With China Trade Back In Focus, Strong Earnings From Apple, Facebook Blunt The Blow

Halloween dawns with snow in the forecast across the Midwest and the Nationals claiming the World Series crown. There’s plenty of drama on Wall Street, too, with investors digesting two FAANG earnings and a Fed meeting. Payrolls loom Friday.

More on Apple Inc. AAPL, Facebook, Inc. FB, and the Fed below. We start the day with the spotlight on trade stocks took on a negative tone and Treasury yields gave up ground in pre-market trading due partly to media reports suggesting it could be difficult for the U.S. and China to resolve some of the more challenging parts of their trade dispute. That was the word from one Chinese official quoted in the media, anyway.

That shows you how tariffs can still have an impact. One comment from a single Chinese official and the market is down. That’s not to say the report isn’t important, because it has people worried that China might not want a long-term trade deal after all. It’s probably just the rock star earnings yesterday from AAPL, FB, and Starbucks Corporation SBUX that are keeping major indices from taking an even bigger dip.

As it is, the 10-year Treasury yield is all the way down to 1.73%, compared with a peak of around 1.85% earlier this week. The yield definitely seems to reflect trade caution. With stocks at all-time highs and earnings news slowing after this week, the trade battle could take on more importance after we get through payrolls tomorrow. Recently, it’s been good to see stocks trade mainly on stuff that really matters, like earnings. Now the focus might get pulled away. 

That might not be the case tomorrow as investors anticipate two key chunks of data. Consensus for October payrolls growth  is just 80,000, according to Briefing.com. That would be the lowest since May and way below the 136,000 added in September. Consider keeping an eye on wage growth, too. The Fed said yesterday the labor market is in strong shape and it expects that to continue. A bump in wages would probably give those words more heft. Right now, consensus estimates peg hourly pay rising 0.2% in October.

ISM manufacturing numbers also get posted tomorrow morning. This one could be delicate, because the market reacted dramatically last time out when the number suggested a softer manufacturing climate. As we said then, one month isn’t a trend. Neither is two months, but if the number is weak again, it would suggest that last month wasn’t just a blip.

You don’t have to wait until tomorrow for data. This morning has a lot of it, including Personal Consumption Expenditure (PCE) prices, which the Fed says it watches closely, and Chicago PMI. Initial jobless claims climbed to 218,000, up 5,000 from the previous week and a little above expectations. The PCE price index and core price index both came in flat, more evidence that inflation remains muted. Consumer income and spending did rise slightly in September, a good sign of consumer resilience.

60% of FAANGs Fare Well

The hits kept coming yesterday afternoon.

Following the Fed’s much-anticipated decision to lower rates (see more below), both AAPL and FB got lifts in post-market trading after beating Wall Street’s earnings projections. This followed a strong quarter from fellow FAANG member Netflix Inc NFLX, but disappointing earnings from Alphabet Inc GOOG and Amazon.com, Inc. AMZN. 

FB and AAPL shares didn’t exactly go crazy on the earnings news, with both climbing only about 2% right after they reported. For AAPL, at least, that might reflect shares being up more than 50% this year going into earnings. FB’s gains from strong earnings might have been tempered a bit by the regulatory issues it still faces.

FB and AAPL matched or exceeded third-party consensus estimates for all their major businesses, including revenue and earnings per share. It was nice to see FB come in a little above estimates for daily active user and revenue per user. That second one is important because it provides more proof of FB being able to make users into revenue generators. Wall Street had expected revenue per user to fall about a penny, but instead it rose. Daily active users rose 9%. 

One potential knock on FB’s earnings is that the important monthly active users (MAU) category only came in right at the Street’s expectations of 2.45 billion. That said, it’s hard to complain about having 2.45 billion MAU, and it represents an 8% rise. U.S. and Canada users grew, too, a nice little surprise after some stagnant quarters on that metric.

Over at AAPL headquarters in Cupertino, Calif., the news also looked good. Earnings and revenue easily surpassed Wall Street’s expectations, and the company guided for fiscal Q1 revenue of $85.5 billion to $89.5 billion, vs. the average Street estimate of $86.92 billion.

That guidance is maybe more important than anything else in the report, because fiscal Q1 is the holiday season quarter and last January, AAPL had to retreat from its initial guidance when things started going downhill in China. Some analysts think AAPL’s guidance for the current fiscal Q1 might be conservative because AAPL remembers the troubles it had last year trying to meet its goals. 

As many analysts expected going in, iPhone revenue looked pretty solid, but down from a year ago. The total of $33.4 billion compared with the average estimate of $32.4 billion. What’s interesting with the iPhone is how the September launch of iPhone 11, which many analysts had predicted wouldn’t make many waves, seems to have triggered some excitement.

More excitement around the iPhone could come next year when AAPL is expected to introduce a version with 5G. One school of thought suggests that models of the iPhone with lower prices might be pulling some additional users in. 

Greater China revenue for AAPL fell slightly in fiscal Q4, but the drop was less steep than in Q3. The Services category, which AAPL has touted as a revenue leader as iPhone revenue shrinks, rose 18%, which beat expectations. 

Gross margins were also better than expected, especially for Services. The Services portion of revenue was approximately 20% of total revenue for the company. Interestingly, iPhone revenue again topped 50% of the company’s total revenue after falling below that in the previous quarter.

No Tricks From Fed, Just Treats

Yesterday, the Fed delivered the “treat” most analysts had expected going  into this week’s meeting, cutting the Fed funds rate by 25 basis points back to the lowest level in more than a year at between 1.5% and 1.75%. It was the third rate cut since July.

Stocks didn’t initially move much after the Fed decision. It was Fed Chairman Jerome Powell’s press conference that appeared to make a difference. Stocks jumped to new highs for the day and a new closing record high for the S&P 500 Index (SPX) on Wednesday after Powell said late in his post-meeting press conference that the Fed wouldn’t raise rates without a “significant inflation rise.” Technology and Consumer Discretionary led the race higher, but Financials fell slightly, perhaps on worries about lower rates pressing their profit margins. 

In a way, it’s kind of surprising that the market seemed to get such a lift from Powell’s language around rate hikes. It’s been almost a year since the Fed raised rates or even talked seriously about doing that. Still, maybe people wanted reassurance that Powell and company wouldn’t go back to “hawkish” ways anytime soon.

Odds of another rate cut in December now stand at less than 20%, according to CME Fed funds futures, down from 30% a week ago. 

Despite all the hoopla this week, the market’s been behaving pretty well. It is actually impressive that we have held these gains above 3000 in the SPX, even if we are down slightly from the all-time highs reached earlier this week. Considering what is going on, it’s good that there hasn’t been any hard sell-off pressure. The encouraging thing is, at least through yesterday, we’ve been trading more on what you should be trading on, mainly earnings, and less on rumor and innuendo. That’s a nice change of pace and how the market arguably should work.

CHART OF THE DAY: BATTLE OF THE FAANGS: Apple (AAPL-candlestick) and Facebook (FB-purple line), both reported after the close yesterday. So far year-to-date, the two have done rather well, with both beating the overall market’s gains. But over the last month, AAPL has really pulled out ahead. Data Source: Nasdaq.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Sorry, Have to Miss the Meeting: Until Wednesday, a lot of people were focused on leaders of China and the U.S. possibly announcing trade progress next month at a meeting scheduled to happen in Chile. That meeting got cleared from the schedule Wednesday due to domestic unrest in the country, so now it’s unclear when Presidents Trump and Xi will meet. This could be a focus in coming days, and maybe create a little more concern around the trade picture. Consider keeping an eye on volatility over the next day or two, especially with payrolls and manufacturing data in the picture tomorrow. 

Trade Deal’s Potential Business Impact Might Be Muted: Even if the presidents do meet and sign a Phase One deal, it doesn’t necessarily mean U.S. big business can breathe easy. Business confidence has been sapped by this long trade war, judging by what we’re hearing from some of the earnings conference calls this time around. That isn’t something that just gets back to normal thanks to a couple of signatures.

If there’s a trade deal, we may see an initial lift for the market, but it’s not necessarily the case that business spending will start up again quickly. As Reuters reported earlier this week, companies such as Caterpillar Inc. CAT, 3M Co MMM, and Texas Instruments Incorporated TXN have blamed the protracted trade dispute for undermining their revenue or profits as well as their financial outlooks. They can’t just turn on a dime, especially if a Phase One deal doesn’t fully address key issues like forced technology transfers and other intellectual property concerns. That said, the number of S&P 500 companies that have mentioned the term “tariff” so far this earnings season (as of last Friday) is 59, down slightly from 66 over a comparable period in Q2 reporting season, according to data from FactSet.

Balance Reminder: You’ll often hear financial experts tell investors to make sure they check their allocations among different stock sectors and find the right balance between cash, fixed income, and stocks. Another thing you might hear is that if you decide to buy an individual stock, be careful about putting too many eggs in one basket. Some people are tempted to do this, especially when their 401(k) plan offers their company’s own stock as an investment choice. 

Anyone watching the major networks Tuesday morning got another lesson about all this as Boeing Co BA CEO Dennis Muilenburg sat in the hot seat in front of TV cameras and angry senators fielding questions about the 737-MAX. Some of the senators gave Muilenburg a grilling, and it started to look like other recent hearings featuring CEOs from some of the FAANG companies like Facebook. BA’s stock held up pretty well through the ordeal on Tuesday, but it’s down 21% from its 2019 high. While it’s certainly possible that BA could fix its issues and the stock could come back, the last seven months arguably help show what those experts meant when they talked about keeping your portfolio balanced.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image Sourced from Pixabay.