The GENERAL MARKET
U.S. Stock Market Post Strongest 3rd Quarter in Years
U.S. Stocks performed remarkably during the 3rd quarter of 2018 despite the wildly volatile scenario created mainly by the escalating trade tensions between the United States and China. It appears that the U.S. stock market has even resumed last year’s trend of steady gains.
Although the mood was quieter in the third quarter, it was one of the strongest quarters for major U.S. indexes in years. The general tone on Wall Street was a positive one yet U.S. stocks have been outperforming other asset classes and regions considerably.
All three major indexes hit record levels. The S&P 500 Index rose 7.2% which is its best quarterly gain since the fourth quarter of 2013. The Nasdaq Composite Index also registered a 7.1% quarterly gain, its best since first quarter 2017. The Dow Jones Industrial Average obviously outperformed during the third quarter as the blue-chip benchmark rose 9.3%.
Finally, both the Dow Jones and the S&P have risen in 11 of the past 12 quarters while the Nasdaq Composite Index registered its ninth straight quarterly gain. On Friday, 10 of the 11 S&P 500 primary sectors ended in positive territory.
Feds Raise Interest Rates
The Federal Reserve, as expected, raised US short-term interest rates on Wednesday. This is the third time this year the central bank hiked interest rates. The mid-week move is a sign it will proceed with plans to tighten monetary policy despite the White House’s pressure to lower borrowing costs.
The members of the Federal Open Market Committee (FOMC) voted unanimously to increase the target range for its key rate by another quarter percentage point to 2.0% to 2.25%.
New Sector After Industry Reclassification
The third quarter includes the debut of the Communications Sector effective September 28. This is the ‘new’ industry group that was compiled by shifting major companies into a new group.
The communications services sector replaces the telecommunications group and includes not only telecom stocks but also stocks like Facebook Inc. (FB) and Alphabet Inc. (GOOGL) that had previously belonged to the technology sector.
Others that had been in the consumer-discretionary group, like Netflix Inc. (NFLX) and Walt Disney Co. (DIS) have been moved to this industry group too.
Instagram Top Executives & Co-Founders Quit
Kevin Systrom and Mike Krieger sprung a surprise on Monday. The two co-founders of Instagram resigned as Chief Executive Officer and Chief Technical Officer of the photo-sharing app owned by Facebook Inc. (FB).
No explanation was given but from a blog post, Systrom said that he and Krieger planned to take time off and explore “our curiosity and creativity again”. Their departures follow the recent exit of Facebook’s WhatsApp co-founder Jan Koum.
However, Bloomberg reported that the disagreements with Facebook CEO Mark Zuckerberg over the direction of Instagram could have been the reason that prompted the twin resignations.
AT&T Gets Support from Attorney Generals
The U.S. Justice Department wants the federal appeals court to reverse its ruling last June allowing AT&T Inc. (T) to acquire Time Warner. However, a group of attorney generals from nine states is backing AT&T.
The state officials said in a court filing, “It is rare for the federal government to pursue an antitrust case involving major, national companies without any state joining the effort.” In this case, no states have filed briefs in support of the Justice Department’s appeal.
The nine attorney generals are from Alabama, Georgia, Kentucky, Louisiana, New Mexico, Oklahoma, South Carolina, Utah, and Wisconsin.
Comcast Gains 51% Control of U.K.’s Sky
Comcast Corp. (CMCSA) ended its buying of shares of European broadcaster Sky after securing 38% the stock. The U.S. cable company will gain 51% control of Sky after Rupert Murdoch’s Twenty-First Century Fox (FOX A) said on Wednesday they are selling their 39% stake in Sky to Comcast.
Comcast beat FOX along with its supporter Walt Disney Co. (DIS) in the long-running battle for the pay-TV group via a rare auction held last weekend. The entertainment giant Disney would have been Sky’s ultimate owner since it bought most of Fox’s film and TV assets for $71 billion in a separate deal.
SurveyMonkey Makes Sterling Debut at Wall Street
SVMK Inc. (SVMK) or SurveyMonkey made a grand debut on Wednesday. The shares of the software and online survey company surged 42% to end at $17. The company had set its IPO price at $12 late Tuesday night. SVMK hit a high of $20 during trading. Investors’ welcomed SurveyMonkey in the same way they did Eventbrite Inc. (EB) when it debuted last September 20.
Aurora Cannabis to List on Wall Street
The second-largest marijuana producer by market cap is planning to list on Wall Street by October after filing the necessary application papers. The Canada-based Aurora Cannabis Inc. (ACBFF) is fast becoming the Berkshire Hathaway of cannabis because of the manner it has been investing heavily in other weed businesses. The company also surprised investors on Tuesday with their remarkable FY2018 financial results.
Auto Sector Highlights
Tesla Inc. (TSLA) – Musk Settles SEC Fraud Case & Agrees to Step Down
The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Tesla Inc.’s (TSLA) CEO Elon Musk on Thursday. The U.S. regulator is accusing Musk of fraud and is also seeking to remove him from his position as head of the electric car company. They found Musk’s series of tweets on taking Tesla private as “false and misleading.”
On Saturday, Elon Musk agreed to step down as chairman of Tesla and pay a corresponding fine of $20 million as a settlement with the SEC. But the settlement requires court approval. Musk will be allowed to stay as CEO but must relinquish his position as chairman of the board within 45 days. According to court filings, he can’t seek re-election for three years
A court document also said Musk accepted the SEC deal “without admitting or denying the allegations of the complaint.” Tesla will also pay $20 million to settle the claims that the company failed to police Musk’s tweet. SEC’s press statement read, “The $40 million in penalties will be distributed to harmed investors under a court-approved process.”
Tesla will appoint two new independent directors to its board and form a board committee to oversee Musk’s communications. Further, Musk will still sit as a board member. Although it was a quick settlement, it marked yet another horrible chapter for Tesla. The company is beset with several issues including the strange behavior by Musk.
Health Technology Sector Highlights
Eli Lilly & Co. (LLY) – Lilly Scores Big with FDA’s Approval
Investors are projecting shares of Eli Lilly to be further boosted after scoring a big win this week. The health technology company announced that the U.S. FDA has approved its calcitonin gene-related peptide (CGRP) antibody, Emgality. The drug is used for the preventive treatment of migraine in adults. The drug is approved as a once-monthly, self-administered, subcutaneous 120 mg injection.
Eli Lilly also confirmed that the launching of the injection will be very soon. Shares of Eli Lilly have rallied 27.05% year to date which is better than the industry’s increase of 6.8%.
Because of LLY’s recent trend, some investors see the stock is a great momentum stock that offers a great buying opportunity too. They want to take advantage of the upward trend, buy high and hope to sell even higher.
The chart below compares the changes in analysts’ recommendations for Eli Lilly since January this year. As of September 27, 16 analysts were tracking Eli Lilly and here are the recommendations: “strong buys” – 2; “buys” – 6; and “holds” – 8. No analysts made a “sell” recommendation.
Aerospace & Defense Sector Highlights
Boeing Co. (BA) – Standout Defense Stock of 2018
Boeing is back in the limelight and is regarded as one of the best-performing stocks in the Dow Jones Industrial Average in 2018. The stock is now trading within close proximity of its all-time high. A technical analyst says BA easily recapturing those levels and head much higher.
Todd Gordon, founder of TradingAnalysis.com told CNBC’s Trading Nation. on Thursday, “This has been the standout defense stock of the year here. We’re in a beautiful 2018 consolidation in Boeing.” He added that based on a chart of the aircraft manufacturer’s shares, “There is so much pent-up demand in this stock, I think it’s ready to — sorry for the pun — take off.”
Gordon cited to the range of about 17% (from top to bottom) in which Boeing shares have traded this year. By projecting upward from this range, BA could surge next year to a price target of $442 per share or 20% percent from Thursday’s levels.
Gordon sees Boeing’s current uptrend channel as very encouraging as it is approaching its resistance level of around $370 per share. “We’re showing a lot of relative strength, so I would like to try to take advantage of the move through the 2018 highs,” Gordon said. He plans to turn to the options market to express his bullish view.
In the past 12 months, Boeing’s stock has gained 44.5% versus the industry’s 23% growth. BA’s outperformance was largely due to the robust worldwide demand for its commercial aircraft and military jets.
Building the Next USAF’s Trainer Plane
The long race for the right to build the U.S. Air Force’s next trainer jet is over. Boeing Co along with partner Saab had been awarded a $9.2 billion contract to build the T-X or the plane that will train the next generation of pilots.
The Boeing-Saab partnership beat Lockheed Martin Corp. (LMT) and Leonardo DRS. The Air Force plans to purchase 351 of the jets plus 46 simulators. With additional purchase options, the service could buy as many as 475 of the jets and 120 simulators. The USAF expects the first jets to be delivered in 2023. The program is expected to reach full operation by 2034.
In addition to the Air Force’s trainer jets, Boeing was also awarded a $198.9-million contract by the U.S. Army Contracting Command, Redstone Arsenal, Alabama. The U.S. aerospace company will provide logistics support, aft rotor blades and associated containers for its CH-47 Chinook Helicopter. The project completion is expected to be completed by September 30, 2023.
In the previous week, Boeing delivered one of its 787-9 Dreamliners to Shanghai Airlines to make it the 100th aircraft the China Eastern Airlines subsidiary has purchased and the first 787-9 Dreamliner. China is a key growth area for Boeing, so the success of its relationship with China Eastern Airlines would be critical moving forward. Boeing has more than 60 Dreamliners that have entered service across China since 2013.
The WEEK AHEAD
As Wall Street enters the last quarter of 2018, there are two key takeaways during the third quarter. First, even if the Federal Reserve increased interest rates this week, the central bank is a still a friend more than a foe. The Feds are hiking interest rate in response to economic strength.
Second, the third quarter turned out to be a strong quarter and has made 2018 a strong year. For the three-month period, U.S. stocks posted a 7.2% gain. Very strong Earnings growth remain very storing, supported by a range of encouraging economic readings (sub-4% unemployment, multi-year highs in wage growth, and rising consumer confidence).
Following are the important economic data to be released next week: Manufacturing Purchasing Managers’ Index and Construction Spending on Monday; Vehicle Sales and the Purchasing Managers’ Index on Wednesday; and the September’s Jobs Report on Friday.