Market Seems Generally Pleased With Earnings Results, But Geopolitics Still Weigh

Earnings reports from major companies seem to generally be providing a positive counterpoint to ongoing geopolitical anxieties. But market gains have been slight as concerns about global economic growth linger as the U.S.-China trade war shows little sign of a resolution, the U.S. government shutdown continues, and Britain’s exit from the European Union keeps on casting its shadow across the Atlantic. 

European shares were generally higher after the European Central Bank left interest rates unchanged. However, the FTSE 100 was down amid continued uncertainty surrounding Britain’s exit from the European Union. Investors continue to wonder about the potential fallout from Brexit. As of yet, Britain hasn’t passed a plan for the divorce, which is scheduled for late March.

On the trade front, ahead of a visit to Washington by a high ranking Chinese official later this month, Reuters reported that President Trump won’t soften his stance on Beijing making reforms including how it handles intellectual property just to get a deal done.

Closer to home, some high-profile companies have voiced concerns about the effect of the partial government shutdown on their business. (See more below.) Meanwhile, the shutdown battle over the U.S.-Mexico border has thrown President Trump’s State of the Union address into question. 

But the drumbeat of worrisome news also comes as a bevy of companies report earnings, giving investors something else to chew on than geopolitics.

Earnings Season Continues

Positive earnings momentum seemed to continue early Thursday as American Airlines Group Inc AAL released its Q4 results, which sent shares higher in pre-market trade. It reported net earnings of 69 cents per share versus a loss of $1.22 per share a year prior, and it raised its 2019 earnings projections. In other airline news, Southwest Airline Co.'s LUV earnings came in ahead of expectations as unit and operating revenues increased.

Also early Thursday, Bristol-Myers Squibb Co BMY, which is gearing up to acquire Celgene Corporation CELG for $74 billion, reported better-than-expected fourth quarter earnings, with revenue up 10% from the year prior to $5.97 billion, above the $5.95 billion Street consensus. BMY is down about 4% year to date, and shares were down in pre-market trade as it said it was pulling an FDA application for a cancer treatment drug combination for more study.

The generally positive momentum comes after stocks managed to edge higher Wednesday, helped after three Dow Jones Industrial Average ($DJI) components reported encouraging earnings results.

IBM IBM topped third-party revenue consensus estimates when it reported late Tuesday. Earnings per share also came in on top of analyst projections, and guidance looked stronger than many had expected.

Procter & Gamble Co PG and United Technologies Corporation UTX both also beat expectations on their top and bottom lines. PG raised guidance while UTX gave what looked like a strong forecast for 2019. 

Ford in Focus

Ford Motor Company’s F results were a different story. The automaker reported a net loss largely because of one-time pension costs and other charges. It was also vague about its 2019 outlook and said that all of its global regions produced losses except North America.

F is in the midst of restructuring and faces challenges including the company’s debt burden. 

Because of its exposure to overseas-related issues like Britain’s exit from the European Union and tariffs, F offers a microcosm for the worries about global economic growth that have dogged investors for months.

U.S. Shutdown Raises Concerns

Growth worries have only ratcheted up in recent days as the partial U.S. government shutdown continues. Boeing Co BA, the world’s biggest airplane maker, told CNBC that a long-term shutdown could weigh on its operational efficiency and “pose other challenges for our business and the aviation sector in general.”

The warning from BA, which is expected to report earnings next week, comes on the heels of Delta Air Lines, Inc. DAL saying the shutdown is costing it $25 million a month because of government contractors and officials who aren’t traveling. Southwest said the partial government shutdown has cost it $10 million to $15 million in sales this month.

Figure 1: VIX Edges Lower: The Cboe Volatility Index, considered Wall Street’s fear gauge, fell below 20 on Thursday after climbing above that level during the previous session as stocks sold off. The fear measure has been falling in recent days, an indication that investor tensions are easing a bit compared with the end of last year. But the VIX is still elevated compared with much of what we saw last year.Data Source: Cboe Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Dueling Strategies: A common phrase from Wall Street that is “buy low and sell high.” But there’s another, perhaps lesser known phrase among trading circles: “Let your winners ride.” When looked at through the lens of S&P 500 (SPX) sub-industries, the former can mean buying the previous year’s 10 worst-performing-groups while the latter can involve a strategy of buying the 10 best-performing groups, according to investment research firm CFRA. 

From 1991 through the end of last year, buying the 10 winners in equal proportions and holding them for a year returned an 11.5% compound annual growth rate compared with the SPX’s 7.5%, according to CFRA. Investors who focused on the “winners” strategy, and who also rebalanced their holdings monthly instead of holding the stocks for a year, goosed that rate to 12.7%. “Buying beaten-down stocks can be a good long-term strategy, but only for those with an inordinate amount of patience,” CFRA said. “For the average individual, who gets upset if he/she misses a slot in a revolving door, adopting the ‘let your winners ride’ approach of modifying and rebalancing portfolios on a monthly basis may be preferred, as it delivered a superior return and frequency of beating the market.”

Home Affordability Still a Headwind: Given all the noise surrounding threats to global economic growth, it’s probably worth remembering that there’s been at least one persistent internal factor threatening the domestic economy: the housing market. Recent numbers don’t appear to be positive. Data for December showed existing home sales decreased 6.4% month-over-month to a seasonally adjusted annual rate of 4.99 million. One reason for softness in the housing market has been gains in mortgage rates, but despite mortgage rates coming down in December, total sales were 10.3% lower than the same period a year ago. 

But mortgage rates have recently been rising. Separate data showed that weekly mortgage applications fell 2.7% last week as average contract interest rates for different types of 30-year-mortgages rose. On top of the decline in applications, otherdata showed that affordability remains an issue. Housing prices continued to climb in November, according to data from the Federal Housing Finance Agency, which regulates Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks. The agency’s house price index rose 0.4% on top of October’s upwardly revised 0.4% gain, and house prices rose 5.8% from November 2017 to November 2018.

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.