Month: July 2018

The Dow Jones Industrial Average and Nasdaq returned 2.30 and 1.79 percent, respectively, this week.  Technology, consumer staples and industrials were the best performing sectors, while utilities lagged due to rising rate hike expectations. Th S&P 500 trailed slightly, gaining nearly 1.50 percent.

SPDR Industrial (XLI) led sector performance with an increase of 2.20 percent. iShares North American Software (IGV) climbed 3.95 percent and SPDR Technology (XLK) increased 2.08 percent this week. SPDR Consumer Discretionary (XLY) gained of 2.08 percent, due to its 20 percent allocation in Amazon (AMZN), which rose 5.99 percent.

Small business optimism remained near all-time highs in June. Job openings slipped to 6.6 million but remained higher than the unemployed population. The quit rate increased to 2.4 percent, a 17-year high, indicating wage inflation could pick up as workers chase better opportunities. Weekly jobless claims fell back near 40-year lows at 214,000.

Earnings season kicked off this week with several large banks reporting. J.P. Morgan (JPM) and Citigroup (C) beat analyst estimates, but Wells Fargo (WFC) fell short. J.P. Morgan (JPM) earned $2.29 per share, 7 cents above the consensus forecast. Earnings rose 26 percent from last year. Citigroup earned $1.63 per share, beating forecasts by 7 cents. Citigroup missed on revenue by a very small amount, a mere $43 million on more than $18 billion.

Wells Fargo analysts were expecting earnings of $1.12 per share; it generated only $0.98 for the quarter. Mortgage banking fees fell 33 percent, non-interest income was stagnant, and expenses remain a concern despite falling this year.

PNC Financial Services (PNC) saw the best return on Friday after reporting 25 percent earnings growth. The bank reported a 3 percent rise in commercial lending, a core business for regional banks. Shares have gained more than 11 percent over the past year.

SPDR Financial (XLF) gained 1.16 percent for the week, while iShares U.S. Broker-Dealers (IAI) advanced 1.20 percent. We are increasingly bullish on financial stocks, especially small and regional banks.  Investors should consider adding SPDR Regional Banking (KRE).

Equities opened the week on a strong note, led by a 1.31-percent Dow Jones Industrial Average rally. Financials, industrials, and energy strongly outperformed. Caterpillar (CAT) gained 4.11 percent and Boeing (BA) 2.17 percent. Tariffs took effect on Friday, but stocks in China, the U.S. and emerging markets have rallied since then.

SPDR S&P Bank (KBE) gained 2.30 percent on Monday. SPDR S&P Regional Banking ETF (KRE) gained 2.08 percent. Long-term interest rates held steady, but the odds of a fourth rate hike in December climbed 6 percent to 58 percent on Monday.

Small business optimism for June and the Job Openings and Labor Turnover Survey (JOLTS) are due on Tuesday. Inflation data for June comes on Wednesday and Thursday with the producer and consumer price indexes. Economists predict both the PPI and CPI rose 0.2 percent. A Federal Reserve measure of inflation indicates the CPI could surprise to the upside. Friday will bring the University of Michigan’s early report on July consumer confidence.

Chinese inflation data is expected on Monday night, with lending and trade data out later in the week. Canada’s central bank meets on Wednesday. Analysts predict the bank will hike its interest rate a quarter point to 1.50 percent.

The 10-year Treasury yield increased slightly on Monday to 2.86 percent. Crude oil climbed above $74 a barrel. The U.S. Dollar Index rallied slightly thanks to a weaker British pound, which fell amid resignations from British Prime Minister Theresa May’s Brexit team and Foreign Secretary on Monday. As of Monday, there was no sign of a leadership challenge from within May’s party. iShares MSCI United Kingdom (EWU) climbed 0.86 percent on the day.

Pepsi (PEP) will kick off second-quarter earnings season on Tuesday. Analysts forecast $1.52 per share in earnings. Delta Air Lines (DAL) will report on Thursday. J.P. Morgan (JPM), Citigroup (C) and Wells Fargo (WFC), along with PNC Financial Services (PNC) will report on Friday. These four banks account for 26 percent of SPDR Financial (XLF).

Equities rallied strongly on Friday. The Russell 2000 Index led all major indexes with an increase of 3.79 percent. The Dow Jones Industrial Average trailed with a gain of 0.99 percent.

SPDR Healthcare (XLV) advanced 3.27 percent. iShares Nasdaq Biotechnology (IBB) returned 7.65 percent. Biogen (BIIB) pulled the sector higher with positive initial trials of a new Alzheimer’s drug. Shares gained 19.6 percent on Friday.  Biogen was the third-largest holding in IBB coming into Friday trading at 7.85 percent of assets.

Technology also performed well. SPDR Technology (XLK) retuned 2.24 percent, iShares North American Software (IGV) 3.79 percent, and First Trust Dow Jones Internet (FDN) 3.15 percent.

Among the smaller S&P 500 sectors, utilities and telecom benefited from falling long-term interest rates. SPDR Utilities (XLU) gained 2.49 percent and iShares U.S. Telecommunications (IYZ) 2.36 percent.

The Markit and ISM manufacturing PMIs both exceeded expectations this week. The ISM survey climbed from 58.7 to 60.2. The Markit survey hit 55.4, beating a 54.6 forecast. Tariffs on steel lifted costs for steel users. Domestic demand strengthened. Several emerging markets including Brazil and Turkey saw their PMIs slide below 50. Any reading over 50 signals expansion.

Construction spending rose 0.4 percent in May, beating forecasts of 0.0 percent. Spending increased 4.5 percent from a year-ago. Government spending on infrastructure was responsible for the beat.

Auto sales hit an annualized pace of 17.5 million in June. Analysts expected 17 million.  Factory orders climbed 0.4 percent in May, beating forecasts of 0.0 percent. The services PMIs also showed an expanding service sector, with the ISM services index hitting 59.1 percent.

The U.S. economy created 213,000 new jobs in June, but the unemployment rate rose to 4.0 percent as the labor force participation rate increased. The government does not count workers who stop looking for jobs as part of the labor market. Under these conditions, a rising unemployment rate is bullish for the economy.

The U.S. government implemented tariffs on $34 billion worth of Chinese goods on Friday. The U.S. plans tariffs on another $200 billion worth of goods in retaliation for Chinese technology and intellectual property infringement. China retaliated with tariffs on U.S. goods and slowed clearance of U.S. goods at its ports. Many assets directly impacted by the tariffs, such as soybeans, rallied strongly as traders closed short positions. Teucrium Soybean (SOYB) fell 16 percent from late May through early July, but it rallied 4 percent on Friday.

Oil prices jumped above $74 a barrel last week and traded as high as $75 this week. Natural gas slipped despite high electricity usage amid a heatwave in many parts of the country. The U.S. Dollar Index climbed back above 95 on Monday, but closed down 1.3 percent for the week.

A weaker U.S. dollar didn’t help foreign share performance. SPDR S&P 500 (SPY) gained 1.65 percent. It was in line with iShares MSCI Emerging Markets (EEM) and iShares MSCI EAFE (EFA), which returned 1.69 and 1.52 percent, respectively.