Missiles Fly And Geopolitical Stress Eases, Turning Focus To Banks, Netflix

Bank of America and Netflix earnings are in focus today as volatility eased after the weekend missile strikes vs. Syria. Geopolitics could still play a role.

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(Monday Market Open) Missiles flashed over the Syrian skies late Friday after a week of questions about whether the U.S. and its allies might respond to violence against civilians in the country. By early Monday, it looked like Wall Street had shrugged off the attacks and was ready to move higher, at least judging from pre-market trading. An earnings beat from Bank of America (BAC) might lend support, and Netflix (NFLX) reports after the close.

At this point, no more missile strikes seem imminent and reaction to the strikes seemed uneventful, so perhaps things might calm down now that there’s a little less mystery. Volatility eased early Monday. One element to check is the oil market, which touched new three-year highs Friday before the allied missile attacks. If oil prices retreat (as they did early Monday, falling 1%),  it could be a sign that there’s less market worry about Middle East tensions. Still, it’s a little early to get out the party streamers, as these sorts of things can take time to play out.

Bank Earnings: Half Way Home

Earnings season got off to a less than auspicious start Friday, at least as far as market reaction is concerned. Though all three of the big banks that reported Friday exceeded Wall Street analysts’ expectations, shares of Wells Fargo (WFC), Citigroup (C) and JP Morgan (JPM) stumbled as investors seemed to focus on some of the less-than-perfect elements in each company’s data rather than the headline numbers.

This could set the tone for the entire earnings season, so long-term investors and people trading day-to-day need to remember more bumps might be ahead. We’re seeing overall positive numbers getting met with skepticism as the market’s psychology has changed from last year. It looks like if you don’t knock the cover off the ball, you’re going to get one under the chin and hit the dirt, to borrow a baseball analogy. A year ago, it’s likely that earnings like the ones seen Friday would have been greeted as buying opportunity.

Another interesting development, perhaps positive, is that none of the banks’ leaders talked at all about tariffs in their post-report conference calls. Analysts didn’t even ask. The takeaway from this silence might be that none of the executives are that worried about a possible trade war.

Several more big bank earnings loom early this week with Bank of America (BAC) today, Goldman Sachs (GS) tomorrow, and Morgan Stanley (MS) on Wednesday. GS is expected to post adjusted EPS of $5.67, compared to $5.15 in the prior-year quarter, on revenue of $8.9 billion, according to third-party consensus estimates. MS is expected to report adjusted EPS of $1.28, up from $0.94 in the prior-year quarter, on revenue of $10.4 billion.

Considerations aside from the raw numbers include changing leadership at GS and how the high-net worth business is doing at MS. There had been a lot of optimism about trading volume potentially helping GS, but that got dampened a bit based in part on some disappointing trading outcomes seen in Friday’s big bank reports for Q1.

It looks like the market might be hard on any numbers that come in less than ideal. The risk this earnings season is of companies not getting rewarded for beating expectations, but getting hit for any misses. That’s why it’s particularly important to know the underlying businesses at any major companies where you’re a shareholder. The headline numbers aren’t going to necessarily tell the whole story.

Bank of America got the week’s earnings calendar underway with a beat. Earnings per share came in at $0.62, vs. Wall Street analysts’ consensus of $0.58. Revenue of $23.1 billion compared with the analyst consensus of $22.9 billion. The company said loans in its business segment grew 5%, a little under expectations. While the new tax law helped BAC’s earnings, trading in its fixed income segment came in below expectations, reinforcing a trend seen last week from Citigroup. Still, these factors are kind of nitpicky in what generally was a pretty good report. Shares moved up a bit in pre-market action.

More Earnings, Fed Speeches in Spotlight

Other earnings loom early this week outside of the financial sector, with the first of the so-called “FAANG” stocks stepping up to the plate this afternoon as Netflix (NFLX) reports. Healthcare also gets into the mix with Johnson & Johnson (JNJ) reporting Tuesday and Abbott (ABT) reporting Wednesday. The things to watch with NFLX, as always, are user growth and international user growth. Also, see if NFLX executives discuss last week’s deal with Comcast (CMCSA).

Data-wise, retail sales today and housing starts tomorrow are among the bigger numbers to watch. Retail sales for March rose 0.6%, above Wall Street’s expectations and the most since November. The Fed’s Beige Book is due Wednesday. Speaking of the Fed, a number of Fed speeches are peppered throughout the coming week. That could keep investors on their toes. Atlanta Fed President Raphael Bostic kicks things off with a speech today.

From a technical perspective, the S&P 500 (SPX) was once again unable to hold above key resistance at 2670 last week, though it has remained above support near the 200-day moving average which now sits just under 2600. Those two levels have been the indice’s range for a while now, so the question this week is whether the SPX might push through 2670 convincingly. Such a move might give us a better sense of direction. Volatility did die down a bit at the end of last week, with the VIX falling below 20. It continued to decline early Monday.

Crude

FIGURE 1: OIL UNTETHERED

Sometimes crude oil (candlestick) trades in sync with the S&P 500 Index (SPX, purple line). The last month hasn’t been one of those times. Oil is at three-year highs due in part to geopolitical turbulence, even while stocks have pulled back, partly out of concern over that same turbulence.  Data source: CME Group, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Energy Flying High But Watch Out: Shares of many energy companies climbed last week as oil reached three-year highs amid geopolitical tensions in the Middle East. This energy sector strength actually began a while ago, with the sector outperforming the broader market over the last month as oil prices keep climbing. Though much of energy’s strength seems driven by continued geopolitical concerns, it also could be seen as a sign of strong demand triggered by growing economies. One thing to worry about, perhaps, is that gas prices in the U.S. are now approaching $3 a gallon in many regions, territory that in the past has sometimes contributed to a pullback in consumer spending for other things. Another thing to keep in mind is that U.S. crude stocks, while still high, are down more than 100 million barrels from year-ago levels going into peak demand season. That could continue to underpin oil prices even if geopolitical concerns fade.

Trade Fears Hit Main Street: Americans seem fearful that a potential trade war with China could hurt the economy, according to Friday’s preliminary consumer sentiment for April from the University of Michigan. The headline consumer sentiment figure came in at 97.8, down from 101.4 in March, and sentiment fell across all age and income groups across the country, the university said in a press release. “Recent losses… were mainly due to concerns about the potential impact of Trump's trade policies on the domestic economy,” the press release stated. It added that “Spontaneous references to trade policy were made by 29% of all consumers in early April, with nearly all the mentions negative.” Still, the report said consumer confidence remains “relatively high” despite the trade fears. Today’s retail sales report might cast even more light on how consumers feel now about the economy.

No Dry Humor Here: No matter where you are in the investing spectrum, you likely follow economic indicators. We routinely highlight the big ones: unemployment, CPI and other inflation measures, consumer sentiment, auto and home sales, to name a few. It's worth considering, however, at least an occasional look beyond the common numbers. Here's one that may be pointing to a less than rosy outlook on trade: the Baltic Dry Index. This index, which tracks shipping rates for much of the big stuff—grain, iron ore, coal and other raw materials—is seen by many as a proxy for global supply and demand, and thus a leading indicator of future economic growth. Though it's 4% off its lows from last week, the Baltic Dry Index is off 27% year-to-date to 979, according to Bloomberg. Sound ominous? Maybe. But it's important to note this tends to be a volatile index; in the last five years it's been as high as 2300 and as low as 300.

Good Trading,
JJ
@TDAJJKinahan

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