed last time around there are a couple of reasons why such indicators may not be entirely accurate. Firstly, there have been false positives in the past, which haven’t brought on recessions. Add to this a bond market that has been manipulated like never before by governments attempting to stimulate their economies by buying their own bonds and you have a set of circumstances and an environment that we haven’t encountered before.

The good news is when an inversion of the 2-year and 10-year yields does occur it takes a while to kick in. 22 months on average in fact. In even better news, after such an event the market has rallied more than 15% on average in the following eighteen months. So it’s not all doom and gloom. Nevertheless, Wall St will be keeping a sharp eye on the economic data to see any signs of a failing economy.

The banks don’t fare well in such environments of course, and the financials were the hardest hit on Wednesday. All of the big boppers took hits including Citigroup (C) who fell 5.3%, Bank of America (BAC) who lost 4.6%, and JP Morgan (JPM) who moved 4.2% lower. The falls put the sector 10% lower than their most recent high, landing them squarely in correction territory. We’ll be watching this space closely for some buying opportunities in the near future.

Strong retail sales halted the selling in the Thursday session. The economy can’t be going too terribly if consumers are still spending money in stores and restaurants. The data was also boosted by a strong earnings report from Walmart (WMT) who beat expectations and raised forward guidance. We’ve talked before about how much we like Walmart as a stock, and they impressed again by increasing online sales and biting into Amazon’s (AMZN) e-commerce market share. WMT was 6.1% higher by the end of the session.

Chipmaker Nvidia (NVDA), another Catch-Up favourite also produced a stellar earnings result late in the week, beating expectations on both profit and revenue, and jumped more than 6% on Friday. The banks also staged a late recovery as bond yields started improving, possibly on talk that Germany was planning to stimulate their economy.

Overall, the major indices were all lower for the week with the Dow suffering most with a 1.5% loss. The S&P500 was 1% lower despite the Friday recovery, while the Nasdaq was the best performer, mostly on the back of the tariff removals from electronics, and fell only 0.8% over the five sessions. The small-cap Russell 200 was down 1.3%.

In the week ahead a lot of Wall St’s focus will be concentrated on the Fed, and what they are planning to do with interest rates. The minutes for last month’s Fed meeting are released on Thursday, while Friday Jerome Powell speaks at the beginning of the Jackson Hole Economic Policy Symposium.

The symposium is held annually in the ski town of Jackson Hole and is sponsored by the Kansas government. Each year, economists, central bankers, finance ministers, and other financial heavy hitters descend on the town for a two-day discussion on the important economic issues of the day. The get together is always good for a headline or two and Jerome Powell will be hopefully providing insight on exactly when the next interest rate will be coming.

Jackson Hole won’t be the only game in town, however. D23, the Official Disney Fan Club, will be holding their expo which starts in Anaheim on Friday. The event will see studios such as Disney, Pixar, Lucasfilm and Marvel previewing upcoming movies, while we will hopefully get a sneak peek into the new Disney Plus streaming service which is due out at the end of the year. The new Star Wars trailer will dominate much of the excitement. Disney (DIS) is up 23% since the start of January.

But if you think that’s all on the conference front you would be sorely mistaken. We also have Hot Chips starting on Monday and running through to Wednesday. Here the chipmakers shine, with players such as Nvidia, Intel (INTC), and AMD (AMD) amongst others showing off their new innovations. The meeting could prove to be a boost for the sector, still recovering from the bruises made from the trade war.

On the earnings front, we have the top two home improvement companies going head to head in Home Depot (HD) and Lowes (LOW). It’s also a heavy week for the retailers with TJX Companies (TJX), Urban Outfitters (URBN), Gap (GPS), Dick’s Sporting Goods (DKS), and Foot Locker (FL) all reporting. Take a look below for all the big earnings over the next four days.

Hope you have a great week everybody.

Cheers, Paul.

 

Earnings:

  • Tuesday: Autodesk (ADSK), Best Buy (BBY), Foot Locker (FL), Gap Inc (GPS), Home Depot (HD), Kohl’s Corp (KSS), TJX Cos (TJX), Toll Brothers (TOL), Urban Outfitters (URBN)
  • Wednesday: L Brands (LB), Lowe’s Cos (LOW), Nordstrom (JWN), Target (TGT)
  • Thursday: Hormel Foods (HRL), Intuit (INTU)
  • Friday: Boart Longyear (BLY)

Economic Data:

  • Tuesday: Randal Quarles (Board of Governors Fed reserve) speaks
  • Wednesday: Existing home sales, FOMC minutes
  • Thursday: Weekly jobless claims, Markit manufacturing PMI, Markit services PMI, Leading economic indicators
  • Friday: Jackson Hole Symposium, Jerome Powell speaks, New home sales

 

 

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