Stocks Exit Sick Bay as IBM, NFLX Results Seem to be the Right Dose of Chicken Soup

Stocks entered the recovery room Wednesday morning after yesterday’s virus-related weakness. Strong earnings from IBM and improving international subscriber numbers from Netflix seem to be helping.

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5 min read
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Key Takeaways

  • Virus worries recede as China appears to have issue under control

  • IBM earnings beat expectations, while Netflix international subscriber growth firm
  • Texas Instruments puts the chip sector in focus later today, with Intel tomorrow

(Wednesday Market Open) It looks like the market is shaking off that little cold it caught yesterday.

Solid earnings from IBM (IBM) and healthy international subscriber gains for Netflix (NFLX) might have been the warm bowl of chicken soup stocks needed to recover, judging from pre-market gains in futures trading. Also, people seem convinced that China’s government has the new coronavirus in check. 

Even some travel stocks—which got laid up pretty badly yesterday on fears that the new coronavirus might clip travel demand ahead of the Asian Lunar New Year holiday—popped back a bit before the opening bell. Fears that people could decide to just stay home helped plaster airline, resort, and casino stocks all around the world Tuesday, and raised concerns about possible longer-term impact if the virus proves hard to fight or spreads overseas in a big way.

Things turned around after yesterday’s close, helped by NFLX and IBM. While U.S./Canada subscribership growth for NFLX didn’t meet Wall Street’s estimates, it looks like people are focused on a better-than-expected international growth number. It came in at 8.3 million, or more than 1 million above analyst’s projections. Shares rose nearly 2% in pre-market trading after initially moving lower.

Meanwhile, Big Blue (IBM) got things rolling ahead of the open with 4% gains. The company beat Wall Street’s earnings and revenue projections, and talked about “accelerated cloud growth.” It also doesn’t hurt to see IBM’s press release talking about “sustained revenue growth,” something the company hasn’t had in recent years. It looks like IBM’s Red Hat acquisition is starting to pay  dividends, which is good to see when you consider how much the company has struggled recently.

Speaking of struggles, Johnson & Johnson (JNJ) is having some this morning. Shares fell more than 1% in pre-market trading after the company missed Wall Street’s estimate on revenue. The medical device unit saw sales fall from a year earlier.

The big earnings report to consider watching later today is Texas Instruments (TXN) for a look at the chip sector.

Earnings so far have been good, not great, overall. It’s still early, but we’ll have a better idea after this week is over. It’s good to see a tech company like IBM do well, because it’s in Technology but not in the FAANGs or social media.

No Quarantine for U.S. Markets

Market damage seems relatively contained so far from yesterday’s flu scare. The Dow Jones Industrial Average ($DJI) took the worst punch of any big large-cap index, but that mainly reflected another piece of bad news from Boeing (BA). More on that below.

Small-caps, which you’d think would get a break thanks to less Asian market exposure, actually did worse than large-caps. The SPX inched lower, but that’s not too surprising after the rapid rally it’s enjoyed the last three months. Maybe the virus gave some people an excuse to take profit, Briefing.com noted.

The Dow Jones Transportation Average ($DJT) was the big loser Tuesday, dropping nearly 2%. Fear yesterday mostly affected the cyclical sectors, and also seemed to have people embracing bonds. The 10-year yield stepped back seven basis points to 1.77%, well below recent highs near 1.9%. Yields just can’t get going so far this year. Even with the stock futures gains this morning, the 10-year is stuck at 1.77%. Gold, another defensive asset, hasn’t retreated much from its recent seven-year highs, either. 

As an investor, it’s important not to panic or over-think the virus. This isn’t a medical column, but history shows these kinds of things tend to make a bunch of headlines and then blow over pretty quickly. That’s not a prediction, because every case is different. Maybe keep in mind what the New York Times said Tuesday about there being “no evidence that the new virus is readily spread by humans.”

Also, keep in mind that travel stocks can be pretty volatile even in normal times based on macroeconomic ups and downs and the price of fuel. Consider this another reminder that if you don’t like turbulence, maybe it’s best to stay out of the cockpit.

Any pressure on the travel industry tends to boomerang around the economy, and that can include the crude market. It looked for a while there last week like U.S. crude might test $60 a barrel again, but it didn’t happen. Now it’s down below $58, near six-week lows, after the International Energy Agency predicted a surplus of supply in the first half of the year. That’s probably not the best news for Energy stocks.

BA didn’t need a virus to catch the flu Tuesday. The company said 737 MAX service won’t start again until June or July, and that  might have been all it took to send the struggling stock down another 3% to a 13-month low. The softness in BA also appeared to hurt shares of companies that manufacture aircraft components, like Spirit Aerosystems (SPR) and General Electric (GE). Also, this could remain a drag on airline stocks looking ahead, because it means summer travel season will be affected by the missing planes. 

The BA troubles probably hurt suppliers more than airlines. The airlines have been making plans around it.

One sector that didn’t end up on the sick list Tuesday was semiconductors. Though the chipmakers generally declined, they mostly got a reprieve from heavy selling as investors awaited earnings later today from TXN and tomorrow from Intel (INTC). Speaking of INTC, shares rose Tuesday on an analyst upgrade. 

Chipmakers have been sprinting ahead of the broader indices as fears of a trade war recede, and fundamentals in general seem to be improving for the industry. This is the week where we start to hear details.

On the data calendar today we get existing home sales for December. It’s really the only major piece of economic data this week.

CHART OF THE DAY:  IS SOMETHING BREWING IN BONDS? From the daily chart of the 30-year Treasury bond futures (candlestick), it looks like bonds are trying real hard to break out above the downward sloping trendline (yellow line). But as it breaks out it seems to be flirting with a recent resistance level (blue line). Does that mean bonds are attracting attention even though stocks have been rallying? Data Source: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Earnings with a Twist: We’re off to a decent on earnings, with 75% of companies coming in above expectations, according to FactSet. However, FactSet still expects a 2.1% drop in S&P 500 earnings for Q4, with companies facing tough comparisons to the year-ago Q4 when profit margins busted at the seams. Also, some of the firms reporting last week discussed inflation worries, including rising input and employee costs. That’s potentially something to keep an eye on as earnings roll along. Another thing to think about is price-to-earnings (P/E) ratio. It’s near 19 for the SPX vs. forward earnings, way above historic averages. Financial sector earnings last week showed the “E” starting to gain ground, but the “P” keeps going up so fast it’s hard for the “E” to catch.

Technical Tightrope: The prolonged SPX rally since October took a day off Tuesday, but some chart watchers remain worried that things might have climbed too far, too fast. They point to the SPX’s premium to longer-term moving averages. At the end of last week, Barron’s noted, the SPX’s 10-day moving average—which measures short-term performance—was more than 9.25% above the longer-term 200-day moving average. That gap has only been this wide near all-time highs 16 times since 1995, Barron’s said, and often precedes quick sell-offs. Also, the SPX’s 20-day moving average had risen for 61 consecutive days through Friday, and the 200-day moving average had risen 148 days in a row.

Should this worry anyone? Well, past isn’t prologue, and markets like this historically didn’t tend to suffer long losing stretches immediately afterward, just short downturns. Still, the extended rally could be stretching things somewhere else, like your portfolio, for instance. Maybe now is a good time to check your allocations and make sure the percentage devoted to stocks hasn’t exceeded what you planned. It’s easy to get carried away at times like these, but it’s often a good idea to keep some powder dry in case prices pull back.

Home Cooking: We talk a lot here about a lack of affordable homes dragging the housing market. While New York City isn’t your typical U.S. real estate area, it illustrates things in a pretty dramatic way. Many of the fancy new condo skyscrapers sprouting around Midtown are only half full, The Atlantic pointed out last week, while middle class buyers in the Big Apple are having trouble finding anything they can afford. New York City is losing 300 people a day, the magazine said, even as the average condo cost tripled over the last decade. A lot of those luxury buildings were meant to house wealthy foreigners, but the crude oil plunge a few years ago and a slowing Chinese economy got in the way. Few probably feel sorry for wealthy people who can’t afford a sixth home, but the New York housing market does reflect the overall U.S. market in some ways. Homes around the country are steadily getting larger, more fancy, and more expensive. Young adults today are one-third less likely to own a home at this point in their lives than previous generations, and that might be something with longer-term economic ramifications.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Virus worries recede as China appears to have issue under control

  • IBM earnings beat expectations, while Netflix international subscriber growth firm
  • Texas Instruments puts the chip sector in focus later today, with Intel tomorrow

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