Bob’s Journal for 10/24/19
Some Notable Events That Grabbed My Attention This Week
Earnings season is underway, and the early results are interesting.
Most summaries point out that so far earnings and revenues have met or exceeded expectations. But they don’t point out how expectations have changed over the quarter. During the third quarter, expectations steadily declined, and corporations that commented during the quarter tried to reduce expectations.
The result is that, though reported earnings are doing well compared to estimates, they are down during the last 12 months. The latest estimates from analysts expect S&P 500 operating earnings per share will dip 2.2% from 12 months ago. If the analysts turn out to be accurate, this will be the first 12-month earnings decrease since the second quarter of 2016, when many analysts were talking about an earnings recession.
Also, the percentage of companies reporting earnings that equal or exceed analysts’ estimates has been declining steadily each of the last seven quarters. If that trend continues, the earnings drop for the third quarter will be worse than the 2.2% analysts project.
Late Tuesday and early Wednesday, some significant earnings disappointments were announced.
Notable among them was Caterpillar (CAT). The results from the large multinational equipment maker generally give a good reading on global economic growth. CAT reported revenue and earnings that were below estimates and advised that future results are likely to be below current estimates. Revenue was down 7% for the third quarter, and CAT projected it would be flat for the fourth quarter.
An interesting note in the CAT report was that while overall revenue was down, revenue from North America was up 11%. That surge in capital investment in the United States hasn’t been captured in any other data.
More than 400 companies will report earnings this week and next week, so we’ll know more about how the U.S. and global economies fared in the third quarter very soon.
Fidelity Investments finally joined the other major mutual fund companies and brokers in slashing commissions and fees to 0% on most U.S. stocks, exchange-traded funds (ETFs) and options.
In an interview at the eMoney Summit recently, Fidelity Chairman Abigail Johnson said the move is likely to help Fidelity. Johnson said many of the other firms “sell order flow” to firms that execute trades, providing a source of income to mitigate the loss of commissions and fees from customers. But Fidelity doesn’t sell order flow, according to Johnson. She believes her customers are more likely to receive better prices and execution on stocks and ETFs than if they trade through firms that sell order flow.
Johnson also said that customers are demanding more services while also expecting costs to decline. She said Fidelity offers a range of services and that she expects customers will be willing to pay for services that add value and differentiate Fidelity from other firms.
Long-Term Care Challenges Affect Home Owners
There’s bad news for those who want to remain in their homes for as long as possible, even when they have long-term care needs.
Genworth recently issued its latest annual cost of care survey, which lists the cost of different types of long-term care around the country.
The latest release made clear that there is a shortage of workers in long-term care, especially in the rapidly growing home care market. The cost of aides providing basic homemaking services, such as cooking and cleaning, increased more than 7% in the last year. The cost of a home health aide increased 4.55%. Home health aides provide additional services, such as help with bathing, dressing and eating.
The big news is that after several years of cost increases well above the general inflation rate, full-time home care (44 hours per week) now costs at least as much as care in an assisted living facility in many areas.
Add the home care costs to the regular costs of owning and maintaining a home, and it is more expensive to remain in the home and receive long-term care there. Families need to either plan for higher long-term care costs if they want to remain in the home or expect to move into an assisted living facility should they need long-term care.
The Data
Existing home sales declined 2.2% in September. But we shouldn’t read too much into that. Sales increased sharply in August, making it unlikely September’s sales would match that level, much less exceed it. Also, existing home sales tend to be volatile from month to month. Over 12 months, sales are up 3.9%, and the three-month average of sales is up 0.6%. The three-month average is the highest since May 2018, and the 12-month increase is the best since March 2017.
New home sales took a breather in September after steadily increasing from June through August. September’s sales were 701,000, compared to 706,000 for August. The three-month average for August was a 12-year high. After September’s modest decline, the three-month average still is strong.
House prices are stabilizing, according to the FHFA House Price Index. The index increased 0.2% in August and is up 4.6% over 12 months. House price numbers have been consistently declining for about 18 months, and the 12-month increase is the lowest since October 2014. As I’ve pointed out before, this stabilization in national home prices is the result of a substantial cooling in the markets on the coasts that had substantial price increases in recent years.
The Leading Economic Indicators Index declined by 0.1% in September, and August’s reading was revised down to a negative 0.2% from unchanged. Weakness in manufacturing was the major cause of the declines.
The overall economy improved a bit in October, according to the PMI Composite Mid-month Flash Index. The services component of the index increased to 51.0 from 50.9 in September. The manufacturing component climbed to 51.5 from 51.0. The composite index of the two components rose to 51.2 from 51.0. The PMI manufacturing surveys have been more positive than the more widely followed ISM surveys in recent months. The Institute for Supply Management (ISM) data will be released next week.
Manufacturing staged a recovery in the Richmond Fed region in October. The Richmond Fed Manufacturing Index rose to 8 from a negative 9 in September. New orders, shipments and employment all sharply increased. In addition, expectations for the next six months improved.
But Durable Goods Orders for September were negative. Overall orders fell by 1.1%, compared to a 0.3% gain in August. After excluding the volatile transportation sector, orders still declined 0.3%.
Core capital goods orders, which represent business investment in equipment, dipped 0.5% in September following a revised 0.6% decrease in August.
New unemployment claims fell by 6,000 for the latest week to 212,000. The historic strength in the labor market continues.
The Markets
The S&P 500 rose 0.50% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 0.62%. The Russell 2000 increased 1.88%. The All-Country World Index (excluding U.S. stocks) gained 0.88%. Emerging market equities added 0.86%.
Long-term treasuries declined 0.31% for the week. Investment-grade bonds rose 0.27%. Treasury Inflation-Protected Securities (TIPS) added 0.35%. High-yield bonds gained 0.31%.
On the currency front, the U.S. dollar lost 0.49%.
Energy-based commodities increased 1.79%. Broader-based commodities rose 1.14%, while Gold gained 0.14%.
Bob’s News & Updates
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