October 16, 2018

The major stock market averages screamed higher in early trading, reversing the prior week’s trend. The Dow is currently up 374 pts and the SPX is up 1.5%. So far, this is the Dow’s best day in two months. All eleven market sectors are in the green, led by tech and healthcare (+2%). Even financials are participating to some extent. The VIX Index gapped down below 19 suggesting traders are increasingly less nervous about the near-term. European stock markets are poised to close up well over 1% and most of Asia was up overnight (except China). The dollar is flat against a basket of foreign currencies after having declined a bit over the last week. Commodities are mixed in early trading. WTI crude oil is unchanged at $71.70/barrel. Gold is up slightly today (& up about 4% over the last two weeks). Bonds are trading modestly lower as yields tick up. The 5-year and 10-year Treasury Note yields are back up around 3.03% and 3.17%, respectively.

Blackrock’s Rick Rieder says there is no evidence that the economy is overheating or that inflation is spiking. Despite the widespread fear, it just isn’t reality. Core inflation is hovering around 1.8% vs. about 2.2% last year. So the Fed probably will pause rate hikes. Rates will trend higher, “but just not that far.” The 10-year Treasury yield may reach a cyclical peak of 3.5%. His strategy for fixed income is to own the short end of the curve and “carry.” Asked why credit (i.e. the junk bond market) isn’t reacting to the stock market correction, he gave a couple of reasons. First, the international bid is still there. That is, global investors are buying US corporate high yield bonds. Second, supply is short and that tends to prop up prices. He also mentioned that familiar refrain: there’s not much liquidity (i.e. trade flow) in junk bonds.

Today’s market rally is mostly due to strong corporate earnings announcements. Morgan Stanley (MS) jumped 4% today after its earnings announcement. Bloomberg says MS is “the only Wall Street firm to beat analyst expectations in three main businesses: fixed income, equities trading, and investment banking.” In terms of revenue growth, investment banking was up 15% from year-ago levels; trading revenue rose about 8% and wealth management grew about 4%.

Johnson & Johnson (JNJ) beat Wall Street’s expectations when it reported third quarter results this morning. Revenue rose 4% from year-ago levels and earnings per share grew 8%. The company’s prescription drug business grew 6.7% in the quarter and its pipeline of new drugs is progressing well. Sales of consumer health products rose about 2%. As a result of tax reform, J&J’s effective tax rate fell to 11.1%. The stock is up 1.7% today.

Blackrock (BLK) reported third quarter revenue growth of 11% and earnings per share growth of 27%. According to Bloomberg, those figures were slightly ahead of Wall Street expectations. But that doesn’t matter. Investors are focused on the fact that net inflows of investor capital into Blackrock funds decelerated to just $10.6bil during the quarter. That’s the lowest quarterly increase in capital since 2016. It breaks down like this: retail products saw a slight increase in capital; iShares funds attracted about $35bil; institutional products lost about $25bil. So it looks like institutional investors were de-risking somewhat. CEO Larry Fink highlighted the main issue on an investor call. Clients “don’t understand the political instabilities. They’re worried about the impact of global trade. A common conversation we’re hearing from clients is: are we at peak earnings?” The stock is down 3.5% today and down over 30% from its January peak.

Yesterday, Bank of America (BAC) reported good third quarter results, beating Wall Street consensus earnings per share. Revenue growth of 4% was in line with expectations. Deposits rose 4% and expenses rose only 2%. So the numbers were decent but the stock sold off 2%. Well, today it is rallying 1%.

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