Finally, some positivity.
We don’t want to look a gift horse in the mouth, but Friday’s surprise retail report sent stocks skyrocketing.
While the gains weren’t quite enough to overcome the losses following Wednesday’s CPI inflation report, we think the net result is a positive shift in sentiment.
That’s exactly the good news we need.
Last week, we said that the big bank reports from JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Citigroup Inc. (C), and Wells Fargo & Co. (WFC) would start to set the tone for earnings season as it ramps up this week. Our outlook was mildly positive because we felt that expectations had been set too low…
We were at least half right.
The results from the investment banks (JPM & MS) were bad; the decline in demand for mortgages and other loans was worse that expected, and both companies took a big hit from lower merger and acquisition activity.
However, the reports from C and WFC were stellar – which says a lot, considering the internal problems Wells Fargo’s management is still cleaning up. The bottom line is that these banks were able to finally harvest some benefit from rising interest rates.
Banks make money by loaning at a higher interest rate than they borrow or pay to depositors; this difference is called the yield spread. It is easier for the yield spread to widen (and bank profits to rise) when interest rates are rising.
But it wasn’t just the yield spread that helped banks, and the rest of the market, to rise on Friday. Almost all categories of revenue and profits were better than expected, which tells us a lot about demand from businesses and consumers. Citigroup’s stock was up over 13% alone on Friday, and we expect the other bank reports this week to look good as well.
It may sound odd to put so much emphasis on the banking sector, but it is usually one of the first groups to start turning the corner when market conditions improve. We don’t want to go so far as to say this is the bottom for the market, but if this week’s bank reports look similar, we expect the major indexes to avoid any big drops in the short-term.
Looking ahead, this is still a big week for earnings. There are also a couple of housing reports due on Wednesday and Thursday that could have a minor impact on the markets.
- Monday, Jul. 18
Bank of America, Goldman Sachs, and Charles Schwab reported earnings before the market opened. The BAC report missed expectations, but interest income was up enough that it may compensate for rising costs. GS and SCHW both exceeded estimates. Overall, this is a good sign for stocks.
- Tuesday, Jul. 19
There is also a slew of consumer stocks due to start reporting this week. If the outlook is good, it could further strengthen support and send the retail and tech sectors higher.
- Wednesday, Jul. 20
It may not be the best economic bellwether, but Tesla Inc. (TSLA) represents an outsized portion of big stock indexes like the S&P 500, so their report could push the market around on Wednesday. This is the report we are worried about this week. Auto loans are down significantly, so the potential for TSLA to disappoint is high. The company will report earnings after the market closes on Wednesday, so we won’t get the full market reaction until Thursday morning.
This Market Collapse Isn’t What You Think
Well, it’s finally happening.
For two years, he’s been warning people about a huge economic event, one that he believes will drastically widen the wealth gap and send thousands of stocks plummeting in value.
Today, that event is underway.
And we’re only in the early days.
Over the next couple of months, I expect that certain stocks will continue to plummet.
And if folks don’t take action, they’re going to take heavier losses than they have already.
What to Do
Large-cap value tech stocks and retail stocks still look good, but we think continuing an emphasis on consumer staples within that sector makes sense. Although financial companies were the highlight last week, we think volatility in that sector before the Fed makes another interest rate decision next week is too high for new entries.
The bottom line: Last week’s bank reports were a mixed bag, but the good reports were so surprising, investors sent the market nearly back to breakeven on Friday. So far, this week’s bank reports are also looking good (relative to expectations), so our outlook for the next few weeks is improving.
Stay tuned.
Sincerely,
John Jagerson and Wade Hansen
Editors, Trading Opportunities
