THE GENERAL MARKET
Wall Street Remains Red Hot
The U.S. stock market has come out of the gates smoking in 2018 after a stellar 2017. For the third week in a row, U.S. stocks were higher. The market is euphoric, posting new milestones this week. In just seven trading days, the Dow Jones Industrial Average blasted from 25,000 to 26,000.
In the past two weeks, the eight-year bull market looks as strong as ever. Observers are wondering if something could possibly go wrong in the red-hot stock market. Historically, stock market booms don’t last and inevitably, the risks that are lurking beneath the surface could cause the market to unravel.
Investors remain upbeat and are betting the enthusiasm will continue. There is a resurgence of the U.S. economy and renewed strength overseas will again fuel the market. What can force the market to adjust is an unexpected slowdown in growth due to a natural disaster, terrorism or geopolitical events.
New Market Milestones
Main Benchmarks as of 01/19/2018
Wall Street started the week slowly but regained solid footing on Wednesday as the Dow Jones climbed 300 points to close past 26,000 for the first time. The S&P 500 and Nasdaq forged ahead as well. The blue-chip index closed at 26,115.65 which is its best percentage gain since November.
At the end of Friday’s session, stocks closed higher despite a possible government shutdown. The S&P 500 posted another record high of 2,810.30, , with consumer staples as the best-performing sector. The Nasdaq Composite Index also finished the week at 7,336.38, which is also a record.
The S&P 500 hasn’t suffered a pullback of 5%, either in a single day or over several days, since June 2016. If the streak continues until January 22, the index will break the all-time record set in June 2016 of 394 trading days according to LPL Financial.
It can be recalled that when Trump was elected President, U.S. stocks rose after an initial late-night collapse in futures prices. Thereafter, the market rewarded stocks and sectors that would benefit from the “Trump trade” and Trump’s pro-growth policies.
The 121-year-old Dow Jones easily sets the record for the fastest rise between 1,000-point barriers. The blue-chip index has spiked almost 8,000 points, or about 42%, since President Trump’s election. It appears that the 1,000-point milestones come easier at these days but on a percentage basis, it’s not nearly as big of a move as it was from 10,000 to 11,000.
The stock market has added $6.9 trillion in market cap since the election of Donald. That is a major feat considering that it is already nearly half of what the market grew by in all eight years of the Obama administration.
Trump’s performance, as measured by the S&P 500, is up 23 percent in the year since his inauguration, much better than the 13 percent average of first-year performances since 1928.
Some stocks have even done better than the Dow Jones since Trump’s election. Amazon.com Inc. (AMZN) has zoomed 66%, Netflix (NFLX) has spiked 78%, and Nvidia (NVDA) has skyrocketed 213%. It’s not just the tech stocks that did well. Bank of America (BA) rose 83% and Best Buy (BBY) surged by 93%.
The Effects of the Corporate Tax Cuts
Many investors are also assessing how companies would adjust to the tax law, which delivered a huge tax cut to corporations. The tax cut should save companies billions of dollars, have more cash for buybacks, share dividends to shareholders and go into mergers and acquisitions.
Corporate America is starting to see what a lower corporate tax rate means and its impact on the bottom line. Many companies have reported quarterly earnings and made adjustments to include the one-time tax charge. The effect is substantial but would be beneficial in the long run. Here are the initial reports:
Apple Inc. (AAPL) – $38 Billion
Apple is one of the many American companies with global operations that are expected to pay the one-time tax payment. The company will be paying $38 billion on the overseas profits they’ve amassed in recent decades.
Since the 2016 presidential campaign, U.S. President Donald Trump has been criticizing the iPhone maker for making products in Asian factories. Apart from the huge tax charge, Apple will open a new U.S. campus as part of a five-year investment plan worth $30 billion. That’s the biggest spending of a company thus far since the tax law was enacted.
Citigroup (C) – $22 Billion
Citigroup (C) reported a whopping $18.3 billion quarterly loss after it took a one-time charge of $22 billion because of the tax cut. Like other financial firms, Citigroup adjusted the value of so-called deferred tax assets because the corporate tax rate is going down.
The change in the value of those deferred assets amounted to $19 billion while the $3 billion charge came from the earnings from foreign subsidiaries that was returned to the United States. Citigroup complied with the provision of the new tax law. Without the tax cut, the bank had a decent quarter and it pushed the stock higher on Tuesday.
International Business Machines Corp, (IBM) – $5.5 Billion
After 22 quarters of consecutive year-over-year revenue declines, IBM made a surprise on Friday. The company’s revenue increased from Q4 2016 to Q4 2017. The company reported revenue of $22.5 billion for the last quarter, up from $21.77 billion a year ago. On the tax implications, the company took a $5.5 billion one-time tax charge.
The good thing going for IBM is that all business units have reported increased revenues, including a 32% growth in the “Systems” unit. The unit includes hardware and operating systems software. IBM struggled in this area in the past but is showing some clear growth now.
JPMorgan Chase & Co. (JPM) – $2.4 Billion
JPMorgan kicked off the earnings season and the bank’s profit was also hurt by the tax law. The revenue of 24.45 billion beat expectations but the one-time tax charge amounted to $2.4 billion.
Despite the one-time charges, CEO Jamie Dimon praised the new tax bill. “The enactment of tax reform in the fourth quarter is a significant positive outcome for the country. U.S. companies will be more competitive globally, which will ultimately benefit all Americans,” Dimon said in a press release.
Wells Fargo & Co. (WFC) – $3.35 Billion
The profit of Wells Fargo & Co. for the fourth-quarter rose to $6.15 billion. Instead of a negative impact on the bottom line, Wells Fargo benefited from the tax law. The reported profit included a $3.35 billion gain from the tax overhaul. It was realized due to the sale of its insurance business and costs from litigation accruals.
Wells Fargo is one of the nation’s largest banks. But unlike other big banks that are expected to pay one-time tax charges, the situation is unique and the reverse for Wells Fargo. Instead of a tax cut, the bank will record one-time gain to profits.
Information Technology Sector Highlights
Monumental Quarter for IBM
Tech giant IBM reported a monumental quarter, breaking a slump of 22 quarters. Revenue is up 4% from the same time last year to $22.54 billion. The reported profits beat analysts’ expectation of $22.05 billion.
Shares of IBM peaked at $171.13 and closed at $169.12 on Thursday. Enthusiasm on Wall Street was short-lived after the company reported a loss of $1.14 per share versus $4.73 earnings per share in same period a year ago. IBM dropped 3.99% on Friday to finish the week lower at $162.37. The loss can be attributed to the $5.5 billion one-time tax charge related to the GOP’s tax reform law.
IBM is seen as one of the companies that generate profits overseas. But with the one-time tax holiday as incentive, the company is seen to greatly benefit from the tax reform.
An Explosive Growth for Shopify Inc. (SHOP)
Shopify continues to be red-hot online in the commerce space. The company’s stock rose by a stellar 349% since going public in 2015. SHOP’s is experiencing explosive growth, reaching annualized sales of over $600 million based from its third quarter of 2017 and is still growing 70% year over year.
The full-year figures are expected to be released in February. But should the pace continue, Shopify would be hitting over $1 billion in annual revenue this year.
On Thursday, SHOP traded at an all-time of $116.73 at one point. The stock eventually finished at a record-high of $115.48 on Friday.
Some critics raised issues regarding the company’s ability to sustain growth. Shopify’s recruiting methods and levels of “churn” were questioned. However, Shopify is the acknowledged leader when it comes to supporting small business and entrepreneurs capitalize on the online shopping trend. The company is focusing on helping small retailers and manufacturers of product sell their wares online. They already have some big name subscribers.
Shopify’s customers are charged a monthly fee, so as more sites use its products, the more money it makes. Shopify isn’t concerned about its churn rate -the percentage of online stores and entrepreneurs leaving its service.
The massive shift in the way consumers spend money will boost SHOP moving forward. Online shopping accounts for over 10% only of total retail in the U.S. The figure is growing by double digits.
Biotechnology Sector Highlights
Celgene Corp. (CELG) and Juno Therapeutics (JUNO) Merger
Celgene Corp. is on a roll. After announcing a major deal to acquire privately-held Impact Biomedicines to bolster its portfolio of blood-cancer drugs, news came out Monday that the biotech heavyweight is in talks with Juno Therapeutics for a possible buyout.
The ongoing talks could produce a deal in the coming weeks, assuming everything goes well. No details or terms of the possible deal are known although the market capitalization of Juno as of Friday afternoon is at $7.74 billion.
It was not a good week for CELG and it’s down -1.64% year-to-date. However, JUNO hit a new 52-week high of $70 on January 17 and eventually closed at $69.25 on the same day. The shares of the company surged and hit the new high because of the news. Juno finished the week lower at $67.81.
Juno would further boost Celgene in the market for drugs treating multiple myeloma and other blood cancers. Juno is among the companies pioneering a new kind of cancer treatment, known as CAR-T.
The Week Ahead
The Wall Street train is still moving unobstructed since the year started. However, several analysts are expressing some concerns indicating that stock market booms don’t last forever.
“The market is euphoric, at least relative to the last five years. It certainly feels stretched,” said Nicholas Colas, co-founder of DataTrek Research, a New York-based investment newsletter. While the strong economy may allow stocks to continue rising for some time, there are some threats that could cool off this red-hot market:
The president of investment advisory firm Yardeni Research, Ed Yardeni, told clients on Tuesday that he believes the market is in a “melt-up.” He added the rapid price increase is based on emotion rather than on old-fashioned fundamentals.
Investors are expecting the market to further heat up next week. It’s the conitunation of the earnings season where about 79 companies, comprising 15% of the S&P 500 index, will be reporting their fourth-quarter earnings. On economic data, the following reports will be released: existing Home Sales on Wednesday, Leading Economic Index (LEI) on Thursday, and the 4thQuarter GDP on Friday.