Reaction to earnings news this morning has been mostly positive as CocaCola (KO) beat and General Electric (GE) slashed its dividend. Facebook (FB) looms later after the company’s recent tough stretch.
(AP Photo/John Minchillo)
How does the market follow up a wild day like Monday? Well, stocks started with a positive tone early Tuesday, but gains seemed to evaporate in the minutes leading up to the opening bell. That’s similar to other recent sessions where gains just haven’t been able to hold up.
If Tuesday is anything like recent days, volatility could continue to be an issue, with swift moves one way or the other. Or even swift moves both ways in quick succession, as we saw yesterday. Monday wasn’t a positive day, as tech stocks couldn’t hold up even after a big acquisition announcement by IBM. Once some of the info tech stocks gave up their gains, the rest of the market appeared to follow.
The market evidently is repricing some assets, and this is a move that could last through the end of the year. One thing that could continue to hurt the market is negative guidance from reporting companies, as that might reinforce ideas that the economic and geopolitical outlook could be worsening.
Overseas, China’s central bank set the dollar’s reference rate at 6.9574 yuan, putting the Chinese currency at its weakest since May 2008. This is a move that could make it even tougher for U. S. exports because as the dollar becomes stronger, U. S. products become more expensive. This might be a way China’s government is pushing back at U. S. tariffs. The question is whether the yuan could fall to 7 per dollar, a rate China might be uncomfortable with, according to The Wall Street Journal.
In earnings news this morning, General Electric probably didn’t surprise too many people when it slashed its dividend to a penny a share from 12 cents, starting next year. That move was one some analysts had predicted based on the company’s recent troubles. The company also missed Wall Street analysts’ Q3 estimates for earnings per share and revenue, and announced it will split its power business in two. Shares fell in pre-market trading. GE’s conference call this morning features new CEO Larry Culp and might be interesting to review for his first observations on the company’s future.
CocaCola reported earnings and revenue that beat analysts’ estimates, so that’s a potential positive factor as the day begins. Strong sales of the company’s diet soft drinks, tea, and smartwater helped it in Q3, CocaCola said in a press release. Meanwhile, Boeing shares are potentially in limbo for a bit after the crash of one of its planes in Indonesia earlier this week. It was a new Boeing airliner, so we’ll see what the investigation shows.
Yesterday afternoon’s sell-off seemed to take on a life of its own as the Dow Jones Industrial Average plunged from early 350-point gains to late 550-point losses, picking up speed on the way. However, the index pared its deepest dive pretty dramatically in the last 20 minutes of the session to finish down less than 250 points, or about 1%. Considering how far it had fallen earlier, it seems like perhaps cooler heads prevailed at the end.
The S&P 500 also cropped its losses, but remains down more than 9% this month. The Nasdaq, home to many of the hardest hit info tech and communication services sector names, is down more than 12%. While it takes a 20% drop in an index from its highs to formally declare a “bear market,” some of the big-name stocks down more than 20% so far this year include 3M, Caterpillar, DowDuPont, IBM, and Kraft Heinz.
Still, it’s easy to overlook that many major companies, despite recent losses, are still up double digits this year, including Apple, Boeing, Cisco, Merck, Microsoft, Pfizer, UnitedHealth, and Visa. Also, if you take the broader view and look at the major indices year-to-date, the Nasdaq is still a bit higher, while the S&P 500 and the Dow are lower, but not by much. The last year the S&P fell was 2015, when it lost less than 1%.
One thing to consider keeping in mind is that certain sectors actually held their gains Monday, some by a sizable amount. The sell-off wasn’t across the entire market, but only in certain neighborhoods. The wounds were deep in info tech, consumer discretionary, and communication services, but real estate was up almost 1.5%. Utilities and staples sectors also actually gained ground. Some analysts say there appears to be a move toward “value” stocks underway, and Monday’s action might play into that thesis.
The financial sector, which had been hit hard in recent days, also moved about 1% higher Monday. All of the recent volatility might be seen as potentially helping trading volume for some of the big banks. The futures market still pegs chances of a rate hike by the end of the year at more than 70%, so banks might be drawing support from that, too.
There’s also the economy to think about. It’s not going downhill like the stock market, at least judging from recent data. Last week’s GDP report showing growth of 3.5% looked right down the middle of the fairway in terms of not being low enough or high enough to cause worries on the slowdown or inflation fronts, respectively. There’s a lot of debate about whether Q4 can continue this string of firm growth in the economy, with the Atlanta Fed’s GDP Now indicator predicting a pullback to 2.6% GDP gains this quarter. That’s near the lower end of Wall Street analysts’ estimates.
One thing that sometimes gets lost in the shuffle a bit is what looks like a slowdown across Europe and emerging markets. China’s economy is growing more slowly, and Europe is sputtering a bit. A year ago, when U. S. stocks seemed to go up and up, there was a lot of talk about how U. S. and world economies were growing in sync. You don’t hear so much of that now, and that could be a big factor behind this month’s market losses. The European Central Bank (ECB) holds a non-monetary policy meeting next week, so consider listening for any observations or news coming out of that.
It wouldn’t be too surprising if some investors are suffering after all the downward action this month, and the way the market reacted to fresh tariff news in the China trade war saga yesterday could signal just how nervous people might be. The strange thing is, the threat of new U. S. tariffs, reported by Bloomberg around midday Monday, wasn’t really new information. It’s been reported for a while now that the U. S. might consider additional tariffs, and a lot of focus remains on planned talks next month between President Trump and Chinese President Xi.
The market’s violent reaction after the tariff news could remind long-term investors to try and stay disciplined. Markets like this one can be dangerous, so any moves made now should be carefully considered.
There’s a whole basket of familiar names reporting after the close today, but let’s face it, one of them is likely to get most of the headlines. Facebook is scheduled to unveil its Q3 numbers, and it steps into the spotlight with its shares under all kinds of pressure.
It’s been a tough stretch for Facebook since it reported earnings at the end of July. In that time, the stock went from an all-time high of $218.62 to $143.80, flipping from a 20% year-to-date return to about a 20% decline.
One area that analysts and investors are likely bracing for is a deceleration in the company’s revenue growth rate, which CFO David Wehner said would continue to happen in the second half of the year, after it slowed by 7% in Q2. For Q3, Facebook is expected to report adjusted EPS of $1.47, down from $1.59 in the prior-year period, on revenue of $13.78 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 33.4% year over year, slowing from the 42% growth the company reported in Q2.
FIGURE 1: The Month That’s Been: The month is mercifully coming to an end after tomorrow, and here’s how the S&P 500 (candlestick) and Nasdaq (purple line) are doing.
