Closing Market Summary: High-Growth Stocks Help Wall Street Rally Past Disappointing EarningsThe S&P 500 gained 1.1% on Tuesday, as a shift to high-growth stocks helped the market rally past several earnings disappointments. The ability of the market to rally on bad news fed into a belief that the bad news was priced in already during the December rout, which in turn fueled hope that bargain-hunting efforts will keep the 2019 rally try going.
The Dow Jones Industrial Average gained 0.7%, the Nasdaq Composite gained 1.7%, and the Russell 2000 gained 0.9%.
The S&P 500 health care (+1.7%), communication services (+1.7%), and information technology (+1.5%) sectors led the advance. Conversely, the industrials (-0.3%) and material (-0.7%) sectors underperformed.
Stocks jumped out of the gate despite early weakness from the heavily-weighted financial sector (+0.8%).
Weaker-than-expected (but not weak) earnings reports from JPMorgan Chase (JPM 101.68, +0.74, +0.7%) and Wells Fargo (WFC 47.67, -0.75, -1.6%) provided an early justification to sell the banks. JPMorgan missed both top and bottom line estimates, but net income increased 67%, earnings per share increased 85%, and net revenue growth increased 4%. Wells Fargo for its part missed top line estimates but beat earnings estimates.
On a related note, Delta Air Lines (DAL 47.83, +0.08, +0.2%) overcame a Q1 earnings warning.
Dow component UnitedHealth (UNH 256.87, +8.81, +3.6%) outperformed after it beat earnings estimates and helped drive the leadership of the health care sector.
The preference for high-growth tech stocks kept the broader market afloat despite the earnings disappointments. The outperformance of the growth stocks on Tuesday could be rationalized in part as an effort to invest in companies with stronger growth prospects amid a slowing growth environment.
Netflix (NFLX 354.64, +21.70, +6.5%), for instance, remained in growth mode with reports indicating it will raise its U.S. subscription prices to finance its original content and heavy debt load.
Notably, JPMorgan and the financial sector eventually turned it around in late morning trading. A pivot from negative territory into positive territory helped lift the S&P 500 to session highs (+1.2%) and above the closely-watched 2600 level, which approximates the low end of the 2018 trading range.
The broader market succumbed to some knee-jerk selling shortly after 2:00 p.m. ET when it was learned the British Parliament voted against PM Theresa May's Brexit deal, as expected. The outcome of the vote is a huge blow to Ms. May's leadership but it didn't matter for long for the U.S. market, as stocks would close near session highs.
The bond market was quiet despite the gains in the stock market. The 2-yr yield and 10-yr yield were unchanged at 2.52% and 2.71%. The U.S. Dollar Index rose 0.3% to 95.92. WTI crude rose 2.6% to $51.92/bbl.
Reviewing Tuesday's economic data, which included the Producer Price Index for December and the Empire State Manufacturing Survey for January:
- The Producer Price Index for final demand declined 0.2% (consensus -0.1%) while the index for final demand, less food and energy, declined 0.1% (consensus +0.2%). The monthly changes left the index for final demand up 2.5% year-over-year, unchanged from November, and the index for final demand, less food and energy, up 2.7%, also unchanged from November.
- The key takeaway from this report is that producer price inflation is moderating, which will suggest in the market's mind that consumer price inflation is going to as well.
- The Empire State Manufacturing Survey General Business Conditions Index fell to 3.9 in January (consensus 12.2) from 11.5 in December, led by a deceleration in new orders, inventories, and the number of employees. The six-month outlook also dropped, falling to 17.8 from 30.6.
- The key takeaway from the report is that it fits the view that there is a slowdown in manufacturing activity, which has piqued concerns about a broader slowdown in economic activity unfolding in 2019.
Looking ahead, investors will receive several economic reports on Wednesday: the NAHB Housing Market Index for January, the weekly MBA Mortgage Applications Index, Import and Export Prices for December, the Fed's Beige Book for January, and Net Long-Term TIC Flow for November.
- Russell 2000 +7.2% YTD
- Nasdaq Composite +5.9% YTD
- S&P 500 +4.1% YTD
- Dow Jones Industrial Average +3.2% YTD
Don’t blame Brexit for UK economic wobbles, says ‘Mr Copper’
Michael Farmer, metals trader and prominent Leaver, points finger at China
The UK’s looming exit from the EU is being unfairly blamed for an economic slowdown, according to Michael Farmer, one of the world’s most influential commodity hedge fund traders.
Lord Farmer, a former Treasurer of the Conservative Party and prominent Brexiter who is known as “Mr Copper” for his sway over commodity markets, believes the decision to leave the EU has so far had little effect on the UK economy. He argues instead that global factors, such as the slowdown in China and a lack of other growth drivers, have had a stronger influence.
“The world’s economy is wobbling at the moment. Certainly in our role as a trader and seeing flows, and touching on demand for base metals [we see that],” he said in an interview with the Financial Times.
“There are enough signs of the world’s economy slowing down, stagnating a bit, possibly tipping over,” he said, adding that if there was a significant UK slowdown “I’m sure all the politicians here will blame Brexit”.
Lord Farmer is best known for founding the Red Kite metals hedge fund in 2005, which for years was one of the largest traders in physical copper. His comments on the UK economy stand in contrast to those of most economists. A survey by the FT last June of how much Brexit had dragged down the UK showed estimates ranging from around 1 per cent to 2 per cent of GDP.
Lord Farmer, who donated £300,000 to the Vote Leave campaign in 2016, said leaving the EU without a deal and instead using World Trade Organization terms could lead to “short-term confusion” and “teething problems” for the UK. However, it could potentially end up boosting the global economy, he added.
“I would argue, and I know that this may be a bit radical, that Britain leaving the EU would actually break up what is at the moment a rather comfortable trading relationship,” he said. “At the moment the world needs competition to be encouraged . . . We’re becoming sedentary in our economic blocs, if you like. I think Britain could be an agent for that.”
His comments come ahead of Tuesday evening’s crucial parliamentary vote on the deal negotiated by Prime Minister Theresa May with the EU, which is widely expected to be rejected by MPs.
What would happen next is not clear, with the UK scheduled to exit the EU in March but with a majority of MPs opposed to an exit without a deal.
Lord Farmer, who made large profits during the bull run in commodities more than a decade ago, is the latest Brexit-supporting financier to have spoken out ahead of the vote.
Last week hedge fund manager Crispin Odey told the FT that markets had decided Brexit would not happen and that, with a majority of MPs supporting remaining in the EU, “it’s easy to see . . . that you’re going to get a Remain result”. Meanwhile, Peter Hargreaves, billionaire founder of fund supermarket Hargreaves Lansdown, told Reuters he was “totally in despair” and believed Brexit would not happen.
Lord Farmer said the two years since the Brexit referendum had been “altogether quite disappointing” and that he did not know what would happen next.
“I am right this minute in time feeling despondent, but I pray,” he said.
Holding a second referendum would do “huge damage to trust in government, [and] trust in politicians”, he added. “There would forever be that recognition that democracy ain’t what it seems to be.”