Weekly Stock Market Report / April 9-13, 2018

The GENERAL MARKET

Military Action Upstages Trade War

The major U.S. stock benchmarks ended lower on Friday although it managed to stave losses resulting in a solid week overall. As trade war tensions ease, a new threat emerges.

The Dow Jones Industrial Average went down 122.91 (-0.5%), the S&P 500 index fell 7.69 points (-0.3%) and the Nasdaq Composite Index shed off 33.60 points (-0.5%). For the week, three indexes trended upward that the blue-chip index still gained 1.8% while the Nasdaq and S&P 500 booked gains of 2.8% and 2% respectively.  https://www.marketwatch.com/markets

Financial giants kick off ‘Earnings Season’

With the beginning of the earnings season, a bright spot for Wall Street and investors, in general, has arrived. Lately, trading has been cautious because the U.S.-China trade war tensions, not fundamentals, dictated the scene.

The financial giants of Wall Street took center stage on Friday to report their first-quarter earnings. Hopes are high due to the estimated 17% increase in corporate profits overall for the first-quarter of 2018.

The banking sector should be benefitting from tax cuts, rising interest rates and a generally positive outlook for economic growth. Citigroup (C), JP Morgan Chase & Co. (JPM), PNC Financial Services Group Inc. (PNC), and Wells Fargo & Co. (WFC) lined up to present their respective reports. However, it turned out that the financials fell 1.6% and were the worst-performing sector at the week’s end.

Trump orders precision strikes on Syria

As the trading session at Wall Street ended, U.S. President Donald Trump announced Friday night that upon his orders, the U.S. military will conduct precision missile strikes against the Syrian government. The attack is in retaliation for the alleged chemical attack by the government of Bashar al-Hassad against its Syrian citizens.

Trump has been intimating his desire to withdraw U.S. forces from Syria but his sudden reversal surprised many. The attack was carried out in conjunction with British and French allies.

Trump declared in his speech at the White House that the U.S.-led coalition’s objective was to “establish a strong deterrent against the production, spread, and use of chemical weapons. Establishing this deterrent is a vital national security interest of the United States.”

Aerospace & Defense Sector Highlights

Will history repeat itself?

Wall Street was weighed down on Wednesday by a new threat. This time the threat has nothing to do with a U.S.-China trade war but a war in the true sense of the word. United States President Donald Trump issued a warned that Russia to “get ready” for a hail of missiles falling on Syria. He also vowed to foil any missile defenses. Meanwhile, Russia vows to shoot down any incoming missiles aimed at Syria.

Every time the U.S. goes on a military offensive, a familiar pattern emerges at Wall Street. Historically, shares of defense companies outperform the broader market whenever the U.S. is at war or in a military offensive. With U.S. military action in Syria underway, defense stocks might again show their might.

Trump’s drive to increase the United States’ defense spending has boosted the aerospace and defense sector. On top of that, the sharp reduction in corporate taxes in 2017 will further strengthen the sector’s growth this year.

https://eresearch.fidelity.com/eresearch/markets_sectors

Raytheon Co. (RTN) $222.01 as of 04/13/2018 (+18.18% YTD)

  • The U.S. military has the option to strike Syria from a distance to avoid fighter jets being hit by anti-aircraft missiles. Instead of airstrikes using fighter jets, tomahawk missiles manufactured by Raytheon can be launched from aircraft carriers or U.S. Navy destroyers. The tomahawk guided missiles can be just as effective.
  • As early as March, Raytheon is developing a technology to control multiple ground-based and air-based drone vehicles with “drag and drop” visual interface. Its development is under the Department of Defense DARPA program.

Lockheed Martin Corp. (LMT) $342.60 as of 04/13/2018 (+6.71 YTD)

  • Lockheed Martin will always be at the forefront of any U.S. airstrike offensive. The company boasts of F-16 fighter jets capable of performing missile attacks. Their modern and stealth capable F-22, and F-35 fighters are effective to eliminate Russia’s S-400 long-range air defense missile system that is currently deployed in western Syria.

Aside from the two prominent defense stocks, there are other established giants in the aerospace and defense industry that will play critical roles to support the U.S. military.

  • Northrop Grumman Corporation (NOC) provides internal and external security to the U.S. government in both wartime and peacetime. Huntington Ingalls Industries, Inc. (HII), America’s largest shipbuilding company, will always be a key partner, particularly of the U.S. Navy.
  • Boeing Co. (BA), General Dynamics (GD), and Kratos Defense and Security Solutions (KTOS) will also figure prominently in any U.S. warfare. The combined products of the three would form a formidable array of military hardware, satellites, launch systems, and missile defense systems.

Banking Sector Highlights

Financial giants kicks-off earnings season

The financial giants of Wall Street reported their first-quarter results on Friday to kick off the earnings season. Generally, the reports showed that business was booming even though their stocks swung wildly during the first three months of the year. The banks reaped greater profits from their core lending businesses with the aid of rising interest rates. https://eresearch.fidelity.com/eresearch/markets_sectors

The favorable first-quarter results could signal the beginning of a new period of vitality for the banking industry, which in recent years has had to contend with a mix of harsh winds, including a peculiar silence in markets, which depressed their usually lucrative financial and trading activities.

JPMorgan Chase & Co. (JPM) $110.30 (+3.14% YTD)

  • Looking at JPMorgan’s quarterly results, the bank has already begun preparing for a more relaxed environment. Within a year, the bank’s key capital ratio dropped to its lowest level. The said ratio is its safest form of capital measured as a percentage of its assets, adjusted for risk.
  • The bank’s chief financial officer, Marianne Lake, JPM’s chief financial officer, said they welcome the rule changes of the Feds but it came as no surprise. Lake added, “We don’t think the company needs to continue to accrue capital.”

Citigroup Inc. (C) $71.01 as of 04/13/2018 (-4.57% YTD)

  • Like JPMorgan, Citigroup reported slightly thinner capital cushions in the first quarter. That is a reflection of banks’ expectation that regulators would ease rules for banks in the coming months.
  • Given the reduced capital buffers, banks can now afford to spend more on repurchasing their shares, distributing dividends to shareholders, paying their employees or increase lending activities to clients.

Wells Fargo & Co. (WFC) $50.89 as of 04/13/2018 (-16.12% YTD)

  • The overall first-quarter results of Wells Fargo were better than analysts’ expectations. However, the bank said it might have to revise its results if two regulators, the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) would move to penalize them for forcing some of its customers to buy inessential auto insurance.
  • The two regulators jointly proposed settling their actions against Wells over the auto insurance and another matter to the tune of $1 billion. Wells Fargo issued a news released saying, “At this time, we are unable to predict final resolution of the CFPB and OCC matter and cannot reasonably estimate our related loss contingency.”

New FED rules and investors’ reaction

  • The Federal Reserve presented a proposal to make two changes to its rules for the amount of capital banks need to hold. Although the reduction in capital requirements would only cushion the banks slightly, it’s a sign that the Trump administration and its appointees to the central bank are having a concrete impact on the banking industry as a whole.
  • The objective is to give big banks more freedom to distribute capital to their shareholders than they have had since restrictions on capital requirements were imposed following the 2008 financial crisis. The tempestuous markets and relaxed regulations are great news for banks.
  • Improved business conditions are already good news for banks but with the Feds proposal to loosen oversight could be even better for the industry over the long haul.
  • After the reporting on Friday, investors were not impressed by the results. The price of JPM closed almost 3% lower and dropping more than the half a percent drop by the Dow Jones Industrial average. The prices of WFC and C fell by 3% and 1.5% respectively.

Telecommunications Sector Highlights

AT&T – Time Warner Deal – A Vertical Integration

AT&T Inc. (T) $35.14 as of 04/13/2018 (-9.62% YTD)

  • The U.S. Department of Justice and AT&T (T) are locking horns in court over antitrust issues concerning the latter’s deal to merge with Time Warner Inc. (TWX) / ($98.68 as of 04/13/2018 +5.70% YTD). Economists argued the case for the contending parties before U.S. District Judge Richard Leon.
  • The government filed a lawsuit in November to block the deal and alluded to possible violations of antitrust laws. Aside from that, Judge Leon is expected to rule against the proposed merger if it would mean higher prices for pay TV consumers or it endangers the development of online video.
  • Investors are keenly following the legal proceedings as it might have an impact on future M&A’s of similar nature.

Competitors as well as consumer interest groups fear that AT&T would leverage Time Warner’s programming in the future. As an example, “DirecTV” might give preference to Time Warner content. They might boot out or refuse to take on board alternative and independent programming other viewers want to see.

On the contrary, the merger will not result to a telecom consolidation or a semblance of media consolidation. Since it is not a horizontal integration, some observers see this set-up as not having an effect on competition. Also, there is no noticeable harm on consumers at the moment.

The other problem facing AT&T is the matter of consumer privacy. Questions regarding the company’s preparedness to safeguard and protect consumer data will arise. They will be able to track users with even more screens and platforms available.

AT&T desires to break the dominance of Google and Facebook in digital advertising. Public safety might be set aside again to achieve that goal. It would be totally unacceptable if account information or data will again be compromised.

The Week Ahead

The concerns over higher tariff proposals will again be present next week but the negotiations being worked out by the United States and China should cushion the effect on Wall Street. The impact will only be felt in the broader market when the tariffs take effect.

What could negate the impact of the tariffs would be the improving economic and earnings growth. More than 10% of the S&P 500 companies will be reporting their first-quarter results. The retail sales data will come on Monday, housing starts report on Tuesday, and the leading economic index on Thursday.

As for the brewing military conflict in Syria, the U.N. Security Council convened on Saturday and rejected Russia’s proposed resolution to condemn the attacks. Meanwhile, the North Atlantic Council also held a meeting on Saturday where France, the United Kingdom and the United States briefed allies on the military actions against Syria. It’s a grim development for Wall Street if things escalate to a full-drawn war.

Leave a Comment

Your email address will not be published. Required fields are marked *