October 19, 2018

Stocks teeter-tottered up this morning after yesterday’s slide. The Dow and SPX are currently up 150 pts and .3%, respectively. Defensive sectors—consumer staples, utilities—are up nearly 2% in early trading. To a lesser degree, financials and technology are participating as well. European stock markets ended mostly lower. China’s stock markets began the session in the red but ended higher after state-owned investment funds were directed to buy stocks. Commodities are uniformly higher today, with oil beginning to recover from its two-week decline. WTI crude oil is back up around $69.50/barrel. Bonds are selling off a bit as yields head higher. The 5-year Treasury note yield is back up around 3.06% and the 1-year yield ticked up to 3.20%.

China’s economy grew 6.5% in the third quarter from year-ago levels. Relative to most other countries, that’s enviable. Relative to its own history, however, growth is clearly slowing down. Ten years ago, it was commonplace to see China’s economy grow 10-12% in a year. Of course, now that it is the world’s second-largest economy, the law of large numbers applies. But bleeding economic momentum comes at the same time China is fighting a trade war with the US, and not coincidentally, at the same time its stock market is tanking. All of this should put pressure on the communist leadership to make a deal with the Trump Administration on trade. In addition, this should convince them to drop the effort to reign in debt growth and instead push through more economic stimulus.

Procter & Gamble (PG) reported excellent third quarter results, beating Wall Street projections. CNBC is characterizing this as the best quarter in five years, and the stock is up nearly 7% this morning. Organic (that is, excluding acquisitions & divestitures) revenue growth accelerated to 4%. Management says global demand for consumer packaged goods is strong, and that’s especially true in the US. Of course, commodity input prices have come up a lot and P&G is planning to raise prices 3-5%. And management’s outlook is viewed as a little conservative because the stronger dollar is causing some trouble in overseas markets. But really, investors were expecting a far less optimistic outlook from the company.

Intuitive Surgical (ISRG) also reported third quarter results. While revenue and earnings-per-share beat analysts’ expectations, the stock is down 3%. While revenue rose 14% from year-ago levels, earnings only grew 2%. This initial negative market reaction is probably incorrect. Surgical procedures using the company’s DaVinci robots shot up 20% and management’s forward guidance on procedure growth was upgraded as well. And if you strip out one-time events that impacted sales and earnings, results were much stronger (revenue +17% and earnings +33%).

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