July 28, 2016

Stocks opened modestly lower this morning (Dow -77 pts; SPX -.2%). The Nasdaq is flat. Technology (led by FB, AAPL, V, GRPN, TWTR) and utilities are the only sectors in the green at the moment. Telecoms, energy, biotechs and transports are down the most. The dollar is a bit weaker on the day and most commodities are higher (iron ore, copper). But oil continues to slide; WTI crude oil is trading below $42/barrel. This is a problem for the stock market. Bonds are modestly lower on the day. The 5-year Treasury yield is hovering around 1.1% and the 10-year is at 1.52%. Yesterday, the Federal Reserve’s Open Market Committee (FOMC) declined yet again to raise its short-term policy interest rate. However, the FOMC’s statement was a bit more positive on economic conditions. The bond market continues to believe the Fed will not raise rates this year.

Former Federal Reserve Chair Alan Greenspan says the US may be heading into “stagflation”. He’s nervous about two things: the yield curve is flattening, and bond prices are too high. That means there is a good chance bonds will sell off over the next couple of years. At the same time, the flat yield curve suggests economic growth will remain modest because of low productivity growth. Put those trends together and you have rising interest rates without rising economic growth. “I think we’re seeing the very early signs of inflation.” 

Facebook (FB) reported a stellar quarter with revenue up about 60% y/y. Both advertising revenue and user growth came in significantly better than expected. The stock is up about 3% this morning. Ford (F), on the other hand, posted weak earnings as profit margins fell due to incentives. The CEO suggested the auto market has peaked. Mastercard (MA) is up 1.2% after a strong quarterly announcement. Revenue rose 13% and the company said consumer credit card spending increased during the quarter. Whole Foods (WFM) said second quarter same-store-sales actually fell 2.6% and it looks like store sales will decline this year for the first time since 2009. Marriott (MAR) posted a pretty good quarter, but noted slower economic growth impacted results. That said, both leisure and business travel are healthy. The stock is flat this morning. 

So far, 277 of the S&P 500 companies have reported second quarter results. About 59% of those companies beat sales expectations and 82% beat earnings expectations. Those beat rates are relatively high. As for year-over-year growth, S&P sales are up .5% and earnings are down 3%. Those figures are better than Wall Street was expecting. The sectors with the highest earnings growth are consumer discretionary, utilities and telecom. Energy has the worst earnings growth (-88%). 

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