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10-Year Bond Yield Hits 3%; Investors Hit the Exits

By John Persinos on April 24, 2018

Despite Wall Street’s high expectations for corporate earnings, I’ve consistently warned you that several negative factors could supersede strong operating results.

Sure enough, the main stock indices plunged today, even though several sector bellwethers beat on earnings. Today marked the first five-day losing streak for the Dow Jones Industrial Average since March 2017. At its session low, the Dow was down 619 points.

Rising bond yields triggered the rout in stocks. The 10-year Treasury bond yield reached the psychologically important threshold of 3% in midday trading, before slightly pulling back to close at 2.99%.

In recent weeks, I’ve repeatedly advised the following steps to protect your portfolio: elevate cash levels; pocket partial profits from your biggest gainers; and increase exposure to hard assets such as precious metals and commodities.

As usual, many “analysts” on financial news television have been downplaying current risks. I heard them do so again today. Go ahead and follow their advice. If you want to lose money.

These TV performers yap all day like chihuahuas on speed. They boost their favorite stocks and government policies regardless of underlying conditions. When the markets tank as they did today, average viewers get left holding the bag.

Remember this well: The goal of financial news channels isn’t to make you money. It’s to sell advertising.

These shows gin up drama, to keep you glued to the tube. Many of the pundits on cable news also have hidden links to a political party, company or industry. Conflicts of interest abound in the world of “infotainment” and they’re getting more brazen. In an era when TV stars become government officials, hucksterism pervades all aspects of our lives.

I take a contrarian approach. I look behind the headlines, to distinguish facts from falsehoods, trends from spin, reality from myth. Job One is steering you toward profits.

A closer look at Google…

Even though it swooned today with the rest of the market, the tech sector still provides ample growth opportunities. On Monday after the closing bell, Alphabet (NSDQ: GOOGL) reported first-quarter earnings. The Silicon Valley giant beat consensus expectations on both the top and bottom lines.

Alphabet’s earnings per share (EPS) in the quarter came in at $9.93 versus $9.28 expected by Wall Street. Revenue reached  $31.15 billion versus expectations of $30.29 billion.

Google’s core advertising business racked up most of Alphabet’s revenue, posting $26.64 billion in the first quarter, up nearly 20% compared to the same quarter a year ago. Google didn’t provide detailed numbers about its cloud unit, but management said it experienced significant growth in the quarter.

Despite the fears of technology investors, the GOP-run Congress is unlikely to pass regulations that hurt the tech sector. But the strongest reason for optimism about tech firms is their earnings outlook.

According to the consensus, first-quarter earnings for the tech sector are expected to increase 20.7% on a year-over-year basis. That number outpaces the S&P 500’s estimated earnings growth rate of 18.3%.

The consumer staples sector also is poised for resurgence, as unemployment plumbs 17-year lows and wage growth gains traction. Accordingly, the consumer giant Kimberly-Clark (NYSE: KMB) reported stellar first-quarter operating results before the market opened Monday.

Kimberly-Clark’s revenue reached $4.7 billion in the quarter, up 5% compared to the same year-ago quarter and above the consensus of $4.6 billion. EPS came in at $1.71, beating the consensus of $1.69.

Machinery maker Caterpillar (NYSE: CAT) reported first-quarter earnings Tuesday morning that were well above expectations. EPS came in at $2.82 vs. the forecasted $2.13. Revenue was $12.9 billion vs. the expected $12.1 billion. Management raised its 2018 EPS guidance by $2.00 to a range of $10.25 to $11.25.

Illinois-based Caterpillar is a bellwether for the industrial sector. The company’s strong first quarter bodes well for the U.S. economy. But so far, the market has been rewarding upside earnings surprises less than average. Case in point: The shares of GOOGL and CAT plummeted today, by 4.77% and 6.36% respectively. Bond yields spoiled the party.

Rising bond yields particularly hurt interest rate sensitive investments, notably utility stocks. The benchmark Utilities Select Sector SPDR Fund (XLU) is down 3.34% year to date, compared to a decline of 1.00% for the SPDR S&P 500 ETF (SPY).

Utilities must borrow large sums of money for capital expenditures. As rates go up, utilities’ rising cost of capital dampens their share prices. At the same time, safer interest-rate pegged investments such as U.S. Treasuries become more enticing from a risk-reward calculation.

Here again, though, you should avoid the herd mentality. The robust dividend yields churned out by high-quality utilities aren’t in danger when interest rates rise because their businesses are fundamentally strong.

Stick to the long-term investment strategy that you devised in calmer times. And when a pseudo-economist on CNBC starts barking, hit the mute button.

Tuesday Market Wrap

  • DJIA: -1.74% or -424.56 points to close at 24,024.13
  • S&P 500: -1.34% or -35.73 points to close at 2,634.56
  • Nasdaq: -1.70% or -121.25 points to close at 7,007.35

Tuesday’s Big Gainers

Electronics maker beats on earnings.

Telecom targeted for buyout.

Oilfield services firm boosted by rising energy prices.

Tuesday’s Big Decliners

Chemical maker’s earnings disappoint.

FDA suspends biotech’s drug trial.

Software firm announces follow-on public offering.

Letters to the Editor

“What are the best ‘Trump plays’ in the stock market right now?” — James L.

Instead of making broad generalizations, you need to emphasize careful stock picking. Pay less attention to news headlines and closer heed to fundamentals.

The standout opportunities in the Trump era are aerospace/defense companies, which have been rising since the presidential election in November 2016. As President Trump makes good on his vows to beef-up defense, the large-cap defense leaders should continue to soar.

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

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