EARNINGS & STIMULUS TO THE RESCUE
The stock market gapped up at the open today on overseas headlines (see below). The Dow is currently up 126 pts and the SPX is up .24%. Banks are up over 2% in early trading after strong earnings reports from Bank of America (BAC) and Goldman Sachs (GS). Oil fell back under $52/barrel in early trading, but that could easily turn around through the trading day. Bonds are mixed—corporates are modestly higher on the day but Treasuries are selling off as yields tick higher. The 10-year Treasury yield has rebounded to 2.73% from 2.55% just 2 weeks ago. Remember, higher long-term Treasury yields will likely be viewed by investors as a positive for the economic outlook.
A couple of headlines boosted stocks around the world today. First, Mario Draghi, head of the European Central Bank (ECB), acknowledged falling economic momentum in the Eurozone but said the recession will be avoided. Any time central bankers point out economic weakness, it generally signals a willingness to take it easy on monetary tightening. Second, China vowed to increase government stimulus to shore up its economy. Premier Li Keqiang said China should increase “targeted and precise” economic stimulus in the form of more spending on infrastructure and public services. This is exactly what China did back in 2016 when growth slowed and financial conditions tightened.
Bank of America (BAC) reported an excellent quarter, beating Wall Street estimates for both revenue and earnings-per-share. Expenses fell during the quarter, and the net-interest profit margin rose unexpectedly. Revenue growth, which has been flat for most banks, rose 10% from year-ago levels. The bank’s CFO, Paul Donofrio, said on the conference call that he sees no signs of an economic slowdown in the US. His comments corroborate those of JP Morgan’s Jamie Dimon earlier this week. The stock is up 7% today.
We’re beginning to get the details on consumer spending during the holidays, and they’re prompting more questions than answers. Mastercard says total holiday sales rose 5% from year-ago levels, whereas First Data says total sales were up 2.4%. Most sources agree online sales rose 16-19%, but in-store sales weren’t so hot, especially for department stores. Reports confirm Costco, American Eagle, and Target were among the best-performing during the fourth quarter. On the other hand, Macy’s and Nordstrom were weak. It seems like third quarter consumer spending was very strong, but momentum softened up after Thanksgiving. It’s possible that the stock market correction affected consumers’ willingness to spend freely.