U.S. equities finished lower on Monday, suffering their worst decline in a month, as investors braced for a heavy week of catalysts. These include the peak of the second-quarter earnings season with heavyweights like Apple Inc. (NASDAQ:AAPL) reporting, eagerly anticipated decisions from the Federal Reserve and the Bank of Japan and the sure-to-be-contentious Democratic Convention.
In the end, the Dow Jones Industrial Average lost 0.4%, the S&P 500 Index lost 0.3%, the Nasdaq Composite lost 0.1% and the Russell 2000 ended the day 0.3% lower than it began it. Elsewhere, Treasury bonds were generally lower, the dollar lagged, gold gained 0.3% and crude oil hit a three-month low declining 2.4%.
Consumer discretionary stocks led the way with a 0.1% gain. Pandora Media Inc (NYSE:P) jumped 5.9% after Bloomberg reported the company is pursuing strategic options. Sprint Corp (NYSE:S) surged 27.7% on a quarterly operating earnings beat of around 5%, driven by strong cost controls and better-than-expected subscribers additions.
Energy stocks led the decliners, down nearly 2%. Deere & Company (NYSE:DE) dropped 2.8% on a downgrade from Piper Jaffray on the risks of a large expected U.S. corn crop, which could pressure farmer profitability and weaken demand for new, expensive tractors.
AAPL lost 1.3%, capping a three-day losing streak, ahead of earnings on Tuesday after the close. Analysts are looking for earnings of $1.39 per share (vs. $1.85 last year) on $42.1 billion in revenue — marking the second consecutive quarter of falling profitability as iPhone demand stalls along with tepid iPad and Apple Watch sales.
The day marked the third straight drop for energy prices, following last week’s 4% loss. Bloated inventories, especially for refined products, remain in focus. As a result, refiner profit margins are under pressure, which will encourage a slowdown in cracking and push the inventory backlog up the supply chain into raw crude — which remains badly oversupplied.
Investors are looking ahead to the end of the summer driving season in August and September, and are bracing for a breakdown in crude oil and a return of the “cheap oil, bad earnings” dynamic that’s largely disappeared since those OPEC-Russia supply freeze rumors (which ultimately came to not) first started back in February.
The big M&A news was that Verizon Communications Inc. (NYSE:VZ) would purchase the core operations of Yahoo! Inc. (NASDAQ:YHOO) for $4.8 billion in cash — a far cry from the $45 billion Microsoft Corporation (NASDAQ:MSFT) offer the company rejected back in 2008. Sometimes, playing hard to get isn’t so smart.
Stepping back, aside from AAPL and big oil earnings later this week, all eyes are on the Fed policy announcement on Wednesday and the BoJ announcement on Thursday morning, which has almost been exclusively driven on hopes of a “helicopter money” drop out of Tokyo since the Brexit — encouraged by the recent visit of former Fed chairman Ben Bernanke to the land of the rising sun to recommend more aggressive action.
Stocks have stalled over the last two weeks as expectations have died down. The head of the BoJ said there was no need and no possibility of an aggressive fiscal stimulus funded by direct money printing.
Expectations are extremely high for the BoJ decision after recent disappointments with decisions to cut rates into negative territory by the BoJ and the European Central Banks. Attention is turning to a possible fiscal stimulus out of Tokyo with numbers of around $240 billion floating around. But analysts note these numbers are being inflated by loan and loan guarantees; new “fresh water” stimulus could only amount to as little as $30 billion.
There was an attempt late in the U.S. trading session to juice excitement on a Nikkei headline that the stimulus could be as much as $60 billion. But stocks were unimpressed.
As for the Fed, Michael Hanson at Bank of America Merrill Lynch expects officials to note ongoing strength in the labor market and financial market resilience to the Brexit vote. He expects the door to be left open for a possible September rate hike, but doesn’t expect a policy tightening move until December — removing any potential impact on the upcoming presidential election.
Any stock market pullback from the historic post-Brexit rebound will be driven by commodities and currencies in a self-reinforcing dynamic. Recent strength in the U.S. dollar (on safe haven inflows) not only weighs on corporate earnings (FactSet estimates the corporate earnings recession will now stretch into Q3) but crude oil. And lower oil prices further weighs on earnings.
In response, I continue to recommend a focus on bets against the energy sector with the ProShares UltraShort Crude Oil (NYSEARCA:UCO) up 5.4% for Edge subscribers today while the Aug $41 ConocoPhilips (NYSE:COP) puts recommended to Edge Pro subscribers are up nearly 50% since recommended on July 21.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
