6/16/17 – Amazon Shakes Up Grocery Sector

Amazon Throws Wrench in Grocery Sector, Stocks Slightly Higher

Stocks moved slightly higher in a busy news week. The Fed increased interest rates as expected on Wednesday. The big news, however, came out today as Amazon announced it agreed to acquire upscale grocery chain Whole Foods. On the week, the Dow gained 0.5% while the S&P 500 increased 0.1%.

Grocery Sector – Amazon made waves this morning announcing it agreed to buy Whole Foods for $13.7 billion. Amazon has slowly been opening some retail stores and this will immediately give the company ~450 stores nationwide. The reaction for competing grocers was severe. SuperValu closed down more than 14% while Kroger, Walmart, Target, and Costco all declined between 5-10%. The sell-off was driven by fears of what Amazon will do to grocery profits in an industry that already operates on thin margins.

Amazon stock increased on the news. Typically the acquiring company will see its stock decline after a merger announcement, but Amazon increased 2.5% today. That equates to a gain in total value of over $11 billion. Amazon essentially paid for the Whole Foods acquisition just with the move in it stock.

I think the down move in the grocery sector seems overdone, especially for Walmart and Costco. Costco makes most of its money from membership fees. I don’t see Amazon owning Whole Foods changing that dynamic. Walmart has a very different customer base from Whole Foods and is already the low cost provider on essentially everything it sells. That said, Amazon will likely put margin pressure on grocery stores, many of whom operate on very thin profit margins already.

Federal Reserve – As expected the Fed raised short-term interest rates this week by 0.25%. The new target range for the Fed Funds rate is 1.00 – 1.25%. While the Fed increased short-term rates, longer-term rates continue to move lower. This is called a flattening of the yield curve and often happens when the bond market expects economic growth to slow. I’ve written about this over the last few weeks and it remains interesting to me the difference we’re seeing in the bond market versus the stock market. The bond market is telling a much more negative story about future economic growth than the stock market. The bond market is notoriously pessimistic, but it is a trend that is worth following.

Oil kept moving lower this week, decreasing another 2.6% to close at $44.70/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.16% from 2.20% a week ago. The average rate on a 30-yr fixed rate moved higher this week, to 3.91% from 3.89% last week.

Close Weekly YTD
Dow Jones 21,384.28 0.5% 8.2%
S&P 500 2,433.15 0.1% 8.7%
Oil 44.70 (2.6%) (17.1%)
10-yr Treasury (∆ in bps) 2.16 (4) (29)

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Stock Rally Continues in Holiday-Shortened Week

Stocks Post Another Strong Week

Stocks rallied in the holiday-shortened week, in spite of today’s underwhelming jobs report. General optimism and strong corporate earnings continue to fuel the market. The Dow gained 0.6% this week while the S&P 500 added 1.0%.

May Jobs Report – There was a lot of optimism heading into today’s report after a strong April and a good reading in the less-influential ADP jobs report yesterday. However, that optimism was unfounded and the May jobs report disappointed on several levels. The economy added only 138k net new jobs in the month, below the estimate of 184k. Additionally, the estimates for March and April were revised down by 66k total jobs. The unemployment rate did decline, to 4.3%, the lowest level since 2001. We haven’t seen much wage growth, but at this level of unemployment, wage growth has to start increasing unless people start coming back into the labor force. Read More

Retail Continues to Struggle – Names such as Michael Kors and Restoration Hardware disappointed investors this week and saw their stocks decline sharply. Retail and apparel companies are struggling to adapt to a rapidly changing retail landscape. A report from Swiss bank Credit Suisse this week estimated that 20-25% of malls could close over the next five years. Beyond the financial pain to retailers, the companies that own malls are going to struggle going forward as well. As stores close, there simply aren’t enough new tenants to fill malls. Highly populated areas, or popular destinations, will remain viable, but many typical American malls won’t be able to survive. This will create millions of square feet of available and unused real estate. It will be fascinating to watch how this changes the commercial real estate market. Read More

Oil moved sharply lower this week, decreasing 4.2% to close at $47.78/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.15% from 2.25% a week ago. The average rate on a 30-yr fixed rate ticked lower this week, to 3.94% from 3.95% last week.

Close Weekly YTD
Dow Jones 21,206.29 0.6% 7.3%
S&P 500 2,439.07 1.0% 8.9%
Oil 47.78 (4.2%) (11.3%)
10-yr Treasury (∆ in bps) 2.15 (10) (30)

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5/26/17 – Stocks Rise Ahead of Holiday Weekend

Happy Memorial Day Weekend!

Stocks had a great week heading into the holiday weekend. Some positive earnings and economic data coupled with minimal political headlines fueled the rally. On the week, the Dow gained 1.3% while the S&P 500 increased 1.4%. The stock market will be closed on Monday.

US GDP Growth – The second estimate for first quarter economic growth was revised higher today to 1.2% from the prior 0.7% estimate. While still a pedestrian figure, the first quarter is often seasonally weak and this revision will support the view that growth will bounce back during the current quarter. Many analysts are expecting 2nd quarter growth in the 3% range. The 3% growth rate is a critical level for much of the Trump economic agenda. The tax and budget plans are based on 3% annualized growth, yet we haven’t grown faster than 3% in any year since 2005.

Jobs Report – The May jobs report will be released next Friday. Investors will be closely watching to see if last month’s strength carries through to May. The jobs report will also give clues about the GDP growth discussed above. The current consensus estimate is for 170k net new jobs being created this month.

Oil moved lower this week, decreasing 1.1% to close at $49.87/barrel. The yield on the 10-yr Treasury moved slightly higher, closing at 2.25% from 2.24% a week ago. The average rate on a 30-yr fixed rate mortgage dropped below 4% this week, to 3.95% from 4.02% last week.

I hope you have a great Memorial Day weekend and take some time to remember the brave men and women who made the ultimate sacrifice for our freedom.

Close Weekly YTD
Dow Jones 21,080.28 1.3% 6.7%
S&P 500 2,415.82 1.4% 7.9%
Oil 49.87 (1.1%) (7.5%)
10-yr Treasury (∆ in bps) 2.25 1 (20)

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5/19/17 – Political Headlines Drive Volatile Week

Volatile Week Ends On A Positive Note

Wednesday saw stocks suffer their worst day since September, with the Dow declining over 370 points, or almost 2%. However, strong rally today reversed most of the week’s losses. The Dow and S&P 500 each declined 0.4% on the week.

Special Prosecutor – Growing concerns about Trump’s ties to Russia and potential obstruction of justice charges surrounding the hiring/firing of Michael Flynn and the firing of FBI Director James Comey spooked markets Wednesday. The view was an investigation could derail the Trump economic agenda that some argue has helped propel stocks since the election. There are two main views of what has driven the relatively strong market this year. First, market expectations of a corporate tax cut and deregulation has increased future earnings’ outlooks for companies. That in turn has pushed stock prices higher. Second, corporate earnings are experiencing strong growth this year regardless of future tax/regulatory policy and that is the primary cause of higher prices. I think it’s more of the latter, but both have been important.

Corporate earnings have been strong and corporate forecasts have generally been better than expected this year. This is true earnings growth and that growth supports the higher stock market. If we get corporate tax reform, that will be another large boost to corporate earnings, but current analyst estimates aren’t based on a lower corporate tax rate. From that viewpoint, the sell-off Wednesday seemed overdone. If something does happen with Trump, markets still have a reasonable expectation of corporate tax reform with a President Pence. Read More

US GDP Growth – For basically the last 16 years, the US economy has grown at an underwhelming ~2% annual rate, on average. From the end of WWII through 2000, the average was 3.1%. A key piece of Trump’s economic and tax plan in based on getting growth back to 3%. Right now, the bond market isn’t buying the rosy growth projections. The 10-year Treasury bond is yielding ~2.2% currently, down about half a percentage point from December. This tells me the bond market doesn’t think there’s any chance growth will reach 3% in the coming years. It’s worth noting, the bond market is notoriously pessimistic. There’s an old joke that the bond market has correctly predicted nine of the last five recessions. Meaning it often fears recessions that never happen. It is interesting though to see the divergence in expectations between the equity and bond markets.

Oil moved sharply higher this week, increasing 5.3% to close at $50.41/barrel. The yield on the 10-yr Treasury decreased, closing at 2.24% from 2.33% a week ago. The average rate on a 30-yr fixed rate mortgage ticked lower to 4.02% from 4.05% last week.

Close Weekly YTD
Dow Jones 20,804.84 (0.4%) 5.3%
S&P 500 2,381.73 (0.4%) 6.4%
Oil 50.41 5.3% (6.5%)
10-yr Treasury (∆ in bps) 2.24 (9) (21)

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5/12/17 – Stocks Down, Retail Hit Hard

Stocks Decline Slightly, Retail Punished

After three positive weeks, stocks retreated in the second week of May. Retail earnings dominated the financial headlines and most of those disappointed investors. For the week, the Dow and S&P 500 decreased 0.5% and 0.3%, respectively.

Retail Demise – Most of the major department stores reported earnings this week and the stocks sold of sharply as a result. Even in an environment where people are pretty negative on brick and mortar retail, the results pushed names like Nordstrom, Kohl’s and Macy’s down approximately 20% this week. This downward move is huge considering we weren’t talking about the holiday shopping season. Declining same-store sales seemed to be the major concern. Many retailers have too many stores and most haven’t yet figured out how to effectively run their online sales. While online sales don’t have the costs of a physical store, the fulfillment cost is very high on a per-order basis. Instead of shipping large crates to individual stores, they must ship thousands of individual orders. Traditional retail needs to figure out how to effectively and profitably make the transition. We will continue to see a large shift in the retail sector over the coming years as stores close and online shopping continues to grow. Read More

French Elections – Emmanuel Macron won the French Presidential election on Sunday as expected. Markets initially reacted positively, but quickly moderated as the result was essentially priced-in over the prior two weeks. It will interesting to see how Macron will govern. Given that he started a new political party, he doesn’t have a built-in coalition. He says he will have candidates in Parliamentary elections next months, but it’s unclear how many will be elected. Either way, he will need to quickly build a governing coalition to start implementing his policy ideas. Read More

Ransomware Hack – Late Friday news broke of a large-scale ransomware attack affecting hospitals in the UK and companies around the world, including FedEx. A ransomware attack shuts down a computer network then attempts to get a ransom payment to ‘unlock’ the system. It’s a high-tech form of piracy. This is a growing problem and one companies will have to be vigilant in protecting themselves from going forward. Read More

Oil rebounded this week, increasing 3.4% to close at $47.89/barrel. The yield on the 10-yr Treasury decreased, closing at 2.33% from 2.35% a week ago. The average rate on a 30-yr fixed rate mortgage ticked higher to 4.05% from 4.02% last week.

Close Weekly YTD
Dow Jones 20,896.61 (0.5%) 5.7%
S&P 500 2,390.90 (0.3%) 6.8%
Oil 47.89 3.4% (11.1%)
10-yr Treasury (∆ in bps) 2.33 (2) (12)

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5/5/17 – Stocks Up Again On Jobs Report

Stocks Rise is Busy News Week

Stocks continued on an upward trajectory this week amid strong earnings, the Federal Reserve holding interest rates steady, a good jobs report today and the expectation that Emmanuel Macron will win the French election on Sunday. For the week, the Dow increased 0.3% while the S&P 500 added 0.6%. The Dow closed above 21,000 for the first time since March 3rd and only the 4th time ever.

April Jobs Report – There was a lot of focus on today’s jobs report after the March report disappointed investors. The US economy added 211k net new jobs in April and the unemployment rate declined to 4.4%. Through the first four months of the year, we’ve averaged 185k new jobs a month, essentially identical to the 183k average in the first four months of last year. This reports follows last week’s disappointing US economic growth and suggests the economy is stronger than some had feared. Read More

French Elections – In the latest polls, Emmanuel Macron holds a 20+ point lead over Marine Le Pen. Most business leaders favor Macron because he has supported reducing labor laws and remaining in the EU. The election takes place on Sunday and the market is fully expecting a Macron victory, so a Le Pen shock would like cause volatility next week. However, it seems the populist wave hitting many parts of the West won’t continue in France this weekend.

Federal Reserve – The Federal Reserve voted this week to keep interest rates unchanged while saying conditions remain positive for future rate increases. I think we’ll see two additional rate increases this year which will be a good development for savers. We could all benefit from higher interest rates in savings accounts and other fixed income investments. Any slowdown in the economy could delay rate increases, but at this point we are tracking in a good direction for higher rates. The Fed meets again in June and I expect we’ll see a 0.25% increase in the Fed Funds rate.  Read More

Oil moved sharply lower, decreasing 5.9% to close at $46.30/barrel. The OPEC production cuts expires later this month and OPEC is meeting on May 25th to discuss whether to continue, increase or end the production caps. The yield on the 10-yr Treasury increased, closing at 2.35% from 2.28% a week ago. The average rate on a 30-yr fixed rate mortgage ticked lower to 4.02% from 4.03% last week.

Close Weekly YTD
Dow Jones 21,006.94 0.3% 6.3%
S&P 500 2,399.29 0.6% 7.2%
Oil 46.30 (5.9%) (14.1%)
10-yr Treasury (∆ in bps) 2.35 7 (10)

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4/28/17 – Great Week for Stock After French Elections

French Elections Drive Best Week of 2017

Stocks posted their strongest two-day stretch since the election on Monday and Tuesday following French elections that will now pit Marine Le Pen against Emmanuel Macron. Even with today’s report of somewhat disappointing US GDP growth in the first quarter, stocks finished their best week of the year. The Dow gain 1.9% while the S&P 500 was up 1.5%.

French Elections – Markets loved the outcome of the first round of the French election. Heading into the first round, Emmanuel Macron had the largest lead over Le Pen in a hypothetical final round vote. Macron is a former socialist who started a new centrist party and most believe he will easily win the election on May 7th. That said, many said the same thing about Brexit failing and Hillary Clinton winning. A Macron victory essentially ensures France won’t attempt to leave the EU or the Euro currency. Whether this is the best long-term decision for France is unclear, but in the short-term financial markets prefer consistency and the status quo. I’ve long argued that the Euro’s days are numbered and the weaker countries should look to leave. Countries like Greece and Italy cannot effectively compete with Germany and other northern European countries, yet they never benefit from a weaker currency. At some point, more countries will decide they would be better served with a single currency, but the French elections likely push that time further into the future. Read More

US GDP Growth – Expectations for Q1 economic growth have been coming down for weeks. The first quarter is often seasonally weak, but today’s report showed the worst Q1 growth in three years. The US economy grew at an anemic 0.7% annualized rate in the first three months of 2017. More concerning was the weakness was driven my lackluster consumer spending. Consumers account for roughly two-thirds of the US economy, so any prolonged weakness in consumer activity threatens economic growth. The first quarter has been weaker than average over the last 5-6 years, so it’s hard to read too much into one report. We’ve averaged less than 2% annualized economic growth in the last 16 years, but markets have eagerly anticipated higher future growth. This report, while just one report, calls that belief into question. Read More

Oil moved lower, decreasing 0.7% to close at 49.21/barrel. The yield on the 10-yr Treasury was increased slight, closing at 2.28% from 2.24% a week ago. The average rate on a 30-yr fixed rate mortgage bounced higher to 4.03% from 3.97% last week.

Close Weekly YTD
Dow Jones 20,940.51 1.9% 6.0%
S&P 500 2,384.20 1.5% 6.5%
Oil 49.21 (0.7%) (8.7%)
10-yr Treasury (∆ in bps) 2.28 4 (17)

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4/21/17 – Stocks Rise As Earnings Kick-Off

Stocks Rise in Choppy Week

Stocks declined three of the five days this week, but managed to finished positive on the back of a strong Monday and Thursday. For the week the Dow and S&P 500 increased 0.5% and 0.8%, respectively.

Corporate Earnings – This was the first full week of earnings and results were mixed with companies such as Honeywell and Black & Decker exceeding expectations while Verizon, Goldman Sachs, IBM and others disappointed. Financial earnings had been pretty strong before Goldman earlier in the week, which seemed to spook investors. I was less concerned since Goldman’s trading business, a very volatile business, was responsible for much of the miss. Markets as a whole took it as a opportunity to pause and consider future economic growth. The rest of week didn’t provide much clarity as several key bellwether names reported conflicting results. Were Verizon and IBM’s results company specific or is it a message that growth isn’t as strong as people have projected? Did Honeywell’s earnings provide a positive insight into the industrial and defense markets? I think it’s too early to read too much into a handful of earnings estimates. There is always quarter-to-quarter volatility among companies, even the best companies, and it will be important to see what type of reports we see in the next 2-3 weeks.

French Elections – The first round of France’s Presidential election take place this weekend, amidst the backdrop of another terrorist attack. Marine Le Pen is the far right nationalist candidate in favor of France leaving the Euro currency. She was polling in 2nd place before the attacks, at 22%. The French elections are a two-stage process where the top two vote recipients advance to a run-off a few weeks later. The terror attack last night will presumably help Le Pen, who most expected would advance to the second round either way. What investors will be watching is how votes consolidate in the second step. For months, pundits have been saying Le Pen has no chance in the second step, but many said the same thing about Brexit and Donald Trump. A surprise Le Pen election could further weaken and endanger the European Union, the Euro currency and increase market volatility. I think the Euro currency is ultimately doomed either way. There is too much variability in the fiscal condition of each member country to make a single currency work long-term. A Le Pen victory would hasten the breakdown of the Euro and cause some short-term volatility, but I don’t view a potential Le Pen election as a long-term negative to the European economy.

Oil moved sharply lower, decreasing 6.4% to close at 49.54/barrel. The yield on the 10-yr Treasury was essentially flat, remaining at 2.24%. The average rate on a 30-yr fixed rate mortgage continued lower to 3.97% from 4.08% last week. This is the first time since November average mortgage rates have dipped below 4.0%.

Close Weekly YTD
Dow Jones 20,547.76 0.5% 4.0%
S&P 500 2,348.69 0.8% 4.9%
Oil 49.54 (6.4%) (8.1%)
10-yr Treasury (∆ in bps) 2.24 1 (21)

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4/13/17 – Stocks Fall on Heightened Geopolitical Risks

Stocks Fall Amid Geopolitical Concerns

  • Geopolitical risk catches up with markets this week
  • What is the 10-year Treasury telling us about growth?
  • Banks kick off earnings season in a strong fashion

Stocks suffer their second worst week of the year and have now been down in four of the last six weeks. Most of the week’s losses occurred today, with losses accelerating after the news of the MOAB bomb drop in Afghanistan. For the week, the Dow declined 1.0% while the S&P 500 declined 1.1%. Stocks are closed tomorrow for Good Friday.

Geopolitical tensions are increasing as the US is sending a naval strike group to the Korean peninsula while China is amassing troops on the North Korean border. Additionally, the US dropped the largest non-nuclear bomb in the Air Force’s arsenal in eastern Afghanistan today. Many are viewing the Afghanistan bomb as a message to North Korea and potentially Iran. It’s unclear where either of these situations, plus Syria, will go, but clearly geopolitical risk is on the rise.

The 10-year Treasury bond is an important bond in the financial markets and its recent moves raise some interesting questions. A month ago, the yield on the 10-yr was around 2.6%. Today the yield was down to 2.24%. This is a pretty large move in one month, especially since the Fed is increasing the Fed Funds rate. So, why is the yield on the 10-year decreasing? Many theories exist, but it makes me think the bond market isn’t buying into the economic growth story. Economic growth averaged 1.7% annually during the Obama administration and the Trump administration has stated its goal of returning growth to 3%+, inline with the post-World War II average. Investors went along with this forecast on the potential to repeal parts of Dodd-Frank and reduce corporate taxes. Those plans seem to either be waning or taking longer than expected and raise questions about future growth. This could easily be a short-term blip in the markets, but I think it’s an important trend to follow. The 10-yr Treasury shouldn’t be trading at 2.24% in a world of 3% economic growth.

Corporate earnings season started today with Wells Fargo, JP Morgan and Citibank releasing first quarter earnings. All three reported strong earnings and will hopefully serve as a precursor to a strong earnings season overall. The stock market has had a good run the last few months and part of that was based on positive earnings expectations. The next few weeks will tell us whether the optimism was warranted.

Oil moved higher, increasing 1.3% to close at 52.91/barrel. The yield on the 10-yr Treasury moved sharply lower to 2.24% from 2.38% a week ago. The average rate on a 30-yr fixed rate mortgage continued lower to 4.08% from 4.10% last week.

I hope you all have a Happy Easter weekend.

Close Weekly YTD
Dow Jones 20,453.25 (1.0%) 3.5%
S&P 500 2,328.95 (1.2%) 4.0%
Oil 52.91 1.3% (1.8%)
10-yr Treasury (∆ in bps) 2.25 (15) (21)

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4/7/17 – Stocks Calm in Busy Geopolitical Week

  • Stocks essentially flat in a busy week for news
  • March jobs report disappoints
  • US launches targeted strike in Syria
  • Trump meets with Chinese leader Xi

There was a lot of geopolitical news this week coupled with important jobs data. With all the news though, stocks were very calm this week. On the week, the Dow was essentially unchanged while the S&P 500 declined 0.3%.

The March jobs report came in well below estimates, but it didn’t seem to impact markets today. The economy added only 98k net new jobs in the month. This was well below consensus estimates of 180k. Additionally, figures for January and February were revised lower by a combined 38k jobs. Total job creation in the first quarter was 533k, or a reasonably attractive 178k per month, essentially the same as the 176k monthly average in 2016. Wage growth was a bright spot in the report though, increasing at a 2.7% annualized rate. The unemployment rate dropped to 4.5%. The market had a very muted reaction to this report for a couple reasons I think. First, these monthly reports are notoriously volatile. Second, last month was strong amidst a very warm month in many parts of the country. March, however, dealt with a large snowstorm through the entire Northeast that likely hurt construction employment in the month. Finally, we’ve had these weak months periodically in the last few years, but they have always been blips. In May 2016, the economy added only 24k jobs, but rebounded to a strong 271k in June. At this point, people are comfortable chalking this up as an anomaly not the start of a trend. Read More

Lots of geopolitical news this week. North Korea launched another ballistic missile into the Sea of Japan. The launch occurred before the meeting between Trump and Chinese leader Xi where North Korea was expected to be a major topic of discussion. Additionally, the US launched 59 cruise missiles into Syria destroying an air base and some Syrian air force planes over night. The strike was in response to a chemical weapons attack believed to be coordinated by the Assad regime. It’s unclear where this goes from here. Russia, who has backed Assad, has been pretty moderated in its response, even saying its support of Assad isn’t unconditional. Neither event seemed to concern investors. Markets were down early today, but quickly rebounded and some of the negativity could have come from the headline jobs figure. Defense stocks actually did well today, with Raytheon and Lockheed Martin both up over 1%. Read More

President Trump met with Chinese Leader Xi Jinping this afternoon. As of yet, they have not issued a joint statement. Trade and North Korea were expected to be important topics of discussion. Many have speculated the Syria strike was timed to make clear to Xi that the US would be willing to act alone against North Korea if China is unable, or unhelpful in reigning in Kim Jung Un. There’s been few little details about the substance of the meeting release yet, but markets will be looking for details on the trade portions of the discussion. While Trump has continued to talk tough on trade, his actions have been more measured. Hopefully that trend continues because we benefit greatly as a nation from trade with China.

Oil increased 3.0% this week, closing at $52.23/barrel. The yield on the 10-yr Treasury decreased slightly, closing at 2.38%, from 2.40% a week ago. The average rate on a 30-yr mortgage declined again, moving to 4.10% from 4.14% last week.

Close Weekly YTD
Dow Jones 20,656.10 (0.0%) 4.5%
S&P 500 2,355.54 (0.3%) 5.2%
Oil 52.23 3.0% (3.1%)
10-yr Treasury (∆ in bps) 2.38 (1) (6)

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