April 24, 2018

Stocks popped at the open but quickly turned around. The Dow is down 53 pts and the SPX is down .12%. The telecom sector is up over 1.5% after Verizon (VZ) reported first quarter earnings. Utilities and financials, which usually move opposite these days depending on interest rates, are both in the green. But tech, industrials, materials and consumer discretionary are sinking. WTI crude oil is trading back up over $69/barrel. Very few saw that coming at the beginning of 2018. Interest rates continue to march upward and that—along with earnings announcements—is the story of the day. The 5-year Treasury yield is up around 2.83% and the 10-year yield just touched 3% for the first time since the beginning of 2014. Remember that over the last six months scads of Wall Street strategists and economists have said a 3% 10-year would absolutely upset the stock market. We’ll see.

Famed bond fund manager Jeffrey Gundlach was asked in interview whether the flattening yield curve is a warning sign for stock investors. He replied, “Not yet.” But investors will likely take a pause if the difference between the 2-year and 10-year Treasury yields falls below 50 basis points (where it is now). Historically, that is a key level. However, he is quick to say that past rules of thumb on interest rates may not play out this time because rates have been manipulated so low by a number of factors. In other words, it’s different this time. He does foresee trouble in equities, but says “There’s no sign of recession” at the moment, and visibility is about 6 months out.  

Alphabet (GOOGL) reported first quarter revenue growth of 24%, the highest in years and a bit better than Wall Street’s consensus forecast. Very strong metrics were overshadowed, however, by the fact that spending to acquire clients rose to 24% of total revenue (from 22% last quarter). And capital spending jumped as the company builds out cloud computing infrastructure (data centers, real estate, headcount). So analysts are now concerned about profitability over the next few quarters. Funny, no one cares about Amazon’s (AMZN) profitability. Also of note, the company’s CEO addressed concerns related to Alphabet’s protection of consumer data. He explained that internet search is 90% of the company’s revenue and it doesn’t use any personal data, but rather key words. No matter, the stock is down 4% today.  

3M (MMM) reported first quarter results roughly in line with Wall Street forecasts. The company posted 8% revenue growth and 16% earnings-per-share growth. Excluding the effect of currency fluctuation and acquisitions, revenue growth was 2.8%. The company is experiencing weakness within its autos & consumer electronics segments. At the same time, operating costs—for transportation, oil, etc.—are rising. Management lowered the top end of its previous 2018 full-year earnings and revenue guidance. Needless to say, traders were not impressed and the stock sold off 7% this morning. The way the stock market is trending, investors & traders have absolutely no patience for weakness. 

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