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Aside From Geopolitics, How About Those Earnings? Fresh Batch In Focus

By TD Ameritrade (JJ Kinahan)Market OverviewJan 23, 2019 10:12AM ET
Aside From Geopolitics, How About Those Earnings? Fresh Batch In Focus
By TD Ameritrade (JJ Kinahan)   |  Jan 23, 2019 10:12AM ET
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(Wednesday Market Open) Like a rubber band, it appears stocks are ready to snap back from Tuesday’s sharp losses as investors ponder a fresh set of earnings news.

At the same time, nothing else seems to have really changed much. The same old stew of geopolitics continues to be the backdrop, with little progress to report on China talks, the government shutdown, or Brexit. Economic news continues to be grim out of Asia, with the latest batch coming from Japan (see more below).

With those things looking pretty static—at least as of early Wednesday—investors could be looking for a diversion, and they may have gotten it in the form of earnings.

Earnings Scorecard Gets An Update

One seemingly unlikely source of good cheer was IBM. The company, whose shares are up 7.8% since the beginning of the January after a long slide marked by years of falling revenue, topped third-party revenue consensus estimates when it reported late Tuesday. Earnings per share also came in on top of analyst projections, and guidance looked stronger than many had expected. Shares jumped 6% in pre-market trading.

IBM’s consulting business helped lead the way, and revenue from the company’s cloud-based offerings rose 12%. Last year, IBM bought software maker Red Hat to help it grow its presence in the cloud business. In its earnings press release, the company said “major clients worldwide” are turning to IBM cloud services, including French bank BNP Paribas (PA:BNPP). On the negative side, the company’s systems unit, which includes hardware and operating systems software, declined 21% in Q4.

Two other key firms delivered mostly better than expected results early Wednesday: Procter & Gamble (NYSE:PG) and United Technologies (NYSE:UTX). PG also raised guidance and saw shares move higher in pre-market trading. UTX gave what looked like a strong forecast for 2019 and saw shares up 4% before the opening bell.

Abbott Laboratories (NYSE:ABT) also reports this morning, and Ford Motor (NYSE:F) is due after the closing bell. One question about F is whether its truck and SUV sales can continue to make up for any softness in demand for traditional cars. Another question is how the company might be affected by trade issues with China. The stock has been under a lot of pressure, and last week F reported preliminary 2018 earnings that failed to meet third-party consensus estimates.

Volatility Roared Back Tuesday

Wall Street welcomed back an old friend on Tuesday: Volatility.

The market’s most closely watched fear indicator, the VIX, spiked back above 20 after a couple weeks when it appeared to be on winter break. As VIX climbed and the major stock market indices retreated amid fears of world economic slowing and a possible hitch in China/U.S. trade talks, investors got a reminder that turbulent times could be far from over. The VIX remained above 20 early Wednesday.

Tuesday’s action could also serve as a reminder that most of the worries contributing to December’s sell-off haven’t really gone away. It’s true that the Fed is less of a primary concern and more secondary after signalling what appears to be a somewhat hands-off stance, at least for the moment. Other than that, however, there’s still the China situation, the global economy, Brexit, and the government shutdown. These are all things investors need to grapple with, making the next six months perhaps as important for the economy as we’ve seen in a long time.

The so-called “three horses” of risk might be reflecting some of these concerns, as both U.S. Treasury notes and VIX galloped higher. Gold, the third risk marker, barely rose, however. The 10-year Treasury yield, which falls when bond prices rise, dipped back below 2.75% Tuesday after flirting with 2.8% last week. (See chart below). Gold fell overnight and crude came back a little, both possible signs of investor confidence.

U.S./China Meeting Center Stage

Stock markets around the world were already down on Tuesday even before news came at midday of a canceled meeting between U.S. and Chinese trade negotiators. The media said the disagreement was over intellectual property issues. However, White House economic adviser Larry Kudlow came out right before the close to say the cancellation news was incorrect, and the market got a late lift from that.

There’s only about five weeks left for the two countries to make a deal before U.S. tariffs are scheduled to rise. Intellectual property issues might be tying things up, according to a Bloomberg report over the weekend.

The bearish China news hit the Dow Jones Industrial Average ($DJI) particularly hard, because some of its 30 names have businesses so closely tied to China. The stocks that come to mind are Boeing (NYSE:BA), Caterpillar (NYSE:CAT), Apple (NASDAQ:AAPL), Goldman Sachs (NYSE:GS) and 3M (NYSE:MMM). At one point, these five stocks alone accounted for about 250 points of the $DJI’s 400-point losses. This kind of market action shows why many investors keep a closer eye on the broader S&P 500 index (SPX), which has far more components and doesn’t get buffeted around so easily by weakness in a few names.

Banks Step Back

Financials, which had been showing signs of life so far in 2019, took it on the chin Tuesday. That was especially true for Morgan Stanley (NYSE:MS), which fell nearly 3% and just hasn’t recovered its mojo since last week’s disappointing earnings report. Other big banks fell, too, which might have had to do in part with the pressure on Treasury yields. However, the 10-year yield rebounded early Wednesday and recently traded at 2.77%. We’ll see if that helps banks today.

Also from a sector standpoint, some of the cyclicals that led last week brought up the rear Tuesday. Communication services, energy, consumer discretionary, industrials, and information technology all fell 2% or more. It’s just one day, but that looked like quite a contrast to the “risk-on” kind of trading seen much of last week.

It’s getting toward the middle of earnings season, but so far, there hasn’t really been a lot of clarity on earnings calls about how executives see the tariff situation potentially affecting their businesses. It’s still up in the air, and companies might be struggling with what to do next. This could be making investors nervous, perhaps contributing to a more conservative type of trading. If executives seem conservative about their next steps, it might stand to reason that investors would feel the same way.

On the data side, there wasn’t much help from the U.S. economy Tuesday as existing home sales for December decreased 6.4% month-over-month to a seasonally adjusted annual rate of 4.99 million. That was under the consensus of 5.25 million, and total sales were 10.3% lower than the same period a year ago. Sales declined in all regions despite mortgage rates coming down during the month. Also, weekly mortgage applications fell 2.7% last week. All this would seem to add another chapter in the ongoing story of a slowing U.S. housing market, and could play into those fears about the global economy easing.

Speaking of economic easing, there was more negative economic news early Wednesday when Japan reported weak export data. The Bank of Japan reduced its inflation target and left its monetary easing program unchanged.

If you’re trying to take any positives out of Tuesday’s retreat, the markets did rally back a bit from their lows in the final minutes of the session. Also, some analysts said stocks might have gotten over-bought last week, making them ripe for a sell-off. In addition, the SPX managed to close above its 50-day moving average of 2625, a level that could represent technical support.

All that and earnings aside, the China situation is probably going to be front and center going into today, and any sign that more serious background issues potentially threaten negotiations might mean a chance for continued selling.

Volatility And The 10-Yr. Treasury (purple)
Volatility And The 10-Yr. Treasury (purple)

FIGURE 1: FLASHES OF RISK-OFF? Though the CBOE Volatility Index (VIX - candlestick) fell in recent weeks and the 10-yr Treasury (TNX - purple line) rose over the same period—two indicators of a "risk-on" trading environment, both VIX and TNX reversed course in Tuesday's session. Data source: CBOE Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Europe’s Central Bank In Spotlight: This week’s meeting of the European Central Bank (ECB) begins today, with a press conference scheduled for Thursday and analysts not expecting any major policy changes. Economists and investors have pushed back their expectations for higher European interest rates after a string of disappointing data, Bloomberg reported late last week. Trade tensions and a disorderly Brexit are seen as potential threats. ECB President Mario Draghi told the European Parliament last Tuesday that the region isn’t headed for a recession, though the current slowdown could last longer than expected. Remember that just last month, the ECB ended its qualitative easing (QE) program. The question now becomes, how slow would the region’s economy have to get to force the ECB to consider new forms of stimulus? That question could be one that Draghi faces at the press conference.

Case of the Missing Data: Durable goods and new home sales for December are both supposed to come out this Friday, but don’t hold your breath waiting for the numbers. The government shutdown means they might not come out. Additionally, investors anticipating the scheduled Jan. 30 release of preliminary release of Q4 gross domestic product (GDP) might also find themselves disappointed. Many of the inputs for GDP have been delayed by the shutdown.

This may seem like a mere inconvenience, but it’s also a bit troubling. Many companies rely on government economic data as they make their decisions about what to invest, and at this point, they could be flying partially blind. This goes beyond data. Johnson & Johnson’s (JNJ) CFO told CNBC Tuesday in an interview that the company is concerned about possible regulatory delays slowing approval of its pharmaceutical products. User fees that drug companies pay the U.S. Food and Drug Administration (FDA) to help shorten approval time for certain products are running low, and the FDA can’t accept new fees during the shutdown, according to FDA Commissioner Scott Gottlieb, M.D.

No Silver Bullet for Volatility: Back over the weekend, there were some analysts and investors quoted in the media saying the VIX might go back down to 14 or 15. Even at the time, before Tuesday’s sharp spike in volatility, that sounded like a head-scratcher. After all, the market is still wrestling with uncertainty over China, tariffs haven’t gone away, and economic news lately hasn’t been too enticing. Now few probably expected a double-digit jump in the VIX to start the week, but it shouldn’t be too surprising considering all the geopolitical forces at play. There’s also the potential of earnings news stirring up the markets. Several major companies, including Apple (NASDAQ:AAPL), are scheduled to report next week. The VIX is implying strong chances of more volatility as those results come in, so keep the seat belts fastened.

Disclaimer: Charts For illustrative purposes only. Past performance does not guarantee future results.TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Aside From Geopolitics, How About Those Earnings? Fresh Batch In Focus

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Aside From Geopolitics, How About Those Earnings? Fresh Batch In Focus

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