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Week in Review

Week Ending: Friday, July 19, 2019

Recap & Commentary

The S&P 500 finished the week slightly below its record high as expectations for contracting second quarter profits, declining margins, and a smaller rate cut weighed on the market.

Second quarter earnings season kicked off with reports from several big banks. While financial results were mixed, robust loan growth and historically low bad debt write-offs reinforced the notion that the consumer remains healthy, which bodes well for the overall economy. Aggregate S&P 500 earnings, however, are expected to decline -1.9% year-over-year, although revenue growth is expected to increase roughly 4% year-over-year, according to FactSet. Additionally, if the S&P 500’s blended net profit margin stands at the current expectation of 11.3% after earnings season, it will mark the first time the index has reported two straight quarters of year-over-year declines since Q1 and Q2 2016.

Investor focus also centered on the Fed and whether the FOMC would cut interest rates by 25bps or 50bps at its July 30th and 31st meetings. Early in the week, Fed officials were unclear in communications about how aggressive the impending rate cut would be. This drove up expectations for a 50bps rate cut to over 70%, per the futures markets. However, by week-end, mostly positive macroeconomic reports and softer policy remarks out of the New York Fed led markets to, again, price in a greater likelihood of a 25bps vs. a 50bps rate cut.

Economic Bullet Points

The Index of Leading Indicators fell a greater-than-unexpected -0.3% in June, marking the first time the index has contracted this year. Additionally, the index’s six-month rate of change slowed to 0.4%, matching its lowest level since 2016. In sum, the softer year-to-date readings are signaling that economic growth is likely to remain slow for the rest of the year.

Retail Sales rose 0.4% in June, beating the 0.1% consensus estimate. However, the prior month’s figure was revised down modestly to 0.4% from 0.5%. Notably, the June retail sales figure extended the data point’s streak to four consecutive monthly gains, resulting in the longest winning streak for the figure since early 2018. Overall, year-to-date consumer spending remains strong.

Industrial Production was flat in June, as a drop in utilities output outweighed gains in mining and manufacturing. Despite the reading posting its second consecutive monthly gain, overall manufacturing output remains weak.

Housing Starts fell -0.9% to a 1.253 million-unit pace in June. A solid single-family gain failed to offset a sharp multifamily decline. While still subdued, housing activity should improve through the second half of the year, on the back of lower rates, which should bolster buying conditions and boost demand.

Consumer Sentiment rose 0.2 points in July to 98.4 in its preliminary reading. The consensus expectation was for a larger 0.8-point increase to 99.0. Even so, the index’s latest reading is still hovering around its highest level since early 2004, indicating that consumer remains upbeat.

Of Note

After several cases of E. coli, Norovirus, and Salmonella poisoning, which together have decimated the stock over recent years, shares of Chipotle Mexican Grill have bounced back to a new all-time high of 760.19. So far in 2019, the stock has risen an eye-opening 76%.

Market Indices Week of 7/19

S&P 500-1.3%
Small Caps-0.9%
Intl. Developed-0.8%
Intl. Emerging0.0%
Commodities-1.5%
U.S. Bond Market0.3%
10-Year Treas. Yield2.05%
US Dollar0.2%
WTI Oil ($/bl)$56
Gold ($/oz)$1,427

The Week Ahead

  • GDP
  • New Home Sales
  • Existing Homes Sales
  • Durable Goods Orders
  • Int’l Trade in Goods
  • Jobless Claims

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