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Foiled Expectations: Mixed Earnings Topple Stocks

It’s a law of physics: when two forces collide, momentum is lost. Today, investor optimism over earnings growth ran headlong into reality.

Stocks at first opened higher on Friday, as investors were initially encouraged by the first-quarter earnings results of money center banks. But in a frustrating pattern we’ve seen over and over again this year, gains evaporated as the day wore on. The three main stock indices closed deeply in the red, in choppy trading.

JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), and PNC Financial Services Group (NYSE: PNC) all posted fairly strong operating results today. Yesterday, the sector’s earnings out-performers were BlackRock (NYSE: BLK) and Commerce Bancshares (NSDQ: CBSH).

But the closer investors looked at today’s results, the more worried they got. Bank stocks led declines.

JPMorgan, a Dow-30 component, reported first-quarter earnings per share of $2.37 on revenue of $28.52 billion, easily beating expectations on the top and bottom lines. However, the bank reported a 7% decline in investment banking revenue to $1.6 billion. JPM shares today fell 2.66%.

WFC reported better-than-expected earnings in the quarter, but revenue fell largely due to scandals in which the bank is charged with fleecing retail customers. U.S. regulators have proposed WFC pay $1 billion in penalties to settle probes into mortgage and lending abuses. WFC shares today slumped 3.41%.

Investors also found fault in generally good numbers from Citigroup and PNC. Citigroup shares fell 1.55%; PNC fell 4.10%.

Amid concerns of a trade war with China, a shooting war in Syria, and political dysfunction in Washington, Wall Street was hoping that stellar corporate report cards would provide a tonic for frayed investor nerves.

But here’s the paradox: healthy earnings growth can fuel unrealistic expectations that come around to clobber stocks. Investors have been counting on earnings to be their savior, putting them on the road to disappointment.

That said, several sanguine conditions remain in place. Economic growth is on track. The U.S. labor market is close to “full employment.” Wage growth is rising, which stokes consumer spending. The wild card? Headline risk.

The U.S. reaches out…

The risk of trade war further ebbed Friday, when America’s Tweeter-in-Chief indicated in a tweet late Thursday that he would be open to rejoining the Trans Pacific Partnership (TPP), a multinational trade deal his administration walked away from in 2017.

It has belatedly occurred to the Trump administration that membership in the TPP was a steppingstone to bringing China to heel for the country’s flouting of trade rules. The TPP now encompasses 11 nations; it was designed to remove trade barriers in the fastest-growing economies of the Asia-Pacific region.

Trump informed GOP senators on Thursday that he had asked U.S. trade representatives to re-open TPP negotiations.

The ultimate goal of TPP is to counter China’s rising economic, military and diplomatic power in that part of the world. Rejoining the group would provide the U.S. with added clout against China. TPP’s members, though, expressed skepticism today as to whether the White House would follow through on its stated intentions to return to the fold.

Trump officials are insisting on better TPP terms, although they haven’t provided details. But the wider implication isn’t lost on Wall Street. The White House is dialing back its harsh stance on trade, succumbing to pressure from corporate CEOs, farming interests, and GOP leaders.

The question is how long this thawing on trade can last. Trump’s moods take sharp turns on an intraday basis, hence the stock market’s hyper-volatility. Equities are always a tweet away from tanking.

Meanwhile, Boston Fed President Eric Rosengren made news Friday in my hometown of Boston.

In a speech at the Greater Boston Chamber Economic Outlook Breakfast, Rosengren portrayed a rosy picture for 2018 of robust U.S. job growth and above-average gross domestic product growth.

Rosengren did highlight certain risks, such as the ballooning federal budget deficit, stirring inflation and the lingering threat of trade war. But overall, Rosengren’s upbeat assessment cheered Beantown’s luminaries. To the list of positives, allow me to add my team, the first-place Boston Red Sox.

Let’s do the numbers.

Friday Market Wrap

  • DJIA: -0.50% or -122.91 points to close at 24,360.14
  • S&P 500: -0.29% or -7.69 points to close at 2,656.30
  • Nasdaq: -0.47% or -33.60 points to close at 7,106.65

Friday’s Big Gainers

  • Future FinTech Group (NSDQ: FTFT) +26.90%

China-based fruit juice maker to sell major stake to government.

  • Argos Therapeutics (NSDQ: ARGS) +11.82%

Biotech’s earnings please investors.

  • China Rapid Finance (NYSE: XRF) +8.13%

Consumer lending company boasts improving financials.

Friday’s Big Decliners

  • Spero Therapeutics (NSDQ: SPRO) -13.22%

Analysts turn negative on drug maker.

  • Infosys (NYSE: INFY) -7.55%

India-based IT outsourcing firm disappoints on earnings.

  • Zillow Group (NSDQ: Z) -6.53%

Online real estate data provider enters the risky home flipping business.

Letters to the Editor

“Is China really as unstoppable as it seems?” — Harold N.

Not really. China has emerged as the international boogey-man but as usual, the media have created a caricature of the truth. China’s biggest weakness is debt.

Recent estimates peg China’s troubled credit in excess of $5 trillion, which represents about half of the country’s annual gross domestic product.

The policy-making mandarins in China’s centralized economy racked up this staggering debt by trying to stimulate the economy through infrastructure projects, many of them poorly conceived and wasteful.

China is now littered with bridges to nowhere and vacancy-plagued “see through” skyscrapers. The state also has pumped money into uncompetitive corporations that couldn’t survive without massive subsidies. These domestic loans are souring.

China clearly bullies its trading partners, but American leaders have more leverage over China than they realize. Tough negotiating, in concert with allies and trading blocs such as TPP, could bring China to heel. But tariffs won’t work.

Got opinions about China? Get ‘em off your chest: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 


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