The big story Friday is tonight’s meeting between Presidents Trump and Xi. Expectations are high going in based on positive rhetoric, but investors might want to consider tempering their enthusiasm.
Figure 1: SMALL CAP, BIG RALLY. After lagging the S&P 500 Index (SPX - purple line) for most of the past few weeks, the Russell 2000 Index (RUT - candlestick) closed the gap considerably on Thursday, rising 1.9% on a day when the broader-based index edged higher. Data sources: S&P Dow Jones Indices, FTSE Russell Indexes. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Anyone Hungry? Two disappointing earnings reports this week from food companies General Mills (GIS) and ConAgra (CAG) not only continue to weigh on the Consumer Staples sector, but also highlight how people are making their dining choices. Staples stocks are up around 14% year-to-date, only slightly behind the 16% rise in the S&P 500 Index (SPX). Over the last month, though, Staples are up less than 1%, compared with 3% gains for SPX. This might partly reflect some investors diving back into “cyclicals” like Technology and Industrials recently amid hopes for progress on the trade picture, and also a little profit-taking after the “defensive” sectors made big gains. However, these earnings could raise questions about fundamentals for major food manufacturers whose stocks are shelved in the Staples aisle.
You never want to make too much out of a single quarter’s results, and some analysts say CAG is well positioned from a brand standpoint. However, it’s hard not to notice that the two companies whose earnings failed to satisfy investors’ appetites this week were both packaged-food makers at a time when many consumers, especially younger people, appear to be veering toward fresh food and making their own meals. Even CAG admitted that some of its weakness is due to aging brands. As The Wall Street Journal pointed out, constant innovation is necessary just to maintain sales in today’s food market, and the frozen foods section is very competitive. CAG highlighted its plant-based meat product in an investor presentation, the WSJ noted, perhaps a sign that the company recognizes the need to stay out in front.
I’ll Have Something Small: Small-caps led the charge on Wall Street Thursday, with the Russell 2000 (RUT) up 1.9%. This could reflect some people putting money into companies with less international trade exposure ahead of the G-20. Last year, small-caps outpaced large caps for a while as trade fears brewed. Smaller companies are often have a bigger percentage of domestic sales than the large-caps. That said, the SPX has outperformed RUT over the last month, and semiconductors—which probably have more China exposure than most sectors—also gained ground Thursday.
GDP Growth Seen Slowing After Strong Q1: Even as the Q1 gross domestic product ended up at 3.1% according to the government’s final estimate, the Atlanta Fed’s GDP now forecaster came down a notch this week to 1.9% for the current quarter. That’s down from its previous 2% estimate, and reflects this week’s durable goods orders and advance goods trade balance. The GDP now is actually above the 1.6% average prediction of analysts surveyed by The Wall Street Journal. If Atlanta Fed’s prediction proves right, Q2 would represent the weakest U.S. quarterly GDP growth since Q1 2017 more than two years ago. The last quarter worse than the WSJ economists' 1.6% projection was Q1 2016.
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Economic calendar for week of June 24. Source: Briefing.com
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