Another Day, Another Bank Misses On Earnings: Market Could Be On Defensive

Big bank earnings might get overshadowed a bit Tuesday by international events, including a key vote on Brexit and a possible China stimulus plan. Still, earnings remain front and center as a full set of major firms open their books today.

Also front and center is the U.S. government shutdown. Corporate executives are starting to warn that failure to resolve it quickly could weigh on both company results and the overall economy.

JP Morgan Chase Sees Slower Trading, Hurting Results

For the second day in a row, a big bank reported slower trading Tuesday. This time it was JP Morgan Chase JPM, which missed analysts’ earnings projections for the first time in 15 quarters as bond trading in Q4 came in well below third-party estimates. The bank reported earnings per share of $1.98, compared with third-party consensus estimate of $2.25. Shares slipped 2% in the pre-market hours.

Keep in mind, however, that despite the trading miss, JPM’s overall profit rose 67% in Q4, so we’ll see if Wall Street takes a breather when investors start digging into the numbers. 

Before JPM reported, futures trading had pointed higher. That changed rather quickly, however, and some indices turned negative.

The earnings miss doesn’t mean all is necessarily out of sorts at JPM, however. Remember, as with Citigroup’s C miss on Q4 revenue yesterday, JPM was hit with weak trading in Q4, and that colored overall results. Investment banking revenue and net income both climbed at JPM, the bank said. Revenue of $26.8 billion, however, was a bit shy of third-party estimates. 

A second big bank reported Tuesday, with Wells Fargo & Co. WFC slightly beating third-party consensus estimates. Shares were about flat in pre-market trading ahead of the opening bell.

As typical with bank earnings, the numbers only compose part of the story. Comments today from JPM CEO Jamie Dimon could get close attention from investors, who tend to listen carefully to Dimon’s analysis of the U.S. and global economy. He recently said, “2019 could be the fastest global growth year on record,” although he did mention that a slowdown in 2020 seemed likely. On Tuesday, Dimon urged the U.S. government to end its partial shutdown, saying the shutdown could significantly reduce economic growth this quarter if it continues.

Delta Cites Government Shutdown Pressure

Another stock retreating a little early on was Delta Air Lines Inc. DAL, which beat analysts’ earnings estimates but appeared to disappoint with its guidance. This came after competitor American Airlines Group In. AAL cut guidance last week, and might lead to more questions about the health of the airline industry. In its press release, DAL cited “increasing currency headwinds and the ongoing government shutdown” as challenges. In its call, the company said the shutdown is costing it $25 million a month because of government contractors and officials who aren’t traveling.

Also on the earnings front early Tuesday, shares of UnitedHealth Group Inc. UNH rose after beating earnings projections and maintaining its outlook. Health care was a strong sector in Q4, and UNH is the first major health company to report so far this season.

China Stimulus Hopes, Brexit in Focus 

Overseas, comments by China’s premier that raised hopes for a possible fiscal stimulus appeared to help Asian stocks and boost crude Tuesday. It looks like China might try to stimulate demand by cutting taxes. Details are awaited.

A little closer to home, there’s a Brexit vote in England tonight where Parliament is scheduled to vote on a bill supported by Prime Minister Theresa May. News reports suggest the bill has little chance of passing. If the deal fails, May needs to come up with something new pretty quickly with the March 29 deadline looming. Failure to approve a Brexit plan by then would probably result in a “no-deal” Brexit, and no one is really sure what the economic consequences might be.

For investors, the vote puts more focus on overnight trading Tuesday after the closing bell on Wall Street. Results of the vote could start to filter in around 10 p.m. ET, and it’s possible we could see some volatility around then. 

In another overseas development, Germany’s economy saw its weakest growth in five years last year.

On the data front, December U.S. producer prices looked pretty benign, falling 0.2%. That was a little more than analysts had expected.

Forgive and Forget?

Last quarter, the market seemed geared up to punish any company that disappointed even a bit. Perhaps now, with earnings season just underway, the tide is turning toward forgiveness.

Exhibit One might be Citigroup C, which reported weaker than expected revenue Monday. Initially, shares fell, but the stock bounced back in a big way, climbing 4% by late in the session as investors appeared more focused on the company’s progress cutting costs and growing its loan business. 

If C can be forgiven, perhaps that bodes well for the other big banks—especially those like Goldman Sachs Inc. GS and Morgan Stanley MS–which rely more on their trading businesses. We’ll see whether they get similar treatment if they come out with weak trading revenues like C did. GS reports Wednesday followed by MS on Thursday.

One thing seems pretty clear if you’ve followed the market for a few years: We need to see financials start leading the way. It was refreshing on Monday, a day when interest rates weren’t going crazy and when C reported its revenue miss, to see financials get a breath of fresh air and basically be one of the only sectors solidly in the green. This doesn’t just look good for the banks, but potentially for the market as a whole. There’s an old adage that it’s hard to have a rally without the financials, and they were basically absent most of last year.

Speaking of interest rates, the benchmark U.S. 10-year Treasury yield seems, well, unyielding. It’s been stuck right around 2.71% for several days. That’s well above recent lows under 2.6%, but still way under last fall’s 3.2% highs. At the same time, the 10-year has expanded its slight premium to the two-year note, with that gap now around 18 basis points. A year ago, that might have seemed very narrow. However, it’s certainly a decent jump from the single-digit premium it had a few weeks back that had some investors worried about the “curve” perhaps going inverted. It’s still a possibility, but there hasn’t been a re-test of the narrowest gap.

Volatility is likely to remain a big factor in the weeks to come, but for now it seems to have settled down a bit. The VIX—which is the most well-known “fear indicator”—stayed below 20 on Monday, near one-month lows. Sometimes earnings season is actually a source of stability, because it can give the market a sense of being moored. Geopolitical pressures, while still a major factor, might step out of the spotlight a bit as company results take the stage. 

Could Shutdown Weigh on Airlines?

With both Delta DAL and United Continental UAL reporting today, airlines could get some attention. It might be interesting to see if the government shutdown starts to affect airlines, in part because there’s a chance it could cause a worse client experience due to possible delays. Most business travelers will probably have to keep flying no matter what, but if the shutdown continues, it raises questions about whether the average person who might normally fly to see their aunt and uncle might decide to drive instead. 

With that in mind, investors might want to hear what airline executives have to say this reporting season about the shutdown’s possible impact on ticket sales, as well as how big their government contracts might be.

There’s little apparent change early this week surrounding the shutdown and the China trade situation. Though the news on both fronts is thin, either or both could jump back into the headlines at any given time. So could news about Brexit, where there’s still no deal with only a little over two months until the deadline to resolve issues. If a “no-deal” Brexit starts to seem imminent, there’s a chance it could send U.S. Treasury yields lower and the dollar higher as investors seek possible defensive fortifications outside of Europe.

Netflix Outpacing FAANG Peers As Earnings Approach

Netflix NFLX is scheduled to be the first FAANG to report, with results due after the close Thursday. Right now, the stock appears to be showing some momentum, and that’s more than can be said for some of its FAANG stablemates like Apple AAPL and Facebook FB. The NFLX strength could be partly due to enthusiasm over its hit movie Bird Box. When your product becomes a cultural phenomenon, that’s never a bad thing.

The company got an analyst upgrade Monday, and investors are probably bracing for the latest batch of subscribership numbers when NFLX reports. Competition might be out there, with Comcast Corporation CMCSA getting into the streaming game, so we’ll have to see how that plays out over time. At this point, however, NFLX is arguably the king of the hill in its industry, so everyone could be coming after them.

Other FAANG stocks just don’t seem to have the same edge right now as they used to, though AAPL got an analyst upgrade Monday. Along with the upgrade came advice to AAPL from the analyst that the company might want to consider lowering prices in China. We’ll see if they take that advice. They do have three new phones coming out, so there is a lot of news bubbling around. Still, when you look at analyst recommendations overall for the FAANGS, it’s interesting to note that AAPL now resides at the bottom of the list, meaning its stock has by far the fewest buy ratings. Amazon.com, Inc. AMZN currently leads the pack in that respect, followed by a tie between FB and Alphabet GOOG. 

If “pack” is the right word to describe how the FAANGs traded the last two years, it now looks like spring has come to the Arctic. The FAANG pack is breaking up, with different stocks going different directions. This could make it a little tougher to get a read on the overall market. A year ago, it was easy to say that if the FAANGs were up, their momentum would often spread to most of tech and beyond that to other sectors. If they continue heading in different directions, the compass might have lost its needle.

Figure 1: Mixed Signals: This one-month chart of copper (candlestick) vs. crude (purple line) tracks two commodities that some analysts point to as possible economic indicators, meaning they tend to rise and fall based on the health of the underlying economy. At this point, they’re sending mixed signals, with crude up sharply since the Christmas Eve lows but copper failing to show much strength. Both could be worth tracking in coming weeks amid worries about the Chinese growth picture. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Body Language: It’s probably no coincidence that stocks came under pressure on the first day of earnings season. Many investors are worried not only about the numbers, but about what executives might say. The market dived in Q4 despite a roaring Q3 earnings season where average S&P 500 earnings climbed more than 20%. You can chalk that up partially to bearish guidance and a cautious tone from many companies as the economy slowed worldwide, and some of those same fears continue to haunt the market now. Maybe that could ease based on what bank executives say this week. Things got started on a positive note when Citigroup C CFO John Gerspach told reporters in a call Monday that the “real economy” is doing well, though he’s worried about how what he calls the “financial economy” will react to the continued unwinding of quantitative easing.

There’s also the numbers themselves, which are starting to face more difficult year-over-year comparisons. For instance, research firm CFRA expects 12.1% EPS growth for Q4 and just 5.6% growth for all of 2019. Those Q4 expectations have fallen from around 10% a few weeks ago, but remember, there’s a long history of analysts’ early-season predictions getting outpaced by the actual numbers. We’ll have to wait and see if that happens again. CFRA expects every sector except utilities and staples to post earnings gains for Q4, and for the biggest gains to come in energy, financials, and industrials.

Proxy Pox: The utilities sector is one often cited as "defensive" — that is, a place to hide when volatility rears its head. It's also referred to as a "bond proxy" — meaning a sector full of companies with long histories of solid, stable earnings, to the point that the return profiles look similar to those of many fixed income investments. Monday's weakness in the sleepy utilities sector, led by bankruptcy talk in PG&E Corporation PCG, one of the nation's top utility companies, should serve as a reminder that utility stocks are still stocks, subject to the same risks of any stock, including the risk of bankruptcy, which typically wipes out most, if not all the equity in common shares. Monday's 2.5% move down in the utilities sector wasn't just limited to PCG, which lost nearly half its market cap yesterday. Other utility biggies, such as NextEra Energy Inc. NEE and Dominion Energy Inc. D—which together comprise about 20% of the S&P 500 Utilities Sector—were off well over 2% on the session. Other sector heavyweights such as Exelon Corporation EXC and Duke Energy Corporation DUK fell on the news as well.

Crude and Copper Watch: Speaking of “proxies,” two of the most closely followed economic proxies are crude and copper. Both could be worth watching in coming weeks as concerns about China’s economy and the U.S./China tariff battle continue to be front and center. Back in early 2016, the last time China went through a rough patch, crude became very closely correlated with the stock market. That seems to be happening again. Since the U.S. stock market hit new lows on Christmas Eve, crude is up about 20% (even with Monday’s slump factored in) and stocks are up around 9%. 

At this juncture, it looks like the stock market might be taking its cues from crude, with some investors figuring if crude prices rise, demand (and the global economy) can’t be doing all that bad. On the other hand, copper—a widely used industrial metal, especially in the electricity sector—might be telling  a different story, and it’s also worth watching. The price of copper futures is actually down a few cents since Dec. 24, and only a smidgen above the one-year lows posted last summer. If copper continues to languish, that could be a sign that China’s economy is starting to affect industrial demand, potentially indicating tough sledding ahead for stock markets globally.

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