November 5, 2018

The major stock market averages are higher this morning in front of the mid-term elections. The Dow is currently up 158 pts and the SPX is up .3%. Several sectors are up more than 1%: real estate, utilities, financials, consumer staples and energy. On the other hand, communications services, tech and consumer discretionary sectors are all down .6% to 1%. The FAANG stocks (Facebook, Amazon, Apple, Netflix & Google) are selling off and boring value stocks are catching a bid. The VIX Index is back up around 20, but VIX December futures are trading down around 19. So traders are perhaps expecting a little more volatility around the election. The US dollar is modestly weaker today and the Bloomberg Commodity Index is up .4%. WTI crude is bouncing up toward $64/barrel after a massive month-long slide. Bonds are trading slightly higher today. The 5-year and 10-year Treasury yields are hovering around 3.02% and 3.19%, respectively. We’re not hearing much chatter about the yield curve lately. That’s because the curve is steepening at the same time rates are rising. This is seen as a normal reaction to strong economic growth. The CEO of Federal Realty (FRT) says interest rates are only rising because the economy is doing well. “I gotta tell you, things look pretty good.”

The simmering trade war with China will take a back seat to the mid-terms elections this week. But make no mistake, the trade war is a much bigger potential threat to the economy and stock market than is the election. JP Morgan CEO Jamie Dimon said last week that a trade conflict would definitely disrupt global economic growth, and it could actually cause a US recession. Other business leaders and investors are worried about the impact on business investment from trade tariffs. After all, tariffs are taxes, and higher taxes tend to discourage corporate capital spending.

Third quarter earnings season has not, however, provided a clear answer as to the magnitude of the potential impact of tariffs on Corporate America. Most earnings reports have been positive. About 380 of the S&P 500 companies have reported, with 60% exceeding Wall Street revenue projections, and 80% beating earnings-per-share forecasts. In aggregate, the group is on pace to show a 26% year-over-year jump in earnings. That is far higher than the 8-year average of about 10-11%. Late last week, Starbucks (SBUX) reported third quarter sales and earnings that beat Wall Street projections. Same-store-sales rose 3% vs. 2.2% expected. Asia-Pacific sales grew about 1% whereas analysts expected no growth. Since then, the stock is up over 10% to an all-time high.

Also last week, Apple (AAPL) reported better than expected third quarter results with 20% revenue growth and 41% earnings-per-share growth. Sales in China grew by 16% from year-ago levels. However, Wall Street analysts were disappointed that the company sold only 46.9 million iPhones vs. 48 million projected. The company was able to raise its prices, and that’s why total revenue beat forecasts. But some analysts have always been stuck on the unit numbers. In addition, management guided current quarter revenue to a range of $89bil to $93bil, the midpoint of which is a bit below Wall Street consensus forecast of $92.7bil. CEO Tim Cook said slower economic growth in “select emerging markets” as well as a stronger US dollar will likely impact fourth quarter results. Famed tech analyst Gene Munster said this was a “solid quarter,” the “business is on track,” and guidance was only a modest negative. But the stock is down 9% since the announcement.

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