Boeing And Brexit: "Two B's" Dominate Market Conversation At Midweek

Despite continued concerns over Boeing Co BA and some weakness in Asia and Europe after another Brexit plan got rejected yesterday,  U.S. shares took on a slightly positive tone early Wednesday.

Considering the focus on Brexit and Boeing, it’s interesting to see how the U.S. market continues to hang in there and plow higher. Last week it was down every day, and then there was a spate of bad news. Still, stocks moved higher Monday and Tuesday. This could reflect investor confidence and bullish sentiment. What’s exciting about the market’s comeback so far this week is seeing some “old reliables” get a little love (see more below).

Controversy over the crash of a Boeing airliner last weekend continues, with shares down another 1% before Wednesday’s opening bell. Many countries have grounded the company’s 737 Max 8, but not the U.S. That said, politicians from both U.S. parties have called on the Federal Aviation Administration (FAA) to temporarily ground the airliner pending further investigation. At least two analysts have lowered their ratings on BA stock, concerned about financial impact from the situation.

There’s a full helping of numbers on today’s plate, including U.S. February producer prices, January construction spending, and January durable goods. Producer prices and core producer prices both rose 0.1% in February, the government said, below Wall Street analysts’ expectations for 0.2%. So inflation appears to remain at bay. Durable orders rose a better than expected 0.4%, but fell 0.1% excluding transportation.

Crude keeps sprinting higher, with U.S. prices approaching $57.50 a barrel early Wednesday and near four-month highs. The weekly U.S. crude stockpiles report is due out later today. There was a huge rise in supplies in last week’s report.

Grit Outshines Glamor

The red carpet rolled out on Tuesday, but not necessarily for the glamor names of last year. While FAANGs and semiconductors had another good day, so did some of the less sexy stocks that don’t normally draw so much attention.

Some of the ones we’re talking about include Visa Inc V, Costco Wholesale COST, and Procter & Gamble Co PG. About 10% of the Dow Jones Industrial Average ($DJI) is at 52-week highs, and the credit card stocks all had positive showings Tuesday. Visa is up more than 20% over the last year. That suggests that whatever else might be going on, the consumer is doing well. A thriving consumer is arguably a positive sign for all three of the big U.S. credit card companies, some of which are focusing on overseas acquisitions that can help break down boundaries for payments.

Staples like PG and PepsiCo, Inc. PEP that held the fort last fall when much of the market was tanking both continued to perform well in the new year. They’ve been joined by McDonald’s Corp MCD and Chipotle Mexican Grill, Inc. CMG, which rallied Tuesday. Both CMG and PG registered new 52-week highs.

However, the S&P 500 Index (SPX) ran into trouble Tuesday when it made another run at the 2800 level. That was a resistance point it closed above earlier this month but hasn’t been able to pierce since then. If the market were playing hoops, that’s where its shot seems to be getting blocked. The SPX rose to an intraday high of slightly over 2798 before turning around and closing off its highs. Wednesday could set up another test. Past isn’t prologue, but history does show that when a major index finds a way to post a few closes solidly above a big round number like 2800, it can sometimes build momentum from there.

Momentum isn’t exactly the story with the Dow Jones Industrial Average ($DJI), unless you’re talking downward momentum. The $DJI once again had a bad day Tuesday, weighed down by heavy losses from Boeing. About two-thirds of the 30 DJIA stocks rose Tuesday, but BA’s 6% loss was enough to keep the index from gaining ground. The BA slide, which continued after last weekend’s airplane crash in Africa, also helped push down the Industrials sector. Nearly all the other S&P 500 sectors finished in the green Tuesday, led by Health Care, Utilities and Energy.

Earnings Awaited Thursday, Brexit Digested

A couple of important earnings reports are on tap tomorrow as Oracle Corporation ORCL and Broadcom Inc AVGO report (see more on Broadcom below). There’s also new home sales for January coming out Thursday. Construction spending for January bows this morning and is likely to be under a microscope after December’s poor showing that spooked some investors.

Speaking of getting spooked, that’s exactly what might be happening with the British pound after the U.K. Parliament once again rejected Prime Minister Theresa May’s Brexit plan late Tuesday. Today and tomorrow, respectively, lawmakers will likely get to vote on whether the U.K. should leave the 28-member bloc with no deal, or should request a delay to its departure, CNBC reported. The departure date is currently March 29. 

The pound, which had been on an uptrend this year, gave back some gains vs. the dollar after the vote. The euro rose slightly. Meanwhile, the dollar index fell to just under 97. That seemed like a relatively calm reaction to the Brexit news, but the dollar might be worth watching as these next votes take place. Any jitters in Europe could potentially fuel investor interest in the greenback, which is often seen as a defensive investment.

U.S. Treasury Yields Dip Again

And as long as we’re on the subject of defensive investments, U.S. Treasury notes rallied sharply Tuesday, bringing the 10-year yield down to just a tick below 2.6% at one point. It was the first time yields dropped under that level since early January. 

That came after analysts said last week that 2.6% might represent solid support unless there were signs of more U.S. economic slowing. Benign U.S. consumer price inflation data Tuesday might have played a role in the yield softness. For those keeping score at home, on a year-over-year basis, total CPI eased to 1.5% in February from 1.6% in January, while core CPI eased to 2.1% in February from 2.2% in January.

Another possible weight on yields was the Brexit vote, which might have attracted some more money into Treasuries (which move opposite of yields). One school of thought suggests that a “no deal” Brexit might make any Fed rate hikes this year even less likely. The CME futures market now puts nearly 8% odds on Fed decision makers cutting rates by 25 basis points at their June meeting, and better than 20% odds on a rate cut happening at some point before year-end. The futures market builds in zero expectations of any rate hikes this year.

We’ll be hearing more from the central bank next week when Fed officials gather for their meeting. At that point, they’ll update the “dot plot” that maps out where they suspect rates will go over the next couple of years. It might be interesting to see if they’re as dovish as the market expects them to be.

Yields Give Way: The 10-year Treasury note yield (candlestick) fell to just under 2.6% intraday Tuesday for the first time since early January as U.S. inflation data looked benign and a Brexit vote failed. Meanwhile, volatility as measured by the VIX (purple line) has quickly faded this week. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Chipmaker Stocks Outrunning Near-Term Noise: After some weakness in late 2018, semiconductor stocks are tearing up the pea patch, to borrow an old baseball expression. They’ve risen 15% year-to-date and are outpacing the S&P 500 (SPX). Strength comes despite a less than ideal fundamental backdrop, according to industry analysts. There’s been pricing pressure for some of the chips used in products like USB flash drives and smartphones. Some of that might reflect declining Chinese demand due in part to the trade war, but there are also some worrisome signs that high inventory levels might be having an impact. A weaker global smartphone outlook could also play a role.

Additionally, trade war or not, China’s economic growth is slowing and that could start to be an issue for the industry, which is one of the more China-sensitive ones. In general, chip makers have guided Wall Street to expect lower first-half earnings this year, followed by a modest recovery in the second half, Investor’s Business Daily notes. Broadcom reports after the close tomorrow, offering investors a chance to potentially assess industry trends from the company’s point of view before earnings season begins next month. Other key companies to consider watching this coming earnings season include Intel Corporation INTC, Advanced Micro Devices, Inc. AMD, and Micron Technology, Inc. MU. 

Long Road, Uncertain Destination For Gold: Over the last year, gold has come a long way and gone basically nowhere. At recent levels of around $1,302 an ounce, it’s down slightly from near $1,325 a year ago. That doesn’t tell the whole story, however, and we won’t attempt to here. In a nutshell, gold reached a peak of nearly $1,370 back in April, plummeted to below $1,170 by August, and then stormed back to nearly $1,350 last month before taking another dive. One thing that might be worth thinking about is how gold seems to be marching to its own drummer lately, rather than playing the traditional role of a place investors tend to park money when they’re nervous. 

For instance, gold moved higher, but not sharply, during Q4 when global stock markets were getting hit hard. Then it rose rapidly last month even as a rally gave most world stock markets a tailwind and concerns about U.S. trade with China diminished. That gold rally also came even as the dollar, which traditionally moves in the opposite direction of gold, stayed near recent highs. Does this mean gold’s role is changing or becoming less important? Hard to say, but it certainly does seem less easy now to look at gold on its own and guess where other markets might be.

Looking Beyond EPS: Investors tend to focus on earnings per share, which makes sense considering a stock’s value can often be closely related. There’s a lot of concern about an earnings slowdown this year starting in Q1, with many analysts expecting a year-over-year Q1 drop for the average S&P 500 company. Despite that, U.S. stocks are up double digits since Jan. 1, so what gives? Well, EPS is far from the only corporate metric to consider watching, and investors might want to think about taking earnings losses in stride considering the tough comparisons many companies have to last year’s double-digit growth and the dwindling impact of the 2017 tax bill. 

One thing to perhaps keep in mind is revenue, which sometimes gets undervalued. Companies can get creative with EPS through buybacks and various accounting strategies, but they can’t easily hide falling sales. Right now, revenue isn’t expected to fall along with earnings in Q1, according to FactSet. It projects a solid 4.9% revenue growth for S&P 500 companies, led by the Health Care and Communication Services sectors. That might not be a blowout number, but it’s far from embarrassing.

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