After Hours Summary: SWCH -15% following earnings, VIAB -3% on reports of low CBS bidAfter Hours Gainers:
Companies trading higher in after hours in reaction to guidance: AAP +0.3% (CFO Tom Okray has decided to leave the organization effective April 15; reaffirms 2018 guidance)
Companies trading higher in after hours in reaction to news: X +1.3% (U.S. Steel confirms agreement with state and federal government to resolve matters at Midwest Plant)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: SWCH -14.8%
Companies trading lower in after hours in reaction to news: VIAB -3.4% (Reuters reporting that CBS proposal will be below Viacom's current market valuation), CELG -0.6% (Pres/COO Scott Smith is leaving the company effective immediately)
Closing Market Summary: April Starts With A Big DropU.S. equities registered big losses on Monday, with declining issues outpacing advancing issues four to one at the New York Stock Exchange.
The S&P 500 dropped 58.99 points, or 2.2%, to 2581.88, falling to its lowest level since mid-November and closing below its 200-day simple moving average (2589.85) for the first time since June 2016. The Dow Jones Industrial Average tumbled 458.92 points, or 1.9%, to 23644.19, and the Nasdaq Composite slid 193.76 points, or 2.7%, to 6870.12, rejoining the other two major indices in negative territory for the year. A late rally brought the major averages up from their worst marks of the day -- the S&P 500 was down 3.3% at its session low.
Losses were both broad -- 11 of 11 S&P 500 sectors finished in the red -- and deep -- 8 of 11 groups lost at least 2.0%.
The consumer discretionary sector (-2.8%) was the weakest group, weighed down by a 5.2% decline in shares of Amazon (AMZN 1371.99, 75.35), which dropped after President Trump promised to intervene in the company's relationship with the U.S. Post Office, which he says is losing "a fortune" by delivering Amazon packages. The president's statement was in line with similar comments that he made last week. Meanwhile, the lightly-weighted utilities group (-0.8%) showed relative strength, closing at the top of the leaderboard.
There were a handful of headline catalysts behind Monday's mauling -- including renewed trade concerns following China's decision to follow through with tariffs on 128 products imported from the U.S. and political angst following President Trump's threat to withdraw from NAFTA if Mexico doesn't do more to secure the border -- but technical and psychological factors were also at play; the S&P 500 wiped out its 200-day simple moving average, which has been a key area of technical support, and the continued underperformance of the influential technology sector weighed on investor sentiment.
The technology space declined 2.5%, with Dow component Intel (INTC 48.92, -3.16) showing particular weakness. Intel shares dropped 6.1% in reaction to reports that Apple (AAPL 166.68, -1.10) is planning to use its own processors, instead of Intel chips, in Mac computers starting as early as 2020. Apple outperformed the broader market, losing 0.7%, while fellow mega caps Facebook (FB 155.39, -4.40), Alphabet (GOOG 1006.47, -25.32), and Microsoft (MSFT 88.52, -2.75) lost between 2.5% and 3.0%.
Despite the broad retreat, there were a few names that moved higher on Monday, including Humana (HUM 280.70, +11.87), which rallied 4.4% after a Wall Street Journal report that Walmart (WMT 85.55, -3.42) is in preliminary talks to acquire the health insurance company. Dow component UnitedHealth (UNH 217.20, +3.20) advanced 1.5% in sympathy, but the health care sector settled just a tick above the broader market, finishing with a loss of 2.1%.
Outside of equities, U.S. Treasuries ticked higher, pushing yields lower across the curve; the benchmark 10-yr yield declined one basis point to 2.73% -- its lowest level since early February. Meanwhile, West Texas Intermediate crude futures dropped 2.6% to $63.08 per barrel, gold futures advanced 1.6% to $1348.10/oz, and the CBOE Volatility Index (VIX) jumped 3.5 points, or 17.1%, to 23.37.
Markets were closed in Europe for Easter Monday, while the major stock indices in Asia opened the week on a modestly lower note.
Reviewing Monday's economic data, which was limited to the ISM Index for March and the Construction Spending report for February:
- The ISM Index for March declined to 59.3 from an unrevised reading of 60.8 in February, while the consensus expected a reading of 60.0.
- The key takeaway from the report is that the Prices Index hit its highest level (78.1) since April 2011, with price increases registered across 17 of 18 industry sectors.
- Construction Spending ticked up 0.1% in February, while the consensus expected an increase of 0.5%. The prior month's reading was left at 0.0%.
- The key takeaway from the report is that construction spending growth continues to run at a relatively slow pace, which is an inhibitor of stronger overall growth.
On Tuesday, March auto and truck sales will be released throughout the day.
- Nasdaq Composite: -0.5% YTD
- S&P 500: -3.4% YTD
- Dow Jones Industrial Average: -4.4% YTD
- Russell 2000: -2.8% YTD
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Why Fantastic Earnings Won’t Save This Stock Market
The recent plunge in the stock market–which sent the Dow Jones Industrial Average down 640 points as of 3:10 p.m. on Monday–comes just as companies are about to start reporting first-quarter earnings in less than two weeks. While the market's recent dive seems to indicate that corporate America is in trouble, earnings are actually expected to be excellent.
In fact, according to analyst expectations measured by FactSet, earnings are on track to rise 17.3% in the first quarter, the best performance since the first quarter of 2011, when earnings rose 19.5%. And analysts have only been getting more bullish in recent weeks. As of Dec. 31, 2017, first-quarter earnings were expected to rise just 11.4%.
The stock market is supposed to be a gauge of the health of corporate America. But don't expect healthy earnings to turn things around this time, says Jim Paulsen, chief investment strategist at the Leuthold Group. That's because the market rose last year on expectations of this year's strength, and it's now exhausted those gains.
"Last year was all about rising valuation on no earnings, and this year is all about falling valuations on good earnings," he said in an interview. "The market used up its excess valuation. We had 2% treasuries, 2% real growth and no inflation."
Investors are now more concerned about the threat of inflation and higher interest rates than the pace of earnings growth. Paulsen expects the consumer price index, which hit 2.2% in February, to rise to 3% by the end of the year. Paulsen is worried both about the potential for stagflation–higher inflation with a stagnating economy–and margin erosion–corporations earning less income for each dollar in revenue.
While earnings may be strong in the first quarter, investors have already factored that development into stock prices, he argues.
"Just coming in as good as expected isn't going to do much," he said.
Actually, if earnings fail to hit the high mark, it could cause more selling.
"Wall Street's got gangbuster expectations," he said. "It's a record-setting earnings year and record-setting expectations year. If anything forces you to revise those expectations–even if the net result is a great earnings year but a little less healthy–it could be a really bad thing."
Others have a similar prediction, which doesn't bode well for the market.
"The rally in 2017 more than priced in this earnings growth," wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in an email to Barron's. "We've seen a large P/E multiple-expansion story over the past five years that drove stock prices higher than underlying earnings. All earnings are doing now is catching up."
Tesla’s latest Autopilot crash is just one of many problems it is now dealing with
A fatal crash, production problems and now a recall.
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Tesla
Tesla is starting the second quarter in a defensive crouch:
- Last week, the company revealed that Autopilot, its semi autonomous feature, was engaged during a recent fatal crash in California — its second confirmed Autopilot-related fatality in the U.S.
- Tesla is struggling to meet its production goals for the Model 3, its first-ever mass-market car. Today, CEO Elon Musk reportedly said the company is producing 2,000 Model 3s a week — 500 short of his goal, which has been adjusted twice.
- Last week, Tesla voluntarily recalled 123,000 of its Model S luxury sedans to fix a power-steering issue. That is a lot of cars — close to half of all the vehicles the company has produced.
- Tesla stock is down about 36 percent since its September 2017 peak.
By the company’s own admission, this is a critical time for Tesla. The electric vehicle movement the company arguably popularized is seeing momentum from new and existing players, while self-driving competitors like Alphabet’s Waymo strike deals with automakers to develop vehicles that could rival Tesla’s own offerings. As both an automaker and a self-driving tech company, Tesla still has a lot to prove.
The crash
It’s not yet known whether Autopilot was at fault for 38-year-old Tesla driver Walter Huang’s death, but the simple fact that it was involved has put Tesla’s already fraught future — as well as the self-driving industry — at risk.
On March 23, Huang crashed his Model X into a median on a California highway while the SUV was operating in Autopilot mode. Tesla recovered the logs from the vehicle, and upon analyzing them said that the driver had received “several visual and one audible” cue to take back control of the car.
“The driver had about five seconds and 150 meters of unobstructed view of the concrete divider with the crushed crash attenuator, but the vehicle logs show that no action was taken,” the company wrote in a blog post.
This is the second U.S. crash of a Tesla confirmed to be operating Autopilot that has led to a fatality. The first was in Williston, Fla., in May 2016.
The National Transportation Safety Board, which is also investigating the March 23 crash, found that the first Autopilot-related fatality in 2016 was in part a result of the driver overrelying on Tesla’s semiautonomous software, but that Autopilot operated the way it was supposed to.
The NTSB’s investigation into this crash is ongoing, but the agency said that it was “unhappy” that Tesla revealed the details of the investigation to the public. The NTSB is also looking into reports that the driver previously complained about the performance of the Autopilot software.
Relatives of Huang said that he took his Tesla to the dealership because the software caused the car to swerve toward the highway barrier that his vehicle ultimately crashed into.
A Tesla spokesperson declined to comment on the NTSB’s comments but said they found no record of Huang bringing the vehicle into a dealership to service its Autopilot software.
“We’ve been doing a thorough search of our service records and we cannot find anything suggesting that the customer ever complained to Tesla about the performance of Autopilot,” a Tesla spokesperson said in a statement. “There was a concern raised once about navigation not working correctly, but Autopilot’s performance is unrelated to navigation.”
The fallout
The tragic death comes as both the industry and Tesla brace for the fallout from a recent fatality that involved an Uber-operated semi-autonomous vehicle in Tempe, Ariz.
The NTSB, along with local police and the National Highway Traffic Safety Administration, is also investigating the Uber crash, which resulted in the death of 49-year-old Elaine Herzberg.
Both crashes hit at a larger question many in the industry have: Is semi-autonomous technology safe?
With Uber and Tesla being two of the most prominent brands in the auto and tech industry working on some version of self-driving, consumer trust in the new technology could take a hit.
When it launched Autopilot, Tesla set the benchmark for the most advanced adaptive cruise control available in consumer vehicles. That technology has received multiple updates, and Musk has said he expects the second generation of the software to be capable of a high level of self-driving in about two years.
However, as it exists today, Autopilot is not intended to operate in all circumstances, and in fact is limited to highway driving. In other words, drivers need to be alert and ready to take over at all times — which creates an odd situation that is now clearly prone to failure.
That was also the case in Uber’s crash: The system relies on a trained operator to take over when the technology doesn’t work, though there are some important distinctions that need to be made between the two. For instance, Uber’s technology, which is still in development, is intended to operate on local roads with variables including pedestrians. Tesla’s Autopilot is only supposed to ease the highway-driving task.
Uber’s vehicles, however, are not available to the wider public, and are not being sold direct to consumers. Tesla, which says its technology is also still in beta, is putting its technology in the hands of consumers. Still, if either of the companies’ semiautonomous software is found to be at fault, there could be a resounding impact on consumer trust around self-driving.
“The consequences of the public not using Autopilot, because of an inaccurate belief that it is less safe, would be extremely severe,” Tesla wrote in a blog post. “There are about 1.25 million automotive deaths worldwide. If the current safety level of a Tesla vehicle were to be applied, it would mean about 900,000 lives saved per year.”
Production woes
Tesla’s voluntary recall of 123,000 Model S cars punctuated its ongoing struggles with meeting production goals of its mass-market vehicle, the Model 3.
The Model 3 is a significant barometer by which investors and the industry are measuring Tesla’s capability as an automaker. Can Tesla make the shift away from being just a luxury player to a mass-market carmaker at scale?
By Musk’s own admission, the early years of Tesla — from the Roadster to the Model X — were in service of laying the groundwork for building and selling a mass-market electric vehicle.
But the company has gotten off to a rough start in meeting the many ambitious goals Musk has set for the production of the vehicle.
In July 2017, Musk said that he aimed to produce 5,000 Model 3 vehicles per week by the end of 2017. The company then shifted that rate goal to 5,000 cars per week by the end of March 2018. But then in January, Musk lowered that goal to 2,500.
Today, Tesla is producing 2,000 Model 3s a week, according to emails obtained by Jalopnik.
“If things go as planned today, we will comfortably exceed that number over a seven-day period!” Musk wrote, referring to the current rate of production.
The company’s head of engineering also tried to rally the troops last week, saying the company needed to prove the “haters” wrong, as Bloomberg first reported.
“The world is watching us very closely, to understand one thing: How many Model 3s can Tesla build in a week?” Doug Field wrote. “This is a critical moment in Tesla’s history, and there are a number of reasons it’s so important. You should pick the one that hits you in the gut and makes you want to win.”