May 2, 2018

Stocks gapped down at the open this morning. The Dow is currently down 101 pts and the SPX is down .4%. The consumer staples sector—now the worst performer of 2018—is down 1.4% in early trading. Telecoms and the healthcare sector are off about 1%. Energy and tech are trading modestly higher. The VIX Index sank to 15 today (2-month low), suggesting that while choppiness is the order of the day investors don’t expect a big move lower. Commodities are mostly higher, led by copper and iron ore. WTI crude oil is up slightly to trade around $67.40/barrel (near 3+ year highs). Bonds are also modestly higher in price, lower in yield today. The 5-year Treasury yield is at 2.82% and the 10-year is hovering around 2.97%. Everyone is waiting for the Fed announcement later today. Consensus says the Fed won’t raise its short-term policy interest rate, but many are expecting the statement to sound more hawkish. 

Mike Wilson of Morgan Stanley was interviewed recently on CNBC about his stock market outlook. He says the stock valuation peak for this economic cycle was likely hit last December. In other words, he doesn’t expect further P/E ratio expansion. Since then, however, many stocks have corrected 10-30% and valuations have reset to lower levels. So while sector leadership is not clear and the market is taking on more defensive characteristics, he sees no reason to get bearish. In fact, his firm is bullish and believes this is a good time to buy stocks. We’ll still see “higher highs” late this year. Longer term, there will be a “staged move to more defensive plays,” but that means healthcare and energy, not necessarily the more traditional safe havens of telecom, staples and utilities. Presumably, that’s because rising interest rates typically act as a headwind to those sectors.  
Apple (AAPL) made many Wall Street analysts look clueless when it reported strong first quarter results yesterday afternoon. A Citigroup research report explains: “…we saw several downgrades of the stock and seemingly an onslaught of negative news of order reductions & claims of how bad Apple’s earnings & outlook would be.” But yesterday the company posted 16% year-over-year sales growth and 30% earnings-per-share growth. While the number of iPhones sold were merely in line with expectations and there is reason to believe the iPhone replacement cycle is elongating, Apple’s services business is arguably just as important and is faring well. iPhone unit rose only 2.9% from year-ago levels but the high price of the iPhone X resulted in 14% sales growth within the segment. Services revenue—app store, Apple Pay, iCloud storage, Apple Music—shot up 31%. Finally, as a result of tax reform, the company said it will devote $100bil in cash to buying back its own shares. And the board raised the dividend 16% to $2.92/share on an annual basis. My sense is that investors are surprised by the size of the buyback but wanted more on the dividend side. The stock is up over 4% this morning. 

Speaking of earnings, roughly 340 of the S&P 500 companies have now reported first quarter results. Aggregate sales growth is tracking to 9% and earnings-per-share growth is up around 23%. Believe it or not, all eleven major market sectors are showing positive year-over-year growth and about 82% of companies have exceeded Wall Street earnings expectations. These are incredible numbers and we all want to know whether they represent a peak for the cycle. 

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