Stocks Rise But Investors Eye a Sea of Risks
Investors are treading water — treacherous water.
Stocks closed higher today, after staying in a narrow range for most of the session. Wall Street struggled for direction but gains accelerated in the final hour of trading, as bargain hunters piled into beaten-down technology and financial shares.
That said, Amazon (NSDQ: AMZN) made some big waves today. The e-commerce giant once again demonstrated its power to cause panic in an industry, simply by entering it.
Amazon announced Thursday that it had purchased PillPack, an online pharmacy that lets users buy medications in pre-made doses. Analysts estimate the deal is worth roughly $1 billion.
Shares of pharmacy retailers Walgreens Boots Alliance (NSDQ: WBA) and CVS Health (NYSE: CVS) fell 9.90% and 6.10%, respectively. AMZN was up 2.47%.
The news from Amazon overshadowed a strong earnings report that Walgreens released this morning before the opening bell. Life was unfair to WBA today.
Also today, the government released mixed reports showing that economic growth is on track but cooling.
The U.S. Commerce Department reported that the U.S. economy slowed more than previously estimated in the first quarter, as consumer spending posted its weakest performance in nearly five years.
U.S. gross domestic product (GDP) increased at a 2% annual rate in the January-March period, instead of the 2.2% pace that the government reported last month. The economy grew at a 2.9% rate in the fourth quarter.
The U.S. Labor Department reported that initial jobless claims rose by 9,000 to 227,000 in the week ended June 23, exceeding the consensus estimate of 220,000. Nonetheless, unemployment hovers at a 50-year low.
Trade continued to occupy center stage. China’s commerce ministry said Thursday it would monitor U.S. policies on inbound investments, emphasizing that it rejects the use of “national security” as grounds to restrict foreign deals.
The White House’s proposed export controls on technology are intended to pressure Beijing into revising its technology transfer and industrial subsidy practices.
The Trump team argues that China has unfairly obtained American intellectual property through joint venture requirements, licensing deals, and acquisitions of U.S. tech firms.
Under new legislation expected soon to pass Congress, the U.S. will expand the corporate transactions it can review for national security reasons.
Ignoring the debt bomb…
Investors are right to worry about a slowing economy and trade conflict, but they’re giving short shrift to another serious risk — America’s growing debt.
S&P Global reported Wednesday that the debt load for U.S. corporations has reached a record $6.3 trillion. Rising interest rates will make it harder for companies to service that debt.
S&P Global also found that the riskiest borrowers are more leveraged than they were even during the financial crisis.
Many companies have taken advantage of low interest rates to borrow greater amounts, without improving their liquidity. The International Monetary Fund (IMF) recently flagged massive corporate debt as a threat to the global economy and financial markets, warning that it could trigger a crash similar to the one in 2008.
Non-financial business debt as a share of GDP has been rising and now approaches levels last experienced during the Great Financial Crisis of 2008-2009. See the following chart, compiled with data from the Department of Commerce:
U.S. government debt is burgeoning as well, due to the $1.5 trillion tax cut signed by President Trump in December and greater federal spending.
The latest projections from the IMF on government debt as a share of GDP across 35 major worldwide economies has only the U.S. moving higher over the next five years.
The perfect storm?
The trade war is dominating headlines these days, but other risks are brewing as well. Unsustainable public and private debt, rising interest rates, high equity valuations, stirring inflation — a “perfect storm” threatens to hit our financial shores.
Now’s an opportune time to consult the wisdom of super investor Warren Buffett.
The Oracle of Omaha once said: “In the short term the market is a popularity contest; in the long term it is a weighing machine.”
By that statement, Buffett meant that he doesn’t necessarily wait for the market to eventually reward the merits of underappreciated stocks; he chooses stocks according to their potential as companies.
Buffett looks for strong balance sheets, good products that people need, market domination, and high-quality management. He emphasizes long-term ownership of a company, not just the chance for capital appreciation based on temporary market dynamics.
Buffett and Jamie Dimon, CEO of JPMorgan Chase (NYSE: JPM), penned an op-ed piece that appeared in the June 6 issue of the Wall Street Journal titled: “Short-Termism Is Harming the Economy.”
Buffett and Dimon argue that public companies should reduce or eliminate the practice of estimating quarterly earnings, because an overemphasis on quarterly performance creates myopia among business leaders and investors.
They have a point. You should stay focused on your long-term investment goals. Don’t overreact to the headlines. Sometimes, it makes sense to just tread water. In the meantime, tech and bank stocks kept the markets in the green on a day when investors seemed to lack confidence.
Thursday Market Wrap
- DJIA: +0.41% or +98.46 points to close at 24,216.05
- S&P 500: +0.62% or +16.68 points to close at 2,716.31
- Nasdaq: +0.79% or +58.60 points to close at 7,503.68
Thursday’s Big Gainers
- Madison Square Garden (NYSE: MSG) +14.15%
Entertainment firm to spin off sports business.
- RPM International (NYSE: RPM) +9.04%
Chemical products maker enjoys robust demand.
- McCormick & Company (NYSE: MKC) +8.40%
Spice distributor posts strong earnings.
Thursday’s Big Decliners
- Arsanis (NSDQ: ASNS) -78.01%
Biotech discontinues trial of new therapy.
- Pier 1 Imports (NYSE: PIR) -19.17%
Homeware retailer posts weak sales and outlook.
- Xcel Brands (NSDQ: XELB) -10.00%
Analysts turn bearish on media company.
Letters to the Editor
“Please explain why opponents of tariffs repeatedly cite Smoot-Hawley.” — Susan W.
The Smoot-Hawley Tariffs of 1930 were designed to protect U.S. farmers and manufacturers from foreign competition. They did the opposite. World trade fell more than 40%, deepening the Great Depression.
Opinions about trade conflict? Let’s start a dialogue: email@example.com
John Persinos is managing editor at Investing Daily.