Alphabet, Chinese Manufacturing Data Weigh on Market as Earnings Season Rolls On

After two sessions of records, it remains to be seen whether the momentum will continue amid mixed earnings and data showing slowing Chinese factory growth.

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6 min read

Key Takeaways

  • Google’s advertising revenue growth slows to around 15%

  • GE, McDonald’s beat on top and bottom lines

  • Fed starts two-day rate-setting meeting today

(Tuesday Market Open) After two sessions of records, it remains to be seen whether the momentum will continue amid mixed earnings and data showing slowing Chinese factory growth.

On the earnings front, shares of Google’s parent Alphabet (GOOG, GOOGL) were down more than 7% in pre-market trading after the internet search giant reported revenue that missed expectations. 

The company has been facing pressure from increased competition in online advertising, and this most recent quarter saw Google’s year-on-year advertising revenue growth slow to around 15% compared to roughly 24% in Q1 2018. 

In events since its last quarterly report, the company was hit with a roughly $1.7 billion antitrust fine from the European Commission over what the commission said was abuse of its dominant position in the market. That’s the third massive fine for the company from the European Union in about three years, totaling about $9.4 billion.

But not all was doom-and-gloom in earnings news. General Electric (GE), McDonald’s (MCD), Merck (MRK), and Pfizer (PFE) all surpassed Wall Street expectations for earnings and revenue. 

They form the latest round of companies to best forecasts during this earnings season, which has been marked by low expectations. The fact that many companies that have reported so far have beaten expectations is one reason the S&P 500 (SPX) and Nasdaq (COMP) have posted record closes for two sessions in a row.

Another leg of support this year has come from a dovish Fed. The central bank starts its two-day policy setting meeting today. While policy makers are widely expected to leave the central bank’s key short-term interest rate unchanged, market participants are likely to try to glean insights into the Fed’s thinking on the economy and interest rate trajectory from comments accompanying the decision. 

One headwind for the market this morning is economic data out of China. The nation’s official April purchasing managers index surprisingly dipped. Meanwhile a private business survey also disappointed. 

The data underscore fears of slowing economic growth in the world’s second-largest economy even as optimism about a potential trade deal between the Asian nation and the United States has been another leg of support for the market, as has recent robust U.S. economic data. 

Data Fuels Records

In a performance akin to Friday’s, the market rose to new records Monday after strong economic data. 

Figures from the Commerce Department showed U.S. personal spending jumped 0.9% in March, ahead of a rise of 0.8% that had been expected in a Briefing.com consensus. But during the same period, core personal consumption expenditures, which are the Fed’s preferred gauge of inflation, came in below a Briefing.com consensus expectation for a 0.1% rise.(See more below.)

The strong reading on consumer spending amid low inflation appeared to encourage investors about the state of the U.S. economy, especially after a surprisingly strong gross domestic product (GDP) figure last week. 

That sentiment appeared to cause some investors and traders to move out of the relative safety of U.S. government debt. Amid the selling, the yields, which move inversely to prices, on the 10-year Treasury note and 30-year Treasury bond rose. 

The rising yields helped the Financials sector rise more than 0.9%, making it the day’s biggest gainer. Banks tend to do better when longer-term yields are greater than shorter-term ones. That way they can earn more money on the interest they charge on loans than they have to pay out on deposits.

On the flip side of the coin, the rising yields helped pressure Real Estate and Utilities. These two sectors are often considered bond proxies because of their history of stable payouts. 

When government bonds, which are considered safer than stocks, rise, that means more competition for these bond proxies, and investors can switch out of them and move into bonds. Also, for Real Estate, higher interest rates can crimp demand by making mortgages more expensive and properties less affordable.

FOMO vs. Uncertainty

Monday offered a pretty classic Investment 101 scenario of investors and traders moving into stocks and out of bonds as they appeared to feel more bullish and perhaps wanted to not get left behind if momentum buying really stepped up.

This FOMO (fear of missing out) trade helped send the SPX and COMP to record intraday and closing highs, and the Dow Jones Industrial Average ($DJI) also closed higher.

But the day’s gains weren’t all that impressive in percentage terms, ranging from a gain of 0.04% for the $DJI to 0.19% for the COMP. It seems that the buying momentum was kept in check by uncertainty surrounding a busy week ahead.

In addition to continued earnings reports and the Fed meeting, U.S.-China trade negotiations that may be nearing a conclusion are continuing, and a widely-anticipated jobs report is scheduled for Friday morning.  

Figure 1: Lackluster: Gold futures dropped Monday. The decline came after the strong consumer spending data apparently dulled gold’s allure as a safe-haven investment. At the same time, a subdued inflation reading also likely pressured the metal, which is often considered a hedge against inflation. Data Source: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Consumers Out Spending: The 0.9% gain in consumer spending in March that the Commerce Department reported Monday was the largest gain in more than nine years, helping to reinforce optimism about the U.S. economy one business day after a bumper GDP report. At the same time, the yearly core PCE price index came in at 1.6%. That’s well under the Fed’s 2% target rate, but probably not low enough to cause worry about a flagging economy, especially with the strong personal spending and GDP figures. So it seems that the Fed’s dovishness could likely remain intact. We may learn more on Wednesday in the language accompanying the Fed’s interest rate decision. 

Rotating vs. Retreating: With today the last trading day of April, some investors may be thinking about the market mantra “sell in May and go away.” But there may be a case for considering revising that slogan to “rotate, don’t retreat, in May.” Perhaps not as catchy, but maybe more lucrative. Since 1946, the S&P 500 has posted an average again of just 1.4% from May through October (the weakest of all 12 rolling six-month periods) while gaining an average 6.7% from November through April, investment research firm CFRA said. Still, that weak period delivered an annualized gain of around 3% (better than a money market fund) and there have been notable summertime surges. CFRA says an option instead of retreating from the market involves rotating into defensive consumer staples and health care stocks during the poorer performing period and into cyclical consumer discretionary, industrial, materials, and tech shares during the more-robust times. “Some sectors have their day in the summertime sun, while others skate along smoothly in winter,” the firm said. 

Gut Check: One way to gain insights about the stock market is to read up on what professional money managers have to say. Another is to gut check your own feelings against those of your peers. Barron’s polls have done both. For instance, only 5% of Barron’s readers think the market is undervalued, compared with 4% of money managers. That left 37% of readers saying they think the market is overvalued and 58% saying it’s fairly valued. Looking forward, 40% of readers are bullish about the market’s 12-month outlook while 49% of the pros are.

Good Trading,
JJ
@TDAJJKinahan 

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Economic calendar for week of April 29. Source: Briefing.com
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Key Takeaways

  • Google’s advertising revenue growth slows to around 15%

  • GE, McDonald’s beat on top and bottom lines

  • Fed starts two-day rate-setting meeting today

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