Investors Sober Up To Economic Reality

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Posted: Jul 10, 2018 10:12 AM
Investors Sober Up To Economic Reality

In addition to adding more value to your portfolio, investors can also keep chasing breakouts, but understand it means more vigilance.

Case in point: market breadth has become decidedly bullish again.

On the NYSE, there were 132 new 52-week highs, against only 14 new lows.

On the NASDAQ, there were 157 new highs against 33 new lows.

Of course, the market remains range-bound, so I would wait for the Dow to close above 25,322 before becoming extra aggressive.

The Search for Value

On Monday, stocks popped big time as the message of the market was intriguing. Defense sectors, utilities and real estate took it on the chin as money rotated back into other parts of the equity market.  What stood out to me is money flowed into areas other than technology, which still finished higher even after Morgan Stanley lowered its rating on Technology (XLK).

Financials enjoyed the best session as the easier play now is to own them ahead of Friday when four big banks post financial results; however, each had great sessions led by JPMorgan Chase (JPM), +3.1%. 

The Search for Value continues in addition to those underperforming Financials. Investors (I think the so-called smart money crowd) are even buying oversold stocks, even those that recently disappointed on earnings enjoyed a solid session.

Industrials led the way with Caterpillar (CAT), United Rentals (URI), and Deere (DE) posting strong sessions.

Consumer Discretionary saw Helen of Troy crush its earnings report, inspiring investors to buy Royal Caribbean (RCL), Chipotle (CMG), and Advanced Auto Parts (AAP).

S&P 500 Index

+0.88%

Communication Services (XLC)

+0.57%

Consumer Discretionary (XLY)

+1.20%

Consumer Staples (XLP)

-0.38%

Energy (XLE)

+1.49%

Financials (XLF)

+2.32%

Health Care (XLV)

+0.73%

Industrials (XLI)

+1.86%

Materials (XLB)

+0.89%

Real Estate (XLRE)

-0.93%

Technology (XLK)

+0.76%

Utilities (XLU)

-3.08%

 

Winning the Trade Battle

Investors are looking beyond the headlines that are predicting a defeat in Trump’s tariff battle to the facts.

If all $34 billion in China’s retaliatory tariffs hit only red states, it would be less than 7% of exports of approximately $500 billion from those states. The $8.5 billion would be a hit of 1.7% to Chinese consumers and largely absorbed. The fact is less than 1% of red state exports are impacted.

Red State Economic Exposure to China Trade

Workers

Goods

Services

Total

Texas

74,700

$15.6

$4.3

$19.9

South Carolina

34,800

$6.3

$.53

$6.8

Florida

31,000

$1.9

$3.4

$5.3

Ohio

30,900

$4.0

$1.2

$5.2

Michigan

29,200

$4.0

$1.1

$5.1

Pennsylvania

26,500

$2.7

$1.7

$4.4

Georgia

23,400

$3.0

$1.3

$4.3

Indiana

26,300

$3.1

$.856

$4.0

Alabama

17,400

$3.6

$.383

$4.0

North Carolina

24,700

$2.6

$1.3

$3.9

Kentucky

15,300

$3.2

$.453

$3.7

Tennessee

20,400

$2.7

$.819

$3.5

Louisiana

23,600

$2.5

$.772

$3.3

Missouri

19,900

$1.7

$.829

$2.5

Iowa

23,600

$2.1

$.332

$2.4

Wisconsin

14,100

$1.9

$.491

$2.4

Arizona

13,400

$1.2

$1.0

$2.2

Nebraska

15,100

$1.4

$.182

$1.6

Kansas

13,300

$1.2

$.278

$1.5

Alaska

6,100

$1.3

$.136

$1.4

Mississippi

9,300

$1.0

$.208

$1.2

Arkansas

8,600

$.910

$.175

$1.1

Utah

6,000

$.704

$.395

$1.1

South Dakota

9,600

$.800

$0.095

$.900

North Dakota

9,000

$.765

$.076

$.830

West Virginia

3,800

$.538

$.171

$700

Idaho

5,200

$.468

$.128

$600

Oklahoma

4,700

$.287

$.381

$.670

Montana

2.600

$.245

$.095

$.340


Corporate PC (Political Correctness) Scale

Yesterday morning, we learned of PC-driven news from two of Americans largest corporations. 

Starbucks announced its goal to eliminate plastic straws from all its stores by 2020, while Costco said it would ditch the Polish hotdog in favor of a fruit bowl and a plant-based protein salad.

More and more corporate decisions are being driven by political correctness and perceived public opinion rather than the bottom line.  Many say doing the right thing will always bolster the bottom line, but what is the “right thing?”

On the PC scale, from reasonable to seriously crazy (cray cray), I’m cool with ditching the plastic straws but not those sausages that I need to chow down on while waiting for my wife to tell me the damage after all our items are rung up.

This morning, the International House of Pancakes returned to its IHOP name as management says “just kidding” about the burger thing.  That move might have been a marketing ploy or might have been intentional and didn’t work.   Companies make moves all the time to move the needle, but I worry when decisions are too embedded in political correctness.

PepsiCo reported mixed results, but the street is impressed with organic growth.

  • Frito Lay +4.0%
  • Europe & Sub Sahara Africa +11%
  • North American beverages -1%