Ticker Tape A Financial Briefing by Baruch College’s Investment Management Group
October was a turbulent month as the stock market faced major headwinds that brought down all three major indices for a second time this year. The S&P 500 fell close to 10 percent correction territory at -9.25 percent before closing the month at -7.23 percent.
Though some components of the Dow Jones Industrial Average, such as 3M and Caterpillar Inc., reported disappointing earnings and gave gloomy guidance, the overall index held up much better than its counterparts.
The strength of the rest of the components, such as UnitedHealth Group Inc., McDonald’s Corp., Caterpillar Inc. and Apple Inc. neutralized the weakness. It was down -8.23 percent before recovering to close the month as -5.77 percent.
The worst performing index was NASDAQ 100, as it crossed below the 10 percent correction territory at -12.28 percent before recovering and finishing the month at -8.78 percent.
The China trade war rhetoric from Vice President Mike Pence, rising yields, suspected peak earnings growth and profit-taking kicked off the initial sell-offs, with disappointing earnings reported by major technology companies exacerbating it further.
From a macro perspective, the United States posted a strong economic report with third quarter initial gross domestic product reading coming in at 3.5 percent, driven by consumption.
The unemployment rate hit a 49-year low of 3.7 percent and the monthly year-over-year wage growth came in at a nine-year high of 3.1 percent as the labor market continues to tighten.
As the economy marches ahead, firing on all cylinders, concerns are being raised over a possibly overheated economy and its implication on what the Federal Reserve’s monetary policy is.
The Fed announced three rate hikes so far for this year and if the economic indicator continues to print strong numbers, the United States could potential get another rate hike announcement in December because of inflation fears.
Currently, the CME Fed Funds Future is pricing in a 76.6 percent probability of a 25-basis-point rate hike during The Fed’s December meeting, which will raise the funds rate to a range of 2.25 percent-2.50 percent.
Oil prices dropped significantly over the month. The U.S. West Texas Intermediate benchmark fell 13.27 percent and the international benchmark Brent crude oil fell 11.19 percent from an $86 per barrel high at the beginning of the month to a seven-month low of around $75 at the month’s end.
This drop was primarily due to U.S. stockpiles increasing for the sixth week straight given the expectation for an inventory drawdown because of falling Iranian crude oil exports following the reinstatement of sanctions.
Exxon Mobil Corp. saw its stock price jump after posting its highest third-quarter profits in four years, and seeing revenues rise 57 percent.
Chevron Corp. also saw its stock rally after posting a positive quarterly results, including setting a new daily barrel production record of about 2.9 barrels, and nearly doubling its production in the Permian Basin.
UnitedHealth, one of the largest healthcare providers in the United States posted impressive earnings with earnings per share beating by 3.91 percent and revenue exceeding consensus expectations by 12 percent.
UnitedHealth also raised guidance for fourth quarter 2018, citing synergies in Optum as a primary reason.
Despite the positive earnings, the stock dropped down 4.12 percent, reflecting the cautious attitude currently surrounding the markets. Johnson & Johnson, the largest drug manufacturer in the S&P 500 reported its EPS beating expectations by 0.02 percent, and revenue growth of 3.5 percent.
The company cited a robust pharmaceutical growth of 6.7 percent, which was slightly offset by the floundering medical device segment shrinking 0.2 percent.
Boeing Co. reported strong EPS and revenue, growth which came in above consensus and raised guidance for the fourth quarter.
The company showed 12 percent growth in its Boeing Global Services and Space & Security segments, making up for declining commercial aircraft sales.
Boeing’s performance indicated that tariffs have not impacted all manufacturers. This was further supported by the fact that “tariff” was never mentioned during its earnings call.
3M told a very different story with third quarter EPS missing estimates by 4.65 percent, revenue shrinking by 0.2 percent, and guidance being lowered for the future.
Reportedly, the implementation of tariffs reduced earnings by 15 cents per share, and 3M management stated future product pricing will offset the higher material costs. Despite tariff impacts, 3M’s main setback were the headwinds from currency volatility, which resulted in a 1.7 percent reduction in revenue.
Facebook report beat EPS by 19.10 percent but missed on revenue growth. The metrics currently catching investors’ eyes are revenue growth as well as daily and monthly active users.
Some see slowing the revenue and user growth as an indication of the company reaching its maturity, which could signal rough roads ahead for the social media giant.
Alphabet Inc., the parent company of Google, beat EPS by 25.5 percent, but like many other companies this earnings season, it fell short on revenue growth.
Alphabet cited growing traffic in total searches, YouTube engagement and cloud services.
The GOOG stock reported large growth internationally as well as domestically. U.S. revenues were up 20 percent year-over-year; Europe, Middle East and Africa revenues were up 20 percent year-over-year; Asia-Pacific up 29 percent versus last year and Other Americas were up 19 percent year-over-year.
Blackrock Inc., the world’s largest asset manager, beat its EPS estimates by 10.10 percent, but missed its revenues by $60 million. In the third quarter, the asset manager posted its first net capital outflow since 2015, announcing a $3.14 billion exodus, compared to its last quarter’s inflow of $20 billion.
The vast majority of this outflow was corporate and not individual investors, signaling that companies are reconsidering their cash investments as a rising interest rate environment seemingly approaches. Blackrock declined 30 percent from highs earlier this year.
By Sean O'Dea and Tenzin Thinlley