RETURN OF THE FED PUT

RETURN OF THE FED PUT

Stocks surged at the open this morning following yesterday’s Fed meeting. The SPX is up .8% and the Nasdaq is up 1.4%. Only the Dow is lagging a bit, down 6 points. The communications services sector shot up nearly 4%. Most other sectors are in the green as well, with the notable exceptions of financials and materials. Oil prices continue to recover, with WTI crude back above $55/barrel. Copper is now up over 5% this month, signaling some optimism over a trade deal with China. Bonds, strangely enough, are uniformly higher as well. The iShares 20+Year Treasury Bond ETF (TLT) is up .8% in early trading, and the SPDR High Yield Bond ETF (JNK) is up .4%. It is rather unusual to see stocks, commodities and bonds all trading higher on the same day.

Yesterday, Fed Chair Powell sounded appropriately dovish when he said that the case for continued interest rate hikes “has weakened somewhat.” He noted the economic outlook is a “contradictory picture,” and the Fed can therefore be patient with monetary tightening. CNBC Contributor Josh Brown said, “I wish I’d owned anything as hard as the S&P owns the Fed.” This is good news for investors.

Jim Paulsen of Leuthold Group expects the stock market to do very well this year. There “seems to be a lot of expectation of…we’re going to have to retest that low” or even fall into an economic recession. He says investors are overly pessimistic and this is setting the table for further gains. He acknowledges that the economy is down-shifting and says economic data will come in mostly slower this year. But that doesn’t mean the stock market can’t continue to rise. Valuations have been reset—meaning that a lot of risk has been priced in—and recession is unlikely.

Microsoft (MSFT) reported strong fourth quarter results last evening. While revenue was a bit shy of Wall Street expectations, year-over-year growth was strong: revenue +12%, earnings-per-share +15%. The Windows & PC business slowed, partially due to chip supply issues. But the cloud computing business remains strong. Public cloud (“Azure”) business surged 76% and management isn’t seeing any weakness here. Commercial cloud bookings rose 22%. This was a very solid quarter but two things are causing the stock to fall today: 1) it has held up much better than other stocks during this period of extreme market volatility, and 2) the stock shot up 3.3% before the announcement yesterday. So the good news was largely anticipated.

Dow DuPont (DWDP) reported a disappointing quarter without much growth. Management cut forward guidance, saying sales will be about flat this year (i.e. zero growth) and operating profits will likely be slightly lower than in 2018. Economic weakness in China and Europe were to blame. But management also forecasts a stronger dollar, which would hurt profitability. And while raw materials costs are increasing the company doesn’t seem to have the ability increase prices. Management expects some of these negative trends to turn around as the year progresses. The stock is down nearly 8% this morning, back below its 200-day moving average. At some point this year, the company plans to split into three separate companies.

Sherwin Williams (SHW) posted 2% sales growth and 12% earnings growth in the fourth quarter. Both metrics were slightly below Wall Street estimates and the knee-jerk headlines are pretty negative at the moment. And the CEO noted results were “below our expectations.” So why is the stock up 5% this morning? Guidance. Full-year 2018 sales are projected to rise 4-7% and the CEO noted the company still has pricing power.


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