Inside the beltway that circles Washington D.C., politicians liken staying out of trouble as “doing the Potomac two-step.” It simply means dancing skillfully through a minefield of potential career-ending scenarios.
For stock investors, this past week has required the deft and grace of Fred Astaire to avoid the hidden trapdoors revealed by what is now being viewed as a highly volatile earnings season. Stock selection is at an ultra-premium following several blow ups by some high-profile market darlings.
Shares of Netflix (Nasdaq:NFLX), Facebook (Nasdaq:FB), Intel (Nasdaq:INTC) and Twitter (NYSE:TWTR) are the most glaring examples of how the market giveth over several months and taketh away in a single day. While there are big winners to crow about, the upwards spikes on good earnings pale in comparison to the gaps lower on negative surprises. As emotions go, when it comes to money, fear trumps greed by a factor of at least 2x and it is evident in how certain once-loved stocks are getting simply crushed.
First to the economy. Consumer spending propelled U.S. economic growth in the second quarter to a 4.1% pace, the fastest since 2014 to let President Donald Trump claim a win for his policies even though most analysts see the high as temporary. It followed first-quarter growth of 2.2% that was revised from 2%. Consumer spending grew 4%, more than estimated, while nonresidential business investment climbed at a 7.3% clip.
The pace of expansion in consumer spending, which accounts for about 70% of GDP, exceeded projections of 3% and contributed 2.69 percentage points to growth. Purchases of new autos were a major factor, along with spending on health care, housing and utilities and food services and accommodations. That followed a downwardly revised 0.5% pace of consumption growth in the prior three months.
In addition to lower taxes, consumers’ purchasing power is benefiting from steady hiring, an unemployment rate that’s near the lowest since 1969, improving finances, relatively low borrowing costs, contained inflation and a 7.3% growth rate in business investment. So, the domestic economy is on pace to register annual GDP growth of 3.0% or higher to pave the way for what should be a higher stock market by year-end.
Along the way though, there are some second-quarter earnings bombshells from companies that contribute heavily to market indexes, as well as investor sentiment. Crowded trades in Facebook, Netflix, Intel and Twitter by analysts and investors proved to be a minefield. And these are only the most high-profile names. Several other fund favorites have broken down; namely Starbucks (Nasdaq:SBUX), Polaris Industries (NYSE:PII), General Motors (NYSE:GM), Electronic Arts (Nasdaq:EA), Boston Beer (NYSE:SAM) and Whirlpool (NYSE:WHR).
It shows how quickly a stock can go from being among those most highly touted to one where investors can’t exit fast enough. Thanks to careful stock selection on our part, we’ve held our own in light of the highly erratic reaction to earnings releases. Let’s take a quick view of our holdings.
We’re about halfway through earnings season and, after the headline of the economy cruising along at a 4%+ pace of growth, some selling on the news last Friday should be of no surprise. The Nasdaq had made a big run leading up to the reporting season and some well-deserved back and filling is in order.
With that understanding, any pullback will be constructive, short-lived and met with fresh buying interest on any meaningful dip. There is just too much liquidity that wants to own the biggest, fastest growing and most trusted market in the world. America’s economic prosperity should do much to lift the global markets as a whole and relieve much of the tension that has beset emerging markets. When the 800-pound gorilla does the heavy lifting for the rest of the world, everyone wins.
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