ARE EARNINGS ENOUGH TO SUSTAIN 2019 RALLY?

Stocks opened sharply lower this morning (Dow -123 pts; SPX -.4%). Communications services—down 2.5%--is the worst performing sector entirely as a result of Alphabet’s (GOOGL) earnings announcement. Other groups like biotechs, banks and transports are also trading lower. Defensive sectors are catching a bid. The VIX Index jumped to 14 for the first time in three weeks. European markets closed down modestly. The dollar is a bit weaker against a basket of foreign currencies and that is giving a little support to commodities. WTI crude oil up .5% to trade around $64/barrel. Bonds are rising in price, falling in yield. The iShares 20+ Year Treasury Bond ETF (TLT) is up .3% today and up 1.6% so far this year. The 10-year Treasury yield is back down to 2.51%.

Alphabet (GOOGL) reported disappointing first quarter results, with a sharp deceleration in revenue growth. Total revenue increased 17% from year-ago levels, slower than the previous quarter’s 23% rate. Analysts were expecting faster growth. It seems as though growth slowed across the company’s different business units. Advertising sales rose 15% vs. 20% in the prior quarter. Management blamed the shortfall on currency fluctuations and timing of product changes. In addition, there was a one-time $1.7bil fine assessed by European antitrust regulators. Thus, some of the weakness is clearly temporary. But investors will shoot first and ask questions later. The stock is down 8% today after reaching an intraday all-time high yesterday.

Pfizer is up 2.7% after reporting first quarter results. Sales rose 2% y/y and earnings-per-share rose 10%, exceeding Wall Street’s consensus forecast. The company managed to raise prices on several drugs, which in this political environment is quite a victory (Eli Lilly just reported drug price decreases.) Pfizer’s success was apparently driven by the consumer business, whereas sales of drugs administered by hospitals fell 8%. Management reiterated sales and earnings guidance for full-year 2019.

The Case-Shiller Home Price Index rose 4% from year-ago levels in February. That’s significantly slower than the 6.5% rate we saw a year ago. The slower rate is also much more healthy for the long-term benefit of the housing market. We all know that affordability is very low, as is the inventory of for-sale homes. We really need to see the rate of home price growth fall back below the rate of wage growth in this country. Not surprisingly, the volume of home sale transactions has dipped over the past year. But this too is helping the market find balance. Home price growth is moderating and mortgage rates are falling. Today we learned that Pending Home Sales (i.e. contracts signed) improved in March. Yes, they’re still down 3% from year-ago levels, but that’s a lot better than the -9.5% decline last December.


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