The New Wall of Worry: Stocks End Mixed on Bond Fears

Simply put, investors are terrified of rising bond yields. The 10-year Treasury bond on Wednesday topped 3%, a key psychological threshold and the highest level since early 2014. Stocks struggled to gain footing today in volatile trading, even in the face of strong corporate earnings.

The main indices were in the red for most of the day, but a late-session rally pushed the Dow Jones Industrial Average and the S&P 500 modestly into the green. The Nasdaq closed lower. The Dow’s gain was almost entirely driven by component Boeing (NYSE: BA), which reported blockbuster earnings before the market opened.

A benchmark yield in excess of 3% means that risk-free bonds can better compete with riskier assets such as stocks. Rising 10-year yields also translate into higher borrowing costs for corporations, making it harder for them to deliver on earnings.

One bright spot is the price of oil, which has steadily risen over the past year (see chart, compiled with data from the U.S. Energy Information Administration).

The World Bank on Tuesday released its April Commodity Markets Outlook, which painted a rosy picture for the energy patch. Oil prices are expected to average $65 per barrel this year, up from the $53/bbl average of 2017. OPEC’s production cuts and consumer demand are tailwinds for crude prices.

On Wednesday, West Texas Intermediate, the U.S. benchmark, gained 0.44% to close at $68.00/bbl. Brent North Sea crude, on which international oils are priced, gained 0.22% to close at $73.23/bbl.

Investors interpret rising oil prices as a sign of economic growth and a positive for stocks.

Reversals of Fortune…

Financial news pundits all year have argued that strong earnings combined with tax cuts would fuel a lasting rally in stocks. At the same time, they dismissed trade tensions as mere posturing. And yet, stocks have drifted lower this year.

Here’s one of my cardinal rules of investing: the mainstream press is a reliable contrarian indicator. Along those lines, there’s a framed Fortune magazine cover hanging on the wall of my home office. Dated January 10, 2001, the cover story’s headline reads: The 100 Best Companies to Work For in America.

At the very top of the list is Houston-based energy company Enron. The smiling face of Enron CEO Kenneth Lay dominates the cover. At the time, Enron generated $101 billion in annual revenue and employed 20,000 people.

By the end of 2001, federal investigators revealed that Enron’s reported financial condition was the product of massive and systematic accounting fraud. Slammed by criminal charges and lawsuits, the firm filed for bankruptcy. Investors, many of them employees who had bet their 401(k) plans on Enron stock, were wiped out.

Lay and other top Enron officials were convicted of conspiracy, fraud, and insider trading. Lay died of a heart attack before prison sentencing. I keep the Fortune magazine cover in a prominent spot, as a reminder to be wary of the media consensus.

Solid report cards…

To be sure, earnings reports this quarter have been good. But are they good enough to offset mounting risks?

After the closing bell on Tuesday, chipmaker Texas Instruments (NSDQ: TXN) reported earnings per share (EPS) of $1.21, 10 cents above consensus forecasts. The chipmaker’s revenue also beat estimates. TXN shares today rose 4.65%.

Before the opening bell on Wednesday, Boeing released a blowout first-quarter earnings report.

The aerospace/defense behemoth posted EPS of $3.64 compared to $2.58 forecasted by analysts. Revenue came in at $23.38 billion versus the forecast of $22.26 billion.

Boeing’s commercial air division racked up first-quarter revenue of $13.7 billion, a year-over-year increase of 5%. The company raised its full-year EPS forecast by 50 cents, to a range of $16.40 to $16.60.

Boeing is the world’s biggest aircraft maker and America’s number one exporter. China is a crucial market for Boeing. The stock has struggled in 2018 because of Trump’s tariffs against aluminum and steel. Today, BA shares jumped 4.19%. However, Boeing would be among the hardest hit by a global trade war.

Investors got a jolt on Wednesday from news reports that China’s purchases of U.S. soybeans have abruptly stopped. Beijing has vowed to curtail imports of U.S. crops in retaliation for Trump’s tariffs on Chinese goods. Last week, China slapped steep import duties against U.S.-produced sorghum, which is used in animal feed.

New data published by the U.S. Department of Agriculture shows that China over the last two weeks hasn’t signed any new deals to take U.S. soybeans. A versatile crop used for myriad purposes, soybeans were the biggest U.S. agriculture export to China last year at a value of $12.3 billion.

Here’s the kicker: sorghum and soybeans are produced in “red states” that Donald Trump easily carried in the November 2016 presidential election.

Rural voters who are part of the GOP base are angry at the Trump administration — right before the fall midterm elections. The Chinese aren’t posturing, after all. Until these issues are resolved, expect repeats of today’s volatility.

Wednesday Market Wrap

  • DJIA: +0.25% or +59.70 points to close at 24,083.83
  • S&P 500: +0.18% or +4.84 points to close at 2,639.40
  • Nasdaq: -0.05% or -3.62 points to close at 7,003.74

Wednesday’s Big Gainers

  • Scorpio Tankers (NYSE: STNG) +13.92%

Energy transporter beats on earnings.

  • Six Flags Entertainment (NYSE: SIX) +8.45%

Amusement park operator posts strong earnings.

  • Carlisle Companies (NYSE: CSL) +8.20%

Diversified manufacturer impresses on earnings.

Wednesday’s Big Decliners

  • Mercury Systems (NSDQ: MRCY) -18.68%

Defense contractor disappoints on earnings.

  • Magellan Health (NSDQ: MGLN) -16.56%

Analysts bearish on managed care firm.

  • Oclaro (NSDQ: OCLR) -8.92%

Analysts pessimistic on telecom equipment maker.

Letters to the Editor

“Are we due for a recession?” — Peter H.

Since 1961, recoveries on average have lasted about eight years. The current recovery is about nine years old. The laws of economics have not been repealed. A recession is looming. The only question is when.

It’s a fool’s game to try to precisely time these events. But one thing is clear: the federal budget deficit, rising interest rates, and trade battles will only make the inevitable downturn worse.

Got questions about the economic cycle? Drop me a line:

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


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