What's On Tap: Markets Rise on Earnings Strength

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  • Jobs Ample; Wages and Consumer Confidence Rise
  • Potential Clouds on the Horizon as Car Sales Decline
  • Fed Stands Pat but on Track for Future Raises
  • Fidelity Wins Race to Zero: It’s a Good Time to Be an Investor
  • Looking Ahead to Job Openings, Consumer Credit and Inflation

Just last week, Facebook’s stock plummeted on disappointing earnings, prompting Chicken Littles to wonder if the tech-sector sky was falling. Days later, strong earnings drove Apple’s market value across the $1 trillion threshold. So maybe the jig isn’t up for tech companies or this long, drawn-out bull market. 

Against a backdrop of trade uncertainty, the economy continues along the slow-growth-not-no-growth track and companies continue to boost earnings. With around 400 of the companies in the S&P 500 index having reported second-quarter results, overall earnings have increased 24% compared to 12 months ago. While there may be the occasional fly in the ointment, the fundamentals remain reflective of a solid (if potentially as-good-as-it-gets) state of affairs for the consumer-driven U.S. economy. 

For the year through Thursday, the Dow Jones Industrial Average has returned 3.7%, while the broader S&P 500 has gained 6.9%. The MSCI EAFE index, a measure of developed international stock markets, is down 1.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.37% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.7% for the year.

Jobs Ample; Wages and Consumer Confidence Rise

While the creation of 159,000 new jobs in July was a bit below expectations, employers are adding to their payrolls at a still-impressive pace given that the economy is already operating at full employment—the unemployment rate ticked down to 3.9% last month from 4.0% in June. Revisions to May’s and June’s numbers added another 59,000 jobs to the ranks of the employed. All told this year, employers have created an average of 215,000 new positions every month. Wages increased 2.7% last month from the same time last year. 

With numbers like these, we are not surprised that consumer confidence rose in July to nearly the highest levels in 18 years. Surveys deserve to be taken with a grain of salt, so it is reassuring to see that consumers are backing up their optimism with their wallets and pocketbooks—spending increased 0.4% in June from the previous month.

Potential Clouds on the Horizon as Car Sales Decline

One potential counterpoint to the apparent strength in consumer spending is car sales, which declined in July after a first half of the year that saw vehicles leaving lots at a near-record pace. Are higher gas prices and borrowing costs putting the brakes on the robust auto market? Or are consumers just temporarily taking their foot off the gas? One month’s data doesn’t make a trend so we’ll keep our eyes on the road ahead to see whether any other speed bumps present themselves.

Fed Stands Pat but on Track for Future Raises

As expected, the Federal Reserve closed its two-day meeting Wednesday without changing the all-important fed funds rate from its current 1.75%–2.00% range. The Fed’s accompanying statement noted that “economic activity has been rising at a strong rate,” a linguistic upgrade Fed-watchers pointed out had changed from the June policy statement, which called the economic growth rate “solid.” 

The takeaway: Fed governors remain on track to raise rates by 0.25% at least once more this year—prevailing consensus sees a hike after its next meeting in September—and potentially again in December.

As we mentioned last week, President Trump created a complicated dynamic for Fed officials when he signaled his personal displeasure about potential future rate hikes. Chair Jerome Powell has clearly indicated that economic facts, not political pressure, will drive policy decisions. In our view, rate hikes are a vote of confidence in the economy from its most important watchdogs and the Fed’s measured pace reflects its cautious and thoughtful analysis of what is best for the country.

Fidelity Wins Race to Zero: It’s a Good Time to Be an Investor

Well, Fidelity did it. They took indexing to a new low—a low in prices, that is. The firm is offering total U.S. stock and total foreign stock index funds with zero operating expenses and zero fees. That’s about as low as you can go without handing investors rebates.

While lower fees are a clear win for investors, at this point the fund industry is splitting basis points (one basis point is one-hundredth of one percent, or 0.01%). The fee competition between Vanguard, Fidelity, Charles Schwab and Blackrock’s iShares unit has been intense over the past several years—all of the companies already offer broad market index funds (or ETFs) with expenses under five basis points (0.05%) but Fidelity’s move is a headline grabber at the least and a possible sign of more to come. 

At the end of the day, it’s a good time to be an investor—you can get exposure to stocks across the globe at low-to-no cost. Our hope is that now that we’ve reached zero costs on index funds, companies start competing more on the fees they charge elsewhere.

Finally, in other headline news, while the threshold is somewhat meaningless, we feel compelled to acknowledge Apple becoming the first U.S. company to reach a market capitalization of $1 trillion. It’s a testament to leadership, innovation, perseverance and perhaps a bit of luck. Congratulations to Apple. 

Looking Ahead to Job Openings, Consumer Credit and Inflation

After this week’s bounty of meaningful economic data, next week’s slate provides fewer reads, though we’ll get informative reports on job openings, consumer credit and inflation.

In the weeks where data can’t countermand the headlines, volatility gains the upper hand. 

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, July 27, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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