Rate, Trade Fears Snap Dow’s 8-Day Winning Streak
The Dow Jones Industrial Average ran out of luck today. The index’s eight-day winning streak came up snake eyes, as rising interest rates, renewed trade fears and geopolitical tensions weighed on stocks. The three major averages closed sharply lower.
The broad declines started in the morning, when the U.S. Commerce Department released healthy retail data that nonetheless planted seeds of concern. The government reported today that the value of retail sales rose 0.3% in April, in line with the median forecast, after a much higher 0.8% increase in the previous month.
Demand for automobiles last month stayed essentially flat, in large part because of rising gasoline costs. Receipts at clothing stores grew 1.4%; sales at furniture stores were up 0.8%; sales rose 0.2% at department stores and 0.3% at general merchandise outlets.
The retail numbers today were mixed but strong enough to generate concerns about inflation, which drove the 10-year Treasury bond past 3.07% to its highest level since 2011. The U.S. dollar rose, while interest rate-sensitive stocks such as utilities fell the hardest.
Just not good enough…
Exacerbating retail sector concerns was the problematic first-quarter earnings report today from retail bellwether Home Depot (NYSE: HD). The do-it-yourself home improvement chain beat analysts’ expectations on the bottom line but missed on the top line.
Before the opening bell Tuesday, Home Depot reported earnings per share (EPS) of $2.08 versus $2.05 forecast by analysts. Revenue reached $24.95 billion vs. the forecast of $25.15 billion. Same-store sales growth came in at 4.2% vs. estimates of 5.4%.
In yet another sign that beating earnings estimates just isn’t good enough these days, HD shares today fell 1.60%.
Further souring investor moods on Tuesday was discouraging news on trade. U.S. Ambassador to China Terry Branstad said today that the U.S. and China are still “very far apart” on resolving trade conflicts. A new round of high-level horse-trading is currently underway in Washington.
Just yesterday, investors thought the trade situation was improving. Not so today. But as I’ve repeatedly warned you, it’s foolhardy to allow yourself to get whipsawed by the daily tit-for-tat on trade.
Geopolitical risk also reared its head today, as North Korea announced that it would suspend high-level talks scheduled for Wednesday with South Korea, because of U.S.-South Korean military exercises.
I find it breathtakingly short-sighted for Wall Street to overreact to every trade or foreign policy pronouncement. You should stick to hard data, such as earnings reports.
On that score, the first quarter has been strong. According to the latest numbers from the research firm FactSet, about 91% of companies in the S&P 500 have reported actual results for the first quarter.
About 78% of those firms have reported a positive EPS surprise and 77% have reported a positive revenue surprise. If 78% is the final number for the quarter, it will mark the highest percentage since the third quarter of 2008.
So far, the year-over-year blended earnings growth rate for the S&P 500 in the first quarter is 24.9%. If that number turns out to be the actual growth rate, it will mark the highest earnings growth since the third quarter of 2010, when it came in at 34%.
The technology, materials, and energy sectors were the largest contributors to earnings and revenue growth in the first quarter. Technology is benefiting from greater corporate investment in IT and a windfall from the tax cut bill. Materials enjoys tailwinds from rising commodities prices, while energy is getting a lift from soaring oil and gas prices.
In OPEC’s latest monthly Oil Market Report, released May 14, the cartel noted that the global glut in crude oil has greatly dissipated. But it flagged a new concern: underinvestment in energy discovery and production. The report warned: “non-OPEC capital expenditure (CAPEX), including exploration, increased by only 2% y-o-y. Moreover, it has seen a decline of around 42% compared to the 2014 level.”
The chart depicts non-OPEC spending and CAPEX, 2014-2019:
Now that the global crude glut appears to be under control, under-investment has emerged as a potential headwind in the energy patch.
As savvy investors should know, too much of a good thing can turn out to be a bad thing. Efforts to rein in the global supply glut have been successful, but they’ve also brought adverse consequences. It brings to mind an Arabian proverb that OPEC ministers could appreciate: “All sunshine makes a desert.”
Regardless of sector, the first-quarter earnings of companies with higher global presence have outperformed on earnings those with lower presence, due to a weaker U.S. dollar and global gross domestic product growth that has outpaced that of the U.S. This factor underscores the wisdom of maintaining international exposure in your portfolio. Tuesday’s steep market declines are a reminder that diversification is crucial.
Tuesday Market Wrap
- DJIA: -0.77% or -192.66% to close at 24,706.75
- S&P 500: -0.68% or -18.69 points to close at 2,711.44
- Nasdaq: -0.81% or -59.69 points to close at 7,351.63
Tuesday’s Big Gainers
- Hollysys Automation Technologies (NSDQ: HOLI) +12.90%
Automation provider posts strong earnings.
- SORL Auto Parts (NSDQ: SORL) +6.87%
Auto parts firm’s operating results excel.
- Nine Energy Service (NYSE: NINE) +6.25%
Energy producer’s earnings jump on higher crude prices.
Tuesday’s Big Decliners
- ALJ Regional Holdings (NSDQ: ALJJ) -16.13%
Analysts bearish on toll collection firm.
- Restoration Robotics (NSDQ: HAIR) -14.42%
Robot maker’s financial results disappoint.
- Maiden Holdings (NSDQ: MHLD) -8.49%
Reinsurer encounters industry headwinds.
Letters to the Editor
“Isn’t cyber espionage a point of contention between China and the U.S., not just trade?” — Andrew B.
The U.S. and China have promised to halt cyber aggression against each other, but these promises are routinely broken.
According to a recent study released by the Ponemon Institute, an independent research firm, information theft accounts for roughly 50% of corporate external costs on an annualized basis. Cyber spying is on the agenda this week in trade talks between Chinese and American officials.
Questions about global trade conflicts? Drop me a line: email@example.com
John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.