Slowing Down? Economy Brakes Slightly In Q4 But Earnings Keep Impressing

A presidential speech and a first look at Q4 gross domestic product (GDP) highlight what looks like a busy Friday on Wall Street as the stock market tries to post its fourth consecutive week of gains.

The economy slowed a little in Q4 with just 2.6% GDP growth, held back by a large increase in imports. That was the government’s first take on Q4 GDP, and it was below analysts’ estimates for another 3% growth quarter. Remember, the government has two more cracks at a Q4 growth estimate, so this isn’t the final word. For the full year, economic growth was 2.3%, up from 1.5% in 2016. While imports held GDP back, U.S. consumer demand looked strong.

On the earnings front, Honeywell International HON surpassed analysts’ estimates while raising its outlook. Still, the stock fell slightly in pre-market trading. That wasn’t the case for chipmaker Intel Corporation INTC, which rose 5% in pre-market trading after beating earnings and revenue expectations late Thursday and raising guidance.

Earnings news was all over the place Thursday and early Friday, with solid reports from INTC, HON, Caterpillar Inc. CAT and 3M Co MMM while Starbucks Corporation SBUX swung and missed on revenue and Union Pacific Corporation UNP came up short of Wall Street’s bottom-line expectations. The overall takeaway for earnings season to date, however, is that most companies reporting so far have beaten analysts’ projections, and momentum appears to remain strong.

In fact, some market professionals are starting to raise their Q4 earnings projections based on the results so far, with research firm CFRA now looking for an 11% year-over-year increase, up from its previous estimate for 10.6% growth. We’ve also seen bullish outlooks from many companies, with CEOs talking very positively about growth.

That said, earnings season hasn’t been without its disappointments. SBUX got a decaffeinated welcome from the Street thanks to weak same-store sales growth across much of its global footprint, and shares tumbled in pre-market trading. The company beat Wall Street’s earnings estimates but missed on revenue. Holiday drink sales didn’t take off as planned, SBUX said.

President Trump takes his economic message to Davos today, and focus could swing toward the dollar as he speaks. As Trump spoke, the dollar index dipped back to 89, near three-year lows.

Looking back at Thursday’s action, the Dow Jones Industrial Average ($DJI) jumped more than 100 points, led by CAT and MMM behind their impressive earnings and by another huge industrial company, Boeing (BA). From a sector perspective, it was kind of a mixed day, with financials and info tech — two recent leaders — both descending, while materials and industrials climbed. As volatility continued to rise, more investors seemed to flock toward protection in sectors like utilities and telecom, as well.

While the $DJI shot up after an initial stumble out of the gate Thursday, the Nasdaq (COMP) fell and the S&P 500 (SPX) barely climbed overall Thursday, while the Russell 2000 (RUT) rose slightly. It was one of those days when you could be fooled by simply looking at the $DJI, which only represents 30 stocks.

Energy prices are really taking off, and transportation companies are going to have to start to hedge against rising oil prices. The Dow Jones Transportation Average fell 1.6% Thursday and is down the last three sessions. Consider this a possible bearish signal, because transports can sometimes form the vanguard for broader market action, history shows.

The European Central Bank kept its rate policy unchanged at its meeting Thursday, which didn’t come as a big surprise. ECB President Mario Draghi sounded dovish for the most part, saying the ECB plans to keep its stimulus program in place and expand it if necessary. It’s unclear if the ECB might start tweaking its guidance anytime in the near future, though some market professionals think this could begin as soon as March.

Bonds, meanwhile, found buyers Thursday, as U.S. 10-year Treasury yields slid back to 2.62%. One school of thought is that some pension funds might be consolidating positions here at the end of the month, rolling investments out of high-priced stocks and into bonds, which have been losing ground. Yields rose to 2.64% in the early going Friday.

FIGURE 2: TRANSPORTS STALL BUT BIOTECHS BOUNCE. The Dow Jones Transportation Average (candlestick line) has fallen three days in a row on worries about expensive oil and possible airline price competition. Meanwhile, the Nasdaq Biotech Index (purple line) bounced back Thursday after a mid-week stumble, and optimism continues regarding potential industry M&A. Data source: Nasdaq, Dow Jones & Co. Chart source: The thinkorswim^® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Everyone’s Invited to Commodities Party

It’s not just oil prices rising over on commodity row. Gold reached its highest level since mid-2016 on Wednesday, and copper — a material used in many industrial applications — climbed above $3.20 a pound this week. The metal had been trading down around $2.50 as recently as last spring. Platinum is on a roll, and silver recently hit four-month highs. Also, natural gas futures keep climbing despite relatively mild U.S. winter weather across much of the country. The natural gas rally might be more of a technical trend than fundamental, however. In the case of oil, it appears that falling supplies triggered this elevator ride upward.

For other commodities, particularly copper, it’s more of a demand-led rally based on strong worldwide economic growth. Commodities rallies can be viewed as either positive or negative for stocks. It’s positive that world economies are strong, raising demand for essential materials. However, as we’ve seen with some of the recent transport company earnings, many firms will have to wrestle with higher costs and how or whether to pass those on to consumers. Inflation should be closely watched.

Biotech Eyes M&A

Biotech shares rebounded Thursday after tumbling on Wednesday, though Wednesday’s slide wasn’t too surprising considering what a roll the Nasdaq Biotechnology Index (NBI) has been on so far this year. Looking ahead, there’s still a lot of optimism for biotech related to the new tax legislation, which some market professionals think could pave the way toward more merger and acquisition activity in the sector this year. The NBI hit record highs earlier this week after French drug maker Sanofi said it had agreed to pay $11.6 billion for a biotech company called Bioverativ that focuses on treatments for hemophilia and other blood disorders. Thursday saw solid earnings from Biogen (BIIB), a major biotech firm.

Transports Hit Turbulence

It’s been a bumpy road this week for transport stocks, with the Dow Jones Transportation Average now well off the record highs it posted earlier this month. A truckload of bad news teamed up to knock transports off track this week, including rapidly rising oil costs, concerns about possible price battles in the airline industry triggered by United Continental Holdings Inc. UAL earnings call, and an earnings miss by Union Pacific. While UNP recorded huge 28% growth in freight revenue of industrial products during Q4, revenue for automotive, agricultural, and coal products all fell.

On the plus side for transports, Alaska Air Group, Inc. ALK and Southwest Airlines Co LUV met and exceeded Wall Street analysts’ earnings expectations, respectively, on Thursday, and the airline business has been profitable the last few years and tends to do well in a growing economy. Also, a lot of the airlines seem to have hedged their energy risk, meaning they locked in cheaper oil prices a while back and may be somewhat shielded from rising commodity costs, for the moment. The same economic strength that helps airlines also could give trucking and railroad firms an underpinning of support, but it’s possible some profit taking crept in after the big run-up.

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