EARNINGS TO THE RESCUE
Stocks opened higher today after Apple’s (AAPL) earnings announcement (see below). The Dow is currently up 369 pts and the SPX is up 1%. Tech, industrials and consumer discretionary sectors are leading the way, up over 1% in early trading. In particular, AAPL is up 4.7% and Amazon (AMZN) is up 3.4%. The VIX Index—a common fear gauge among traders—is still hovering around 19 where it has been for the past couple of weeks. With every passing day it seems more likely that Christmas Eve was the correction bottom. Commodities are trading mostly higher today. WTI crude oil is back up around $54.70/barrel and you can expect it to keep going in the near term. Bonds are mixed; Treasuries are down but junk bonds are higher on the day. The 10-year Treasury yield is hovering around 2.73% and has been pretty tight to that level over the last two weeks. The yield curve is still flattish but hasn’t inverted yet. By the way, Fed Chair Powell is scheduled to hold a press conference today discussing the FOMC’s monthly policy meeting.
Earnings season is well underway and the news is mostly good—or at least good enough. Royal Caribbean (RCL)’s report this morning noted good cruise demand with some pricing power. The CEO said 74% more Chinese are booking non-China cruises compared with three years ago. Despite slower economic growth in China, the middle class is still growing. RCL is up about 6% this morning.
Apple Inc. (AAPL) reported fourth quarter results with revenue and earnings-per-share modestly ahead of Wall Street estimates. As we were previously warned, China revenue fell 27% from year-ago levels as iPhone sales fell. Overall revenue shrank about 5% from year-ago levels mostly due to iPhone demand. There was some good news: services revenue was up about 19% and service profit margins expanded. Also, Apple’s active base of phones is now 10% higher than it was a year ago. CEO Tim Cook said things are looking somewhat better in January than they did in December. The bottom line is that investors are breathing a little sigh of relief because the business isn’t getting worse. So the worst-case scenario has been avoided and with the stock having fallen nearly 40%, the bottom may be in.
Yesterday, 3M (MMM) reported fourth quarter results that were dragged down by weakness in China. Revenue fell 1% from year-ago levels but earnings rose 10%. Management said results excluding currency fluctuation were actually decent (i.e. organic sales growth was positive across all geographies). It’s no secret that 3M’s global exposure has killed its growth, and indeed the stock fell more than 30% late last year. So yesterday’s 4% pop was relief rally; like AAPL the business isn’t getting worse.
Pending home sales—contracts signed—fell for the third consecutive month in December. The housing market—and this is only one gauge—has been trending gradually downward for the past year, first because affordability fell and mortgage rates rose but later because of intense stock market volatility and the government shutdown. But the real story isn’t that simple, and it’s also not that negative. This country has an incredibly tight job market and wages are slowly rising. Consumer debt levels are well in hand. And some factors—like the shutdown and the level of mortgage rates—are temporary issues. According to bankrate.com, the average 30-year fixed mortgage rate has fallen from 4.8% to 4.5% over the last two months. So we may not see much growth in home transactions this year, but we’re not likely to see a precipitous drop in activity either.
CNBC interviewed Eaton Vance’s Eddie Perkin yesterday about his economic outlook. He had some interesting (non-consensus) comments about the level of business investment. “Capital spending is hugely important to economic growth over time. It’s what drives productivity, it’s what drives real GDP growth. Not a…boost…in a single year, but a sustained period of elevated capital spending and investment. That, I think, will be a result of the lower corporate tax rates, higher after-tax returns on capital, more than the…gimmicks of the tax code. That lower corporate tax rate that was put in place a year ago I think will have a multi-year supply side effect, positive effect, on the US economy.”