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After the Democratic Tsunami, Stocks Struggle to Stay Afloat

Wall Street seemed to be in the mood on Wednesday to celebrate the one-year anniversary of Trump’s election, but markets had trouble gaining traction.

The three major indices closed slightly higher on Wednesday, after staying mostly flat throughout the day.

Tuesday’s Democratic rout is casting a pall on Trump’s agenda. Declining bank stocks also kept markets in check. The U.S. Treasury yield curve is near its flattest level since 2007, potentially eating into the profits of banks. A flattening yield curve at a time when the Federal Reserve is raising rates reflects concern about future economic growth.

At the ballot box on Tuesday, Democrats swept the gubernatorial races in Virginia and New Jersey. The party also thrashed Republicans in down ballot races throughout the country. Many see the Tuesday election as a referendum on the president.

Wall Street is concerned that Tuesday’s election results could impede the GOP’s pro-business goals. There’s already mounting opposition to tax reform.

Wednesday’s muted advance came on the first anniversary of Trump’s surprise victory in the presidential race. The S&P 500 has soared 21% since the close of trading on election day 2016. That’s the third-best performance during a president’s first 12 months since World War II. More than $26 trillion of value has been created in global stock markets since Trump’s election.

The current mood of optimism mixed with anxiety could break either way in coming weeks. And yet, on several fronts the news is good.

Since Trump’s election, healthy profits, strengthening labor markets, and rising economic output have buoyed equities. Hence the “Trump Rally.”

It’s also apparent that the Fed is intent on raising rates gradually. For many stocks, the benefits of a stronger economy and rising profits can compensate for higher rates.

More than 81% of S&P 500 companies have reported actual results for the third quarter. Companies are reporting earnings that are 4.8% above estimates.

So far, the blended earnings growth rate for the third quarter is 5.9% on a year-over-year basis.

The blended sales growth rate for the third quarter is 5.8%. Sales are growing at a fast rate rarely witnessed over the past five years, driven by a robust global economy, U.S. consumer spending and greater capital investment.

Six sectors are reporting year-over-year earnings growth. The leading sectors are energy, technology and materials. The worst performer is financials, which stumbled again on Wednesday.

Fueled by upside earnings surprises, technology stocks have outperformed. Major Silicon Valley names have generally beaten consensus expectations. The Nasdaq has been on a tear.

To be sure, analysts had set the earnings bar rather low. But operating results of the S&P 500 this quarter continue to bode well for stocks.

Wednesday Market Wrap

  • DJIA +0.03% to close at 23,563.36
  • S&P 500 +0.14% to close at 2,594.38
  • Nasdaq +0.32% to close at 6,789.12

Wednesday’s Big Gainers

  • Activision Blizzard (NSDQ: ATVI) +5.89%

ATVI’s “Call of Duty” video game surges in sales.

  • MGM Resorts International (NYSE: MGM) +5.12%

Casino and resort operator reports solid 3Q earnings.

  • DXC Technology (NYSE: DXC) +4.55%

IT firm’s fiscal 2Q exceeds expectations.

Wednesday’s Big Losers

  •  Snap (NYSE: SNAP) -14.62%

Social media firm’s 3Q revenue and user numbers fall short of estimates.

  • DaVita (NYSE: DVA) -7.84%

Health care provider misses on 3Q results.

  • CSRA (NYSE: CSRA) -6.81%

IT firm beats in fiscal 2Q, but results are lower year-over-year.

Letters to the Editor

“Do small-cap stocks look appealing?” — Lisa G.

Small caps are poised to breakout. Optimism is growing at the country’s small businesses. Hopes for the economy have increased since the 2016 presidential election. Small business owners are boosting investment.

Donald Trump’s plans to stimulate the economy are music to the ears of entrepreneurs. But there are hurdles. Trump’s pro-business agenda has stalled. His tax bill faces push back.

“Russian hacking is a big worry. Are cybersecurity stocks a smart play?” — Peter K.

Cyberspace is the new battlefield. Growing armies of cyber warriors are stealing information from corporations and intelligence agencies.

The 2016 election revealed that foreign nations can compromise our elections. Russia appears to be fighting a new Cold War against America.

Cybersecurity companies should continue to thrive. Focus on the large tech names. Another good bet: defense firms with cybersecurity divisions. Avoid the tiny newcomers; they’re vulnerable to a shakeout.

Got any questions? Drop me a line: mailbag@investingdaily.com — John Persinos

This Day in History

November 8, 1864: President Abraham Lincoln is re-elected, beating Democratic rival George B. McClellan.

The Civil War still raged. The 11 southern states of the Confederate States of America didn’t vote.

Most observers thought Lincoln would lose. The Confederate Army was scoring victories and both sides were tired of war. But after the pivotal Union victory at Atlanta, Lincoln won in a landslide.

Lincoln was assassinated on April 15, 1865. But he lived to see passage in Congress of the 13th amendment, which abolished slavery.

The 1864 election was remarkable in that it occurred at all. It was a test of national strength during a time of crisis. The lesson: democracy is resilient. Maintain perspective.

Number of the Day: 50%

According to a recent survey by the financial firm Credible, 50% of Millennials say they would give up their right to vote in the next two presidential elections in return for student debt forgiveness.

This statistic reflects the severity of student debt. And reminds us that democracy can die when taken for granted.

Quote of the Day

“Democracy is the worst form of government, except for all the others.” — Winston Churchill

 

 

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