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Gradient Investments Weekly Talking Points 10/28/19
All data is for the week ended October 25, 2019.
Stocks
US stocks rose last week, with the benchmark S&P reaching beyond the all-time closing high with an intraday peak of 3,027.35 as manufacturing data indicated that a turning point may be at hand (see Economic Data below). The S&P rose 1.23%, the Russell advanced 1.53% and the NASDAQ gained 1.90%. Overseas the developed markets (MSCI: EAFE) rose 1.27% while the emerging markets (MSCI: EEM) gained 1.17%. In the US the energy and technology sectors were the best performers while real estate and consumer discretionary were the poorest performing sectors.1
Fixed Income
Interest rates rose and values fell, with the benchmark 10-year US Treasuries rates gaining 4 basis points to 1.80%. Even negative rates overseas have been improving, with the 10-year German bund now offering a -0.38% interest versus -0.58% at the end of last month. The Federal Reserve meets this week, and a third consecutive 25 basis point cut to interest rates is widely anticipated.1
Commodities
West Texas crude oil prices gained 5.2% last week to close at $56.66 per barrel. The drop in inventories reported by the Energy Information Administration was surprisingly large, helping drive oil prices higher. Additionally, news of progress on a US-China trade deal was encouraging for economic growth and energy demand.
Economic Data
The Richmond Fed Manufacturing Index rebounded strongly to +8 in October from -9 in the prior month. All three components—new orders, employment and shipments – witnessed an increase. This is supportive of the positive manufacturing data issued by the New York Federal Reserve in the prior week.3
Flash manufacturing PMIs released last week showed some signs that manufacturing weakness may be nearing a turning point, which is encouraging. In the U.S., the flash reading inched higher to 51.5, the firmest reported since April. Elsewhere, the manufacturing index for the euro area advanced versus the September data, while in Japan their index fell only modestly. Germany, which has been at the epicenter of the slowdown in European manufacturing, and France edged slightly higher. Perhaps more so, the future manufacturing output expectations subcomponent has been firming in both the U.S. and euro area in recent months, suggesting a somewhat more optimistic outlook on business conditions.1
After two months of gains, existing home sales declined by 2.2% month over month in September to 5.38 million units at an annualized rate. This was lower than consensus expectation of a 0.7% decline, driven by a decrease in single family segment, which declined 2.6%. On a year over year basis, sales rose 3.9%. Low inventory continues to put pressure on price growth with median existing home price up by 5.9% year over year in September, up from a 5.0% gain in August.4
Orders for long-lasting or durable goods declined 1.1%-- or a more modest 0.3% if cars and planes are excluded— which was in line with consensus expectations. While demand for autos has been steady year to date, the struggles at Boeing over safety issues along with a decline in government defense spending caused commercial plane orders to drop 12% and military spending to drop 4.5%.5
As mortgage rates crept up 10 basis points to edge above the 4% mark, mortgage applications fell 12% last week vs. the prior week. Applications are still running 6% ahead of the year ago pace. The refinancing subset of the weekly data continues to run very high, up 126% on a year over year basis.6
Company News
Alexion Pharmaceuticals Inc. (ALXN), a G33 holding, reported revenues and earnings that were well ahead of expectations due to new and existing products for the treatment of rare diseases and raised guidance for the fourth quarter. Management also was more optimistic for the upcoming years based on recent innovations. The board approved a $1 billion share repurchase program. Shares rose 6.9% for the week.7
Intel Corp. (INTC), a G50 and Core Select holding, reported quarterly results that were above expectations due to demand for their datacenter products as well as their personal computers. Management also announced a $20 billion share buyback program (10% of the total at current prices). Shares rose 9.9% for the week.8
McDonald’s Corp. (MCD), a G50 and Core Select holding, boosted its dividend by 8% when the company reported quarterly results which were disappointing due to less than expected 4.8% growth in US stores. Shares yield 2.5% at the new rate, and shares were down 6.7% for the week. 9
Procter & Gamble (PG), a Core Select holding, reported sales and earnings that were ahead of expectations and guided results higher for the fiscal year ending next June. Shares rose 5% for the week.10
Did you know…
Candy corn was originally called Chicken Feed. Though many would argue that candy corn tastes like chicken feed, that's not how it got its first name. Created in 1880 by George Renninger, it was sold to the masses by Goelitz Confectionery Company (now Jelly Belly Co.) in the late 1800s. Because corn was commonly used to feed backyard chickens, the creation was called Chicken Feed and the box was marked with a colorful rooster.
Sources:
1 JP Morgan Weekly Talking Points 10-28-19
2 Energy Information Administration Weekly Petroleum Report 10-23-19
3 Federal Reserve Bank of Richmond Survey of Manufacturing Activity 10-22-19
4 National Association of Realtors Existing Home Sales
5 US Census Bureau Monthly Advance Report on Manufacturers 10-24-19
6 Mortgage Bankers Association 10-23-19
7 Alexion Pharmaceuticals press release 10-23-19
8 Intel Corp. press release 10-24-19
9 McDonalds Corp. press release 10-22-19
10 Procter & Gamble press release 10-22-19