Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
FANGs Get a Tooth Pulled
Stocks were able to retain a small gain this week after EU Commission President Jean Claude Juncker indicated willingness to comply with Trump’s demands for fairer trade. Nothing has been set in stone yet, but in the coming weeks tariffs covering the auto, steel, aluminum, and soybean industries will dominate initial negotiations. Stocks jumped at the end of trade on Wednesday and at the opening on Thursday, but couldn’t generate any real follow-through. China maintained its defensive stance on trade, and US corporate earnings coughed up a few hairballs. Facebook shares in particular hit the tech-heavy NASDAQ on Thursday, losing somewhere around $123 billion in market cap when executives of the company forecasted serious trouble ahead for its profit margins. Parenthetically, the company “beat” on earnings that grew by 31.8% quarter-over-quarter, and “missed” on revenues that grew by 41.9%, QoQ, which reflects something I said two weeks ago: despite success, the market may be ready to discount shares ahead of what should be a marginally weaker second half.
Preliminary GDP figures released for Q2 this year indicated that the economy expanded at a 4.1% annualized pace. It was amazing to me just how many financial shows (and the president) were touting the number. It should be clear to anyone paying attention that it was post-natural disaster (therefore temporary) spending that underpinned the results. As it turned out, traders weren’t taken in by the hype; stocks lost considerable ground following the release. They may have been more concerned that June New Home and Existing Home Sales declined by 5.3% and 0.6% respectively. I don’t normally quote revisions to prior months data, but the fact that New Home Sales for May were taken down from +6.7 to only +3.9% was significant. Most other economic data was a nonevent, but showed in one way or another a tapering off of post-storm-related peaks.
In other areas, fixed income was generally weaker (the 2-year Treasury finished at 2.67%), and weakness in the euro pushed the dollar to a modest gain. Most commodities advanced nonetheless (except crude, gold, and silver), as positive developments in trade seemed to take precedence. Next week, central banks in the U.S., U.K., Japan, Mexico, and Brazil will set interest rates. US dignitaries may meet with North Korean and Iranian officials, and we’ll get another look at US jobs via the ADP and US non-farm payrolls. I suspect the Fed will become more dovish given the recent downshift in economic data here in the US – if not at this meeting, then perhaps the next. In any case, I believe it’s a “when,” not an “if” scenario. When it happens, with some degree of force and conviction, I won’t be watching stocks so much as the reaction in bonds. That’s because the promise, or actual infusions, of liquidity have produced unintended consequences – including marginally higher rates along the curve rather than lower.
VP Investment Management