Month: July 2016

The Dow closed the week nearly flat to finish July with a 2.8-percent gain, while the S&P struck a new all-time high of 2177.13 during intraday trading before dipping 5 points just before the close, ending July up 3.6 percent.  Technology shares pushed the Nasdaq 1.2 percent higher on the week following strong earnings   from Microsoft (MSFT), Apple (AAPL), Facebook (FB), Amazon (AMZN) and Google parent Alphabet (GOOG).

Although the Nasdaq is still off its all-time high, this week’s close marked a new 52-week high and a 6.6-percent gain on the month. Facebook reached a new all-time high last week, while Apple traded above $100 per share for the first time since April. Facebook rallied after earnings came in at $0.71 per share, almost triple-year ago levels. Apple earnings fell from 2015 as expected, but it beat estimates by several cents. Amazon’s cloud services continues to drive earnings and investor optimism and Alphabet (GOOG) far exceeded estimates with revenue of $21.5 billion.

SPDR Biotech (XBI) gained more than 3 percent. Large-cap biotechnology advanced following a positive earnings report and raised guidance from Amgen (AMGN).

Weak blue-chip earnings and falling energy prices weighed on the broad indexes. Ford missed its profit targets and second-quarter sales fell 9 percent from the year-ago period. Boeing reported a second-quarter loss and announced the possible end of its 747 family of aircraft due to slumping sales. Verizon (VZ) was lower due to its buyout of Yahoo (YHOO). Declining soda sales in the U.S. lowered Coca Cola (KO) shares. Caterpillar (CAT), however, rose 5 percent after beating estimates.

Crude oil fell as low as $40 per barrel during the week after an increase in oil and gasoline inventories. Exxon missed estimates of $0.64 per share in profit, reporting $0.41 per share on Friday. Exxon fell to its lowest level since April following the announcement.  Energy shares held up relatively well though, with SPDR Energy (XLE) down only about 2 percent.

Although the Federal Reserve left interest rates steady as expected, many analysts interpreted the accompanying statement as hawkish. Barring an unforeseen upsurge in the economy or inflation, rates are not likely to change at the next meeting in September. The Fed’s statement didn’t elicit any significant changes in the interest rate futures market.

Housing continues to benefit from historically low mortgage rates. New home sales rose to an eight-year high as prices climbed more than 5 percent from last year. U.S. weekly unemployment claims were greater than expected, but remain near historic lows.

Second-quarter GDP growth in the U.S. disappointed, coming in at 1.2 percent. First-quarter GDP was also revised lower to 0.8 percent growth from 1.1 percent. The second-quarter GDP estimate will be revised as more complete data accumulates. The Atlanta Fed’s GDP Now Model forecast slid from 2.4 percent to 1.8 percent following GDP estimates.  Given the accuracy of the Atlanta Fed’s model over time, GDP estimates are likely to be revised higher.

Vanguard closed the popular Dividend Growth Fund (VDIGX) to new investors this week. Dividend funds have been extremely popular with investors in recent years and VDIGX outperformed the Large-Blend category by an annualized 1.93 percent over the past 5 years. Current investors will not face any new purchasing restrictions. VDIGX currently has a Power Index of 92 and a Strong Buy rating in the Investor Guide to Vanguard Funds. If you have any questions about this closure, please call us at 844-336-9878.

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
iShares Core High Dividend (HDV)
Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)
iShares MSCI Edge Minimum Volatility USA (USMV)
iShares 20+ Year Treasury (TLT)
iShares iBoxx $ Investment Grade Bonds (LQD)

The market was essentially in a holding pattern over the past week. The breakout to new highs on the S&P 500 Index and Dow Jones Industrial Average consolidated, while small-caps and Nasdaq continued to advance. A dip in oil weighed on the indexes and pulled the energy sector lower.

Oil prices blunted the rally in broad indexes with energy exposure, but strong technology earnings lifted the Nasdaq, with Apple (AAPL) rising more than 6 percent in Wednesday trading. AAPL is more than 10 percent of many technology indexes, as well as more than 10 percent of the Nasdaq-100.

Dividend funds tracked with the broader market, underperforming slightly. High-yield bonds saw a slight decline due to weaker oil prices, while investment-grade bonds were steady and long-dated Treasury bonds rallied.

The Federal Reserve held steady on interest rates and did not signal an imminent hike. In light of the improving labor market and general upside surprise in economic data over the recent weeks and months, the Fed instead chose to focus on 2 percent inflation in its statement.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
Fidelity High Income (SPHIX)

As we noted last week, bond funds hit a wall on July 11 and while FFRHX and THOPX initially drifted higher, they too stalled in the past week. Rising long-term bond yields and weakness weighed on high-yield to keep nearly every major bond category flat for the week.

Sector Performance

The materials sector, led by Utilities, enjoyed its third consecutive week of outperformance. Semiconductors continued to advance following Softbank’s buyout of ARM Holdings (ARMHY). Biotech and pharma, two laggards in the healthcare sector, bucked market weakness and rallied more than 1 percent. Interest rate-sensitive REITs followed utilities higher.

The SPDR Biotech (XBI) fund made an important breakout last week, trading at its highest level since early January. This marks a continuation of a generally bullish trend for XBI. Both IBB and FBIOX need to follow XBI higher to signal a clear bullish uptrend for the sector. Biotech has a lot of catching up to do with the broader market and the healthcare sector, and traders are likely to rotate into the sector if a clear breakout begins.

Home builders edged higher last week and hit a new post-2006 high in Wednesday trading. Housing is a key component for the economy, so this would be an important market signal.

iShares MSCI Emerging Markets (EEM)

The sideways action in the broader market flattened EEM and shares are hovering just below $36.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Gold Miners (GDX)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

Industrial commodities held steady over the past week, with SLX pushing to a new 52-week high. KOL held near its 52-week high, aided by Komatsu’s buyout offer for Joy Global (JOY), a top 10 holding in KOL. Gold remains in a corrective phase.

Oil is approaching key support this week. Since the bear market in oil kicked off in the summer of 2014, West Texas Intermediate Crude has traded above $40 a barrel for all but 5 months, stretching from December 2015 to April 2016. A move below $40 would be bearish for risk assets in the short-term.

WTIC hit $41 and change in Wednesday trading following rising crude oil and gasoline inventories. Farmers in Australia are holding wheat in inventory on the expectation of higher prices due to La Nina. In the U.S., a colder-than-normal winter could lift energy use and drive demand for heating oil.

Fidelity Blue Chip Growth (FBGRX)

FBGRX remains perched at its highest levels since the start of the year, due to strong technology performance. The fund has 37 percent of assets in the tech sector. Top-10 holdings Apple (AAPL) and Alphabet (GOOG) have positively impacted the fund over the past month and AAPL’s Wednesday advance will generate a nice bump.

Domestic equities will attempt to sustain the past month’s gains as this week’s Federal Reserve meeting approaches. The S&P 500 index reached a new all-time high last week and earnings continue to indicate economic stability in most sectors. Global interest rates continue to hover at near-record lows as monetary easing in China, Japan and Europe pushes global investors to the U.S. in search of yield.

The Federal Reserve is expected to keep interest rates unchanged between 0.25 and 0.50 percent at this week’s meeting. Most economists believe the Fed will hold off on raising rates until at least December, despite strong economic growth, job reports and housing data. Inflation is also approaching the central bank’s 2 percent target, but the Fed is likely to justify rate delays by highlighting the recent backslide in oil prices.

The flash PMI for July will be out on Tuesday. The U.S. report is key, but the United Kingdom’s could illuminate any Brexit-induced economic impact. New home sales for June and the Case-Shiller home price index for May will also be available on Tuesday, while June durable goods orders, capital goods orders and pending home sales will be released on Wednesday. Oil inventory data will also be out on Wednesday, though those numbers will be overshadowed by rising gasoline inventories.

The widely anticipated second quarter GDP will be reported on Friday. Economists currently expect 2.6 percent growth while the Atlanta Fed’s GDP Now model predicts 2.4 percent. GDP growth was 1.1 percent in the first quarter.

75 of the 120 S&P 500 companies that have reported have exceeded earnings expectations. Potential market-movers reporting this week include Google parent Alphabet (GOOG), Apple (AAPL) and Facebook (FB) as well as overseas oil giants British Petroleum (BP) and Royal Dutch Shell (RDS.A). In addition to AAPL, other Dow components reporting include Boeing (BA), Caterpillar (CAT), Coca-Cola (KO), McDonald’s (MCD) and Verizon (VZ). Apple’s average forecast calls for a 25 percent drop in earnings. Diminishing consumer interest in the iPhone and increasing pressure from competitors have  led to declines and may persist until the release of the tenth anniversary iPhone slated for 2017.  A beat by Apple would be very good news for both the sector and S&P 500 earnings growth.

Verizon completed a deal to buy Yahoo (YHOO) for $4.8 billion over the weekend, despite the firm having a market cap of almost $40 billion. Yahoo’s remaining value lies its investments in other companies, such as Alibaba (BABA). Yahoo opted to dump its core business due to the inability to execute a tax-free BABA spinoff.

The Dow Jones Industrial Average achieved nine straight days of gains, including seven record closing highs, before profit taking on Thursday of this week. This is the longest such streak since an eight straight day bull streak occurred in mid-March 2013. This week the Dow also hit a new all-time intraday high of 18,622, and gained 0.3 percent. The Standard & Poor’s (S&P) 500 Index gained 0.6 percent and finished the week at a new all-time closing high. The Nasdaq is less than 3 percent away from a new all-time high after rising 1.4 percent the past week.  The Russel 2000 gained 0.6 percent for the week.

With approximately 20 percent of the S&P 500 reporting earnings this past week, investors had a lot of information to digest. Bank of America (BAC) began the week by posting quarterly earnings and revenues that beat analysts’ expectations. The commercial banking giant delivered earnings per share (EPS) of $0.36 on revenues of $20.4 billion. Although EPS and revenue numbers beat consensus estimates, shares of Netflix (NFLX) suffered a 15 percent decline when the company reported slower than expected growth in the number of paid subscribers. International Business Machine (IBM) beat expectations with EPS of $2.95 and revenues of $20.2 billion. The following day, the price of Johnson and Johnson (JNJ) and Microsoft (MSFT) advanced strongly on better than expected earnings reports.

Although quarterly earnings at Goldman Sachs (GS) and Lockheed Martin (LMT) improved, their stocks eased lower during the week. Both Intel (INTC) and Halliburton (HAL) saw stock price declines after reporting Wednesday. Two stocks that advanced strongly on the week were General Motors (GM) and Visa (V). The former delivered record quarterly profits, while the latter reported better than expected numbers and announced an increase to its stock buyback plan.

The mood was generally positive for earnings. Even companies with disappointing results such as Starbucks (SBUX) and Chipotle (CMG) nonetheless rallied in the wake of their earnings reports thanks to solid guidance. Paypal (PYPL) headed in the other direction after its executives delivered more measured guidance.

After this week, 25 percent of S&P 500 companies have reported earnings. The average analyst estimate called for a 5.6 percent decline in S&P 500 earnings this quarter versus year ago levels, but this has now improved to 3.7 percent thanks to the multitude of earnings beats. Industrials and technology are driving the upward earnings revisions.

While mood was positive and earnings reports generally strong, central bankers took some wind out of the market’s sails. The European Central Bank (ECB) did not take any action at its meeting this week as expected, but the result was a weaker euro anyway. More importantly, Bank of Japan Governor Haruhiko Kuroda rejected the idea of “helicopter money.” We take his words with a huge grain of salt because in January, Kuroda said negative interest rates weren’t coming shortly before the BOJ implemented negative interest rates. His comments led to a stronger yen though, as traders better on “helicopter money” pared back their bets against the yen. A weaker yen is usually good news for markets, and a weaker yen accompanied the recent push to new highs in U.S. stocks.

The price for a barrel of West Texas Intermediate Crude oil dropped 4.5 percent on the week. Crude inventories in the U.S. fell by 2.3 million barrels, which was in line with expectations, but gasoline inventories continue to pile up. The gasoline price has been falling since late May in the commodities market and since mid-June at the pump. Crude oil is now following gasoline lower. If this continues, crude could slide as much as 10 percent before it matches the drop seen in gasoline. The Energy Select Sector SPDR ETF (XLE) was lower by 1.3 percent on the week.

The 30-year Treasury bond was flat on the week as interest rates stabilized. The U.S. Dollar Index rallied on weakness in the euro and pound, helping domestic stocks beat their foreign competitors. The iShares MSCI EAFE Index (EFA) was flat on the week. One sector winner this week was biotechnology. iShares Nasdaq Biotechnology (IBB) climbed 3 percent. The buyout of Relypsa (RLYP) by Swiss biotech firm Galenica helped lift the sector.

In economic news, continued low interest rates and the availability of low-down payment mortgages boosted U.S. housing starts in all sectors of the country. Although there was a slight decline in mortgage refinancings, existing home sales climbed to the highest rate in almost a decade. Homebuilder stocks are on the verge of setting a new post-2006 high. The weekly unemployment claims number was the lowest in more than three months.