There were several efforts to rally the market yesterday, but it was clear out of the gate that the session would be a struggle. By the closing bell, the bulls gave up the ghost. The market breadth was muted except measures of 52-week milestones. The NYSE saw 146 new highs and only 34 new lows, while the NASDAQ Composite saw 136 new highs against 72 new lows.
The market is searching for a catalyst during earnings season, which has seen very strong results on revenue and okay results on earnings that are generally beating. Obviously, the market has had a great year, and bias shifted to the upside after the late August breakout, but the rally lacks oomph. Meanwhile, experts continue to make certain assumptions based on major indices being at or near record highs. There are two incorrect assumptions: the market is too expensive, and investors are too ebullient.
I much prefer forward price-to-earnings (Forward P/E) ratios. Right now, the S&P 500 is at 2016 levels. The problem gets “cheaper” as more earnings beats come through.
Then there is the notion that investors are giddy. It couldn’t be farther from the truth. Professional investors are huddled together, cowering in fear like a bunch of long-tailed cats in a room filled with rocking chairs. Individual investors are also more likely to be neutral on the market than bullish.
Bullish | Neutral | Bearish |
35.6% | 36.1% | 28.3% |
Source: AAII | ||
The market is anything but over-enthusiastic. On the contrary, in addition to better-than-expected earnings, investors need something else.
Light My Fire
You know that it would be untrue
You know that I would be a liar
If I was to say to you
Girl, we couldn't get much higher
-The Doors
The Federal Reserve is expected to cut rates today, but the Street needs Powell & Company to light their fire with a clear nod to future rate cuts. If they do the opposite, it could douse the small flame that already exists.
Portfolio Approach
We went heavy in Industrials (XLI), and it is paying off big time. Three names in the model portfolio have surpassed our buy limits. There are other ideas in the sector we believe are still within buying range.
Portfolio Approach
We closed on Fastenal (FAST) for an 8% gain over a very short period. I like the stock, but I wanted cash and felt that the stock price could meander and grind away in the near term. We added a new Consumer Discretionary yesterday as well.
Communication Services | Consumer Discretionary | Consumer Staples |
1 | 3 | 2 |
Energy | Financials | Healthcare |
1 | 2 | 2 |
Industrials | Materials | Real Estate |
3 | 1 | 1 |
Technology | Utilities | Cash |
3 | 0 | 1 |
After the Close
The earnings parade continued after the close with several well-known companies posting results, including Mattel (MAT).
- Barbie’s career series of dolls was the biggest moneymaker: $567.6 million +10% (+12% constant currency)
- Hot Wheels: $293.3 million +25% (27$ constant currency)
Shares of Mattel popped 20%, as the shorts had bet the ranch on the company going the way of the Pet Rock or those Duncan yo-yos. Coming into the session, 46% of the float is short.
Other earnings winners: Unisys (UIS), Maxim Integrated Products (MXIM), Concho Resources (CXO), PriceSmart Inc (PSMT), Herbalife Nutrition (HLF), and Boston Beer Company (SAM).
While old-school Barbie was staying alive, Electronic Arts (EA) wiped out after initially trading higher on its financial results.
Today’s Session
It’s Fed day – more on that on the afternoon note.
3Q GDP Report
At 1.9%, third quarter GDP beat Wall Street consensus of 1.6% (some of the most respected analytic firms were looking for an even smaller print), and it was driven by the consumer +2.9% vs consensus 2.4%. The biggest highlight was the increase in residential investment.
Weakness in trade took almost a full percentage point off the report.
Personal Consumption
Goods 5.5%
- Durable 7.6%
- Non-Durable +4.4%
Services +1.7%
Investments -1.5%
Fixed -1.3%
Nonresidential -3.0%
- Structure -15.3%
- Equipment -3.8%
- IP +6.6%
Residential +5.1%
Home Sweet Home
Residential Investment climbed nicely after six consecutive quarters, and eight out of the past nine quarters of decreases. With U.S. homeownership rate at its highest level since 1Q2014, there is no doubt the overall economy and low rates are making it possible for greater household formation.
Housing starts and permits continue to improve this year, and existing home sales are trending higher as well. I’m not sure how much the Fed factors this in, but they should be thrilled and not curb this trend.
What about that inverted yield curve?
Remember those three days in August when the two- and ten-year yield inverted, and it was the end of the world?
Well the difference between the two has expanded significantly since then, so I wonder if the Fed is still modeling for any chance of recession.
The media certainly would let it go, but then again, their mission isn’t economic outlook or true analysis.
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