While the Strategic Financial Services team was enjoying a wild family outing at the zoo this Friday, investors were enjoying a continuation of the wild summer ride for stocks. The S&P 500 is up over 10% since the start of June and 20% year-to-date. A budget deal and impending monetary stimulus is keeping stocks buoyant.
Headlines This Week
U.S. Equities advanced higher this week, with Small-Cap and Value stocks leading the way. While both segments of the market show impressive returns on a year-to-date basis, they have yet to reach 2018’s highs. The move this week helped them close some of that gap, but Large Cap Growth continues to lead the charge.
Congressional leaders reached a two-year budget deal, and Congress approved it. This deal raises the debt cap and increases spending. The U.S. is set to spend $1.37 trillion in 2020, adding to the national debt, currently at $22.53 trillion.
- This deal will prevent a potential debt default, avoid automatic spending cuts next year, and eliminate a significant headwind for investors.
- Though this kicks the debt ceiling and budget debate out two years, past the critical election cycle next year, it does not solve the structural problem of spending and deficits.
- An amendment to the bill by Kentucky Republican Congressman Thomas Massie to rename the measure “A Bill to Kick the Can Down the Road and For Other Purposes” failed to pass 47-384.
- Credit should go to Treasury Secretary Mnuchin for making this deal happen. There was dissent on both sides, and only 65 out of 197 Republicans supported the budget bill despite support from the President. The deal is expected to clear the U.S. Senate next week.
U.S. gross domestic product (GDP) grew by an annual rate of 2.1% in the second quarter. The growth came from consumer spending with some weakness attributed to a slowdown in business investment as global activity is cooling.
- The annual rate of GDP growth in the first quarter was 3.1%.
The European Central Bank (ECB) is preparing the markets to expect lower rates in the future to combat low inflation and sluggish growth. The current interest rates are at zero percent, which means the ECB is prepared to move into negative interest rates territory.
- Despite the dovish comments, Mario Draghi stated that the risk of a recession in the region was low.
- The unusual European bond market has the German 10-Year Bund yielding -0.346%, Spanish 10-year at 0.395%, Italian 10-year at 1.54% and the Greek 10-year yield at 2%, which is slightly lower than the 10-year U.S. Treasury yield.
Earnings Season Update – Banks are having a tough earnings season, with many slightly missing on the top and bottom-line. Investors are tying the direction of interest rates and banks’ earnings, fearing that profitability will decline as interest rates drop.
The Week Ahead
Another big week of earnings, with the biggest being Apple Corp. (AAPL) on Tuesday after the market close.
The Federal Reserve (Fed) is expected to cut rates after its meeting on Wednesday.
- There are several housing and inflation-related releases the day prior, but we do not expect them to impact the Fed’s decision.
- The Bank of Japan and Bank of England also have a rate decision to make next week.
Preliminary 2nd Quarter Gross Domestic Product (GDP) numbers are due out for the European Union (EU) and its individual members.
- While the EU’s GDP is expected to expand in the quarter, the 1.1% year-over-year expansion is slightly lighter than the previous quarter’s and way too close to contraction for comfort.
The First Friday of the month will bring us the always exciting Non-Farm Payroll report, also known as the Jobs report.
- Consensus expectations are for 160,000 jobs created in July.
- Another 0.2% increase in average hourly earnings is expected.
Stock Highlights from Max
The Technology sector was a standout thanks to an unbelievable run from the semiconductor stocks. On the other side, Consumer Staples was the weakest sector, with a different chip maker, PepsiCo, Inc. (PEP), which owns the Frito-Lay brand, dragging down the sector. Nothing specific to PepsiCo, but more of capital rotating to a competing soft drink company that reported impressive results. Speaking of results…
- Boeing Co. (BA) reported a loss of $5.82 per share thanks to its 737 Max related woes which consisted of an $8.74 per share charge it took for the 737 Max. Even though the company reported a significant loss, it was $0.84 better than expected. The company did report revenue of $15.75 Billion for the quarter.
- Another Aerospace company United Technologies Corp. (UTX) also reported, but unlike Boeing, it reported strong earnings and raised guidance. On the conference call, the CEO announced shareholders should expect $18-$20 Billion return of capital through dividends and stock buybacks in the first three years after the deal closes.
- Facebook Co. (FB) topped expectations, and raised guidance as ad revenue continues to impress. Alphabet Inc. (GOOG, GOOGL) also reported a consensus beating quarter. Despite cost per-click declining by 11%, paid clicks volume increased 28% year over the year. Both companies face extreme anti-trust and privacy scrutiny right now, but the fines and legal expenses seem to be only small bumps as earnings continue to grow.
- Lastly, Intel Corp. (INTC) also reported better than forecasted results and raised guidance, but a bigger boost came thanks to news that it will sell it smartphone modem unit to Apple Co. (AAPL) for $1 Billion. The deal should close in the 4th.
Strategic Family Outing 2019
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