When Jamie Dimon talks, EVERYONE listens!
By David Nelson, CFA
Banks kicked off the earning’s season Friday as JP Morgan (JPM) and Wells Fargo (WFC) reported 2nd quarter results. The headline beat from (JPM) came on the back of higher fees and lower credit costs but the shocker was a surprise lecture from CEO Jamie Dimon. Launching an all-out attack on Washington gridlock, incensed by the partisan divide he feels has held back the economy, Jamie all but demanded Congress get to work and pass legislation that will lift the economy from a tepid 1.5% GDP that has lasted 8 years.
In wasn’t that long ago that Mr. Dimon called the bottom in not just JP Morgan (JPM) but U.S. markets as well. His purchase of $26.6 Million in company shares in February of 2016 came on the heels of a long slide in financials (XLF) and a miserable start for the market that year. Investors who followed his call are up over 80% in the largest U.S. Bank and 35% in the S&P 500 (SPY)
At the top of his list of concerns was corporate taxes which he says, and I’m paraphrasing, are uncompetitive and a drag on the U.S. economy. Both sides of the aisle will twist his speech to their advantage but Jamie’s comments probably echo much of the country who believe Washington cares only about getting elected in a political back drop of I WIN YOU LOSE politics.
Sitting back and watching the Washington circus is entertaining but for investors it’s time to get back to work and focus on 2nd quarter earnings and what it implies about the look forward to Q3 and beyond.
We won’t get fooled again
Earnings season can be an emotional time for investors as stocks often make big moves in response to a positive or negative surprise. The initial stock performance is really a report card on just how good or bad analysts we’re at getting the number right. It will likely justify or not the recent price action but the guidance sets the stage for the look forward. Beware of back-end loaded calls where CEO’s give tepid guidance on the upcoming quarter saying they’ll make it up in the back half of the year.
Despite the slight headline beat, analysts had it right on (JPM) as estimates barely budged following the call. While the stock traded down close to 3% it steadily climbed higher with the market and probably a better tell as to institutional sentiment on the shares.
As a long time portfolio manager, I try to never trade pre and post market looking to square positions later in the day after emotions run their course. Given the run in the stock as well as financials as a sector, it’s not surprising some decided to take money off the table.
Often, initial price performance is an overreaction providing an opportunity for traders to get long or dump shares. Like most things in life, the devil is in the details so always read the full release and examine the earnings call transcript before making a decision to buy or sell.
What to watch out for this quarter
According to Factset earnings growth for the S&P 500 should come in just shy of 7%. Hard to believe that energy stocks down over 12% YTD are a big driver this quarter but Wall Street pegs S&P earnings at just 4% without the sector.
Early in June the OECD raised global growth forecasts so maybe it isn’t surprising that Goldman’s (GS) Strategy baskets followed by many institutions are being led by S&P 500 stocks with high international sales. Add the fact that the U.S. Dollar (DXY) is approaching one year lows and you get a pretty good set-up for U.S. multinationals. All eyes this week will be on names like Microsoft (MSFT), Honeywell (HON) and General Electric (GE). Investors will focus on sales overseas looking for color surrounding the global economy and what it means for the rest of the year.
*At the time of this article some funds managed by David Nelson were long SPY.