Financial Markets Weekly: April 13th

April 19, 2018

Here’s your financial markets weekly report for April 13, 2018. Stocks rose last week. Continuing to elevate following April 2d's double tap of the February 8th lows at which the S&P 500 hit 2,581.
Perhaps last week's gains were due to positive anticipation of earnings season. Which began Friday. And featured higher Q1 earnings and profits from J.P. Morgan, Wells Fargo and PNC Financial Services. These and other bank stocks have outperformed the broader market since the 2016 election. Although last week's solid reports failed to send them higher. As all three sold off.
It's possible that investors were concerned about the impact of rising interest rates on future earnings. Or perhaps the market was held in check as investors fretted over possible airstrikes in Syria (more below). Or was it the possible trade war with China?
Regardless, the details spooked traders. With JPM's credit card charge-offs surging to a six-year high. And WFC reporting the worst mortgage loan numbers since the financial crisis. We've discussed the ill effects of higher interest rates on consumers and home buyers. Now there's evidence that these issues are straining the real economy. The fact that global economic metrics have fallen short of estimates on a pace not seen since last summer, as shown in the global surprise index below, adds to investor angst. And merits attention moving forward.
Still, after all the political rhetoric, it is a relief to see Q1 earnings underway. Providing the opportunity to place attention back where it should be.
And Q1 earnings expectations have soared. With optimism emanating from analysts. And management teams having issued record upside guidance. If that comes to fruition, then stocks will have reason to careen higher following the recent volatility, which saw the S&P 500 double tap its 200-day moving average. Even closing below the 200-DMA for a day. Which it had not done since June 2016. Properly spooking investors from becoming too bullish. Which, counter-intuitively, is a positive.
The S&P 500 now posts a forward multiple of 16.7 times earnings. Much lower than the 18.25 P/E reached earlier in the year. The index is flat on the year. Despite what seems like a surplus of purportedly negative news. Leading us to believe that investors have sharpened their skills at teasing the truth from today's headlines.
Year to date, the best sectors have been technology (+4%) and consumer discretionary (+2.9%). The worst? Consumer staples (-7%) and telecom (-5.6%).
Volatility has been high. Nor will that change. Remember "Sell in May and go away?" The new year has already seen 28 days with market moves of one percent or more. Last year saw only eight such days throughout the entire year.
Overall, the S&P 500 is down eight percent from the January's record high. The average large-cap stock is down 13.8 percent. While the average small-cap is 18.3 percent lower. A discrepancy that stems from the resolute performance of mega-cap technology stocks like Apple and Microsoft, which have fallen only five and four percent respectively. And remain over-weighted in the indexes.
Bulls and bears find themselves in a stalemate. Fighting it out for existential possession of the market's trendline. Even as bulls appear to have so many structural advantages. Like corporate stock buybacks, and money pouring into equity-focused retirement accounts from a near-record labor force. Bulls better make a move soon or they may find themselves overwhelmed by Bears who are tired of being the under card.
Now, a quick note on Facebook.
Founder Mark Zuckerberg spent two days testifying before the Senate last week. Leading many clients to ask if we planned to continue holding Facebook following the controversy. And while we did sell half our position, we have no intention of selling more. In fact, we believe that the recent sell-off will ultimately represent a buying opportunity.
Despite the controversy, the world continues to log in. With billions of users sharing posts, photos and facets of their lives on FB and sister company Instagram (yes, FB owns Instagram...). Regardless of the media's haranguing, there simply is no alternative to these two properties. FB's business model represents one of the most powerful and effective "network effects" ever realized. It gets bigger and better as more users log in and share their lives. Making the network even more attractive to future users. Adding eyeballs and data to the network. Making it more attractive to advertisers, as well.
Outside of a couple of Chinese networking alternatives (American social networking companies have made few inroads into the Middle Kingdom), there remain no real competitors. And with more than two billion users, FB continues to represent an incredibly powerful economic engine and cash-flow machine.
In short, it's one of the most capital efficient businesses around. And in due time, once the blowhards in D.C. have their say, the recent 15 percent pullback will be viewed as an excellent buying opportunity. As of today, the stock has already bounced 8.5 percent off the low. So, let's not confuse controversy with catastrophe. Because regarding FB's future prospects , this is not that.
On to the Middle East.
In response to Syrian dictator Bashar al Assad's brutal chemical attack against Syrian citizens outside of Damascus last week, a U.S.-led coalition fired more than 100 missiles at three different positions inside Syria at 4 a.m. Saturday morning, local time.
The most significant target was the Barzah Research and Development Center, located close to downtown Damascus, and heavily protected by Syrian air defenses. That facility was targeted by U.S. warships, which launched 57 Tomahawk cruise missiles and B-1 bombers fired 19 JASSM missiles. The bombers were escorted by attack aircraft and an EA-6B electronic warfare jet.
The second site was the Hims-Shinshar Chemical Weapons storage facility near Homs, against which U.S. forces fired nine Tomahawks. The British fired eight Storm Shadow cruise missiles from Royal Air Force Tornado jets.
The third target was the Hims-Shinsahar Chemical Weapons Bunker, which was the destination for seven French SCALP land cruise missiles.
According to the U.S. military: "This is going to set the Syrian chemical weapons program back years," Lt. Gen. Kenneth McKenzie, Jr. told reporters.
In D.C., Speaker of the House Paul Ryan announced that he will step down. Surprising many. And exacerbating the sense of panic already enveloping House Republicans over November's mid-term elections. The battle to succeed him -- as Speaker should the GOP retain the House, or Minority Leader should they fail -- will be hotly contested. And the battle for the GOP's soul will play out in real time.
Also, National Security Advisor Lt. General H.R. McMaster was let go and replaced by former U.N. ambassador John Bolton. Bolton represents the third NSA in a year.
Major League Baseball paid its annual homage to Jackie Robinson over the weekend in commemoration of the watershed moment in 1947 when organized baseball's color barrier was finally broken. All players wore Mr. Robinson's number 42. And there were many touching moments throughout the weekend. None of which prevented our Cincinnati Reds from starting the season at 2-13.
Finally, a quick glance at brilliant historian Niall Ferguson's latest book,The Tower and the Square. In which he spends a good part of one chapter documenting the percentage of people worldwide who believe in one form of conspiracy theory or another. Ferguson shows how the dominance of Facebook and Twitter has broken us down into tribes. Where, increasingly, we speak only to our own kind. Reinforcing our parochial beliefs and idiosyncrasies.
Worse, we are increasingly overconfident in our own beliefs, Even when lacking expert confirmation. That's no surprise to traders and investors. Who have long known that the crowd is often wrong. But also realize that the crowd can believe itself to be right a lot longer than it should have. Which usually leads to asset bubbles.
Below, you will find a Quartz article by Olivia Goldhill discussing a new paper by social psychologist David Dunning. Extreme wonks might recognize the name because, partnered with Justin Kruger, he defined the "Dunning-Kruger effect." Which explains how people who lack knowledge on a particular topic tend not to recognize their ignorance. Which is to say, we often don't know how little we actually know.
In his latest research, Dunning surprises us again. Revealing that we often make bad decisions not because other people trick us, but because we trick ourselves. "To fall prey to another person you have to fall prey to your belief that you're a good judge of character, that you know the situation, that you're on solid ground as opposed to shifty ground," he says.
When we were all living in small bands on the African Savannah, this was a good survival trait. But then it was easy to see who could and could not be trusted. Because the decisions we were making were pretty simple. Today, the world is vastly more complex. Leaving us to often rely on "experts" to make decisions for us. Even though such experts bring their own biases, assumptions, and agendas -- limitations that often they aren't aware of.
Today's investors (consumers, parents, managers, employees, etc.) face such a tsunami of information that no one person can stay on top of it. So what we are "sure" about is no longer as sure as we once thought it was. And in a world of social media, where we are breaking up into tribes that live in their own echo chambers (rather than as one big happy family, which is what the developers of social media thought we would become), it's harder to know what is right and true. Leading to "Fake news!"
Yet another example of unintended consequences. And a reminder of how investors (and human beings) must be ever vigilant against the plague of our own narrow perceptions. As well as our self deceptions. And the need to mitigate the risk of poor decision making emanating from both.
Stay tuned for your next financial markets weekly update…
Financial Markets Weekly Recap
Major indices finished higher last week. The DJIA gained 1.79%. The S&P 500 rose 1.99%. The Nasdaq climbed 2.17%. While small cap stocks gained 2.39%. 10-year Treasury bond yields rose 5 basis points to 2.82%. Gold closed at $1,345.43, up $11.78 per ounce, or 0.88%.
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