Markets “In a Nutshell” for January 15, 2019

Investment Week at a Glance

Stocks finished higher for the week.  The Dow Jones Industrial Average was up 2.40%, the S&P 500 rose 2.54%, the New York Stock Exchange Composite (2,000 stocks) was up 2.73% and the average investors index (Value Line Index) was up 4.32%.  Foreign stocks (DJ Global ex U.S.) were up 3.17%.  Bond prices were lower for the week, pushing the yield on the 10-year U.S. Treasury up 4 basis points to finish the week at 2.70%.  (Data sources: Barron’s Financial, Wall Street Journal)

Longest Government Shutdown in Modern History

The contentious government shutdown officially became the longest shutdown in modern U.S. history this Sunday, entering into its 23^rd day. As far as markets are concerned, government shutdowns have not historically had an outsize effect and this shutdown in particular is only partial with roughly 20% of the government out of work. While bigger issues are at play, one issue for markets as a result of the shutdown is the lack of some economic data coming from government organizations that would provide clarity into a still uncertain economic future. As more time passes and less data is reported, the effect of the shutdown might contribute to the continuation of the theme of volatility that was experienced by markets in December. (Wall Street Journal)

Slowing Earnings Growth

U.S. companies are facing earnings pressure for the first time in over a year as the direct effects of the corporate tax cuts are already reflected in year/year comparisons, as well as dealing with the negative effects of a slowing global economy and a trade war. Earnings are expected to rise 10.6% for the 4^th quarter of 2018, which was revised down from projections of earnings growth of 17% from as early as September. The decisive shift in earnings growth sentiment reflects how quickly economic data from China, Europe and emerging economies began to disappoint and the belief that the U.S. was not invincible and would soon begin to disappoint too. Earnings reports will get into full swing starting this week with most of the major banks providing insight into the health of the financial system.

Regardless of how bad the revision down to 10.6% earnings growth may look, it would still mark the 5^th straight quarter of double digit earnings growth dating back to the 4^th quarter of 2017. This all follows a period during 2015 and 2016 where there were 5 straight quarters of negative earnings growth. While there will be a “coming back down to earth” period following the immediate effects of the corporate tax cut, earnings growth is still strong and is still forecasted to be at a minimum in positive territory throughout next year. The negativity stemming from earnings projections makes this quarter’s results and guidance to future quarters all the more important to turning the momentum back to the strong optimism of recent years. (Wall Street Journal)

Quiz:

How much market capitalization did Apple lose on the next day after it cut its own quarterly forecast?

a. $25 billion

b. $50 billion

c. $75 billion

d. $100 billion

Answer is below…

 

Have a good week!

 

Answer to quiz:

Apple fell 10% on January 3rd, equaling roughly $75 billion in lost market capitalization, and becoming the 4^th largest company behind Microsoft, Amazon and Google parent company Alphabet