Stocks opened lower this morning as investors strain to digest quarterly earnings & economic reports. The Dow is currently down 123 pts and the SPX is down .3%. Financials and consumer staples are in the green, but most everything else is down.
Here’s a quick look at earnings announcements. Morgan Stanley (MS) is flat after reporting better than expected revenue and earnings; the wealth management business stood out. United Health (UNH) is down 2.8% after reporting better than expected second quarter results and boosting its 2019 profit outlook. Netflix (NFLX) fell 11% after reporting only 2.7 million new subscribers compared with Wall Street forecasts closer to 5 million. Danaher (DHR) is up 1.4% after reporting revenue & earnings slightly ahead of estimates. Honeywell (HON) surged 2% even though second quarter revenue fell slightly short of Wall Street forecasts. Investors felt management executed very well despite a weak global economic environment.
CNBC’s latest “Rapid Update” survey shows that economists believe the US economy is tracking to 1.8% growth in the second quarter, and 2% in the third quarter. That’s roughly equivalent to what the Federal Reserve calls long-term potential growth. Reporter Steve Liesman notes the gap between that figure and the Trump Administration’s goal of 3%, and says achieving that goal would require a boost in capital spending by Corporate America. Unfortunately, the trade war with China is clearly restraining capital spending. So while the US economy achieved about 3% growth last year, don’t expect that this year or next.
The Index of Leading US Indicators (LEI) fell in June, suggesting the 6-month outlook for the US economy is softening. This index is actually a set of 10 different economic indicators designed to predict economic conditions. The primary reasons for the drop were weakness in orders for manufacturing equipment and also building permits. It’s important to note that the index isn’t predicting recession, but the US economy has definitely lost some momentum over the last year. The LEI is 1.6% higher than it was a year ago, and that’s on the low end of the 8-year trend.
China’s economy grew by 6.2% in the second quarter of 2019. That sounds pretty strong, but it’s not. The truth is that growth has been decelerating in China for decades. Part of that trend is natural, due to the law of large numbers. But more recently, growth has slowed due to the trade dispute with the US and also slower economic growth in Europe, a major trading partner to China. Government stimulus, mostly debt-fueled , is being thrown at the problem. But Bloomberg notes that total corporate/household/government debt now equals 300% of China’s annual economic output. While the economy is growing at 6.2%, total debt is growing at an unsustainable 11%. This report, by the way, emboldened President Trump to announce that the US and China are no closer to a trade deal despite ongoing negotiations.