Trade Tension Back In Town, Weighing On Sentiment Despite Strong Tech Results

Tariff fears marched back onto Wall Street early Friday, stirring up tension and possibly overshadowing some solid earnings news in which info tech continues to lead the parade.

Worries about a possible trade war might put a damper on things today as U.S. pre-market trading signaled a possible lower start and markets in Europe took a beating. The pressure came despite Microsoft Corporation MSFT and General Electric Company GE both beating analysts’ earnings estimates. 

In an interview with CNBC, President Trump threatened to unleash tariffs on $500 billion worth of Chinese goods. Just a few weeks ago, the White House slapped tariffs on a smaller amount of Chinese imports, but the market bounced back pretty quickly from weakness then. One thing to remember about this administration is that it tends to make big threats that get people worried, but sometimes pulls back. There’s no guarantee that will happen this time, but it’s important not to let political noise affect your long-term investing plan.

Microsoft’s Quarter Makes a Statement

Getting back to earnings, Microsoft appeared to do really well, especially in cloud services. It reported adjusted earnings per share of $1.13 and revenue of $30.09 billion, topping Wall Street analysts’ expectations of $1.07 and $29.2 billion. 

Heading into the report, MSFT’s cloud products and services were the primary focus among analysts, since they’ve been delivering the fastest growth. They didn’t disappoint Thursday, as server products and cloud services revenue increased 26 percent (up from 20 percent in the prior quarter), driven by Azure cloud computing revenue growth of 89 percent. Overall intelligent cloud revenue beat Wall Street analysts’ projections, though Azure revenue growth fell a bit from the previous quarter.

Beleaguered shares of GE are little changed in pre-market trading after the company reported earnings per share of $0.19, beating analysts’ estimates by a penny. Revenue of $30.1 billion also came in higher than Wall Street had expected as the company continues to work on its turnaround plan. Profit fell 30 percent, and executives said the power market might continue to be challenging, but GE did beat revenue expectations and said it’s focused on renewable energy, so there are some positives. 

Honeywell International Inc. HON also delivered solid earnings, extending what’s been a mostly positive start to earnings season for the industrial sector. Tech has also seen earnings strength, but next week the roster expands to lots of other industries so we’ll get a chance to see what’s happening all over.

The one earnings disappointment Friday came from footwear maker Skechers USA Inc. SKX. The stock is getting hammered, down more than 25 percent, after the company missed Wall Street analysts’ earnings projections and delivered what some analysts saw as bearish guidance.

Banks Give Back

Wednesday’s fledgling financial sector rally didn’t last too long, as bank stocks gave back most of their gains Thursday and the sector fell more than 1 percent. Sliding Treasury yields might have contributed to the pallid bank performance Thursday, which helped end the Dow Jones Industrial Average’s ($DJI) five-day win streak. The risk-on sentiment that edged higher early this week pretty much went into hiding on Thursday, with only real estate and utilities gaining ground. Both of those are often considered sectors where some investors tend to go when sentiment gets fearful.

Concern appeared to center in part on revived trade fear headlines—this time potential automobile tariffs against Europe—and an interview President Trump gave in which he expressed disapproval for the Fed’s rate hikes. The benchmark yield fell to 2.83 percent on Thursday from around 2.87 percent the previous day, and might have taken a psychological hit from the president’s words. The yield bounced back to 2.85 percent by early Friday, basically landing in the middle of its recent range.

It’s not the first time a president has appeared frustrated with Fed policy, but it’s uncommon for people to hear about it. The Fed started raising rates in late 2015 and Fed Chairman Jerome Powell—appointed by Trump earlier this year—said nothing to Congress this week that would indicate any change. Something to keep in mind is that presidents don’t actually have much of a say over Fed policy, and the Federal Open Market Committee (FOMC) operates independently of the White House.

Talking Down the Dollar

The interview might have helped weaken the dollar, as well, though, as we noted yesterday, the greenback generally has been on the rise. The dollar index hit a new one-year high of 95.65 early Thursday, compared with below 90 earlier this year. This puts the index roughly in the middle of its range between this year’s lows and last year’s highs, so we’re not in uncharted territory. However, some analysts believe the market rally late last year and early this year might have received a tailwind from the weak dollar. The strengthening dollar might end up being a challenge for some multinational companies with big sales abroad. It’s not something that’s necessarily going to show up in the current Q2 earnings, but could be something to watch for in the fall when Q3 reporting takes place.

Today looks kind of quiet on the data front, and the afternoon earnings schedule might be like watching paint dry. That could mean focus shifting toward next week’s earnings and data calendar, which is pretty packed. Earnings to watch next week include Alphabet Inc. GOOGGOOGL, Boeing Co. BA, Verizon Communications Inc. VZ, AT&T Inc. T, The Coca-Cola Co. KO, General Motors Corporation GM, McDonald’s Corporation MCD, Ford Motor Company F, Facebook, Inc. FB, Amazon.com, Inc. AMZN and a host of others.  

The economic calendar next week includes more housing numbers as well as a first look at Q2 gross domestic product (GDP). It might be mid-summer with the kids at camp, but Wall Street looks like it could stay pretty busy in coming days.

FIGURE 1: As Go Yields… The financial sector (purple line) seems to be closely tracking 10-year Treasury yields (candlestick) this week, as this chart of the last three days hints. Data Sources: S&P Dow Jones Indices, CME Group. Chart Source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Flying Cheap

Despite high fuel prices and strong consumer demand, it costs less to fly these days, The New York Times reported this week. It said fare prices will be down 6.7 percent this summer compared with last summer, with the average domestic fare dropping to $211 in July and August from $240 in June. This comes even as the number of fliers is expected to rise 3.7 percent this summer over last, with a record 246.1 million passengers traveling domestically on U.S. airliners between June 1 and Aug. 31. Why is it cheaper to pack up and go? Added capacity has helped. You probably have noticed seat space getting tighter, and even lavatory sizes have been compressed in some planes to fit more passengers in the cabin. The surge in low-cost carriers is another possible reason fares fell, the newspaper noted. However, climbing fuel costs might make this vacation from high fares a short hop rather than a long haul, according to air industry experts quoted in the article.

Like 1969 All Over Again

Earlier this week, Fed Chair Jerome Powell painted an enthusiastic picture of the economy in his testimony to Congress. On Thursday, fresh data seemed to underpin what he had said. Initial weekly unemployment claims fell to 207,000, the lowest level since the week of Dec. 6, 1969, the year of the Woodstock festival and the first two manned lunar landings. In the nearly 50 years since, the U.S. population has grown from about 203 million to nearly 326 million, making these rock-bottom initial claims arguably even more impressive. The low level of initial unemployment claims seems to point toward another possible bullish payroll numbers in the July jobs report due in a couple of weeks. Still, keep in mind that the percentage of working-age adults in the labor market remains at relatively low levels for a variety of reasons, as Fed Chair Powell outlined to Congress earlier this week.

Balanced Approach

Though stocks struggled a bit Thursday, the S&P 500 (SPX) is now back within range of its all-time high of 2872 recorded nearly six months ago on Jan. 26. The bull market that began in 2009 would become the longest in history if it continues for about another month (as a reminder, a bull market is deemed over when there’s a 20 percent drop from the high. A “correction” like the one earlier this year is a 10 percent drop). While the old saying is that bull markets don’t die of old age, all this could be another reminder if you’re a long-term investor to look once again at your portfolio and see if you’re comfortable with your allocations between equities and fixed income. The comeback in stocks over the last month or so might have some investors weighted more heavily toward equities than they had planned, so make sure to consider the importance of regular re-balancing.

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