By David Nelson, CFA

In the face of an endless wave of BREAKING NEWS banner headlines, U.S. markets put in a strong week adding to July gains. Closing at levels near resistance, stocks are within ear shot of challenging the highs earlier this year. The threatened tariffs on an additional $200 Billion in Chinese imports produced the only down day of the week.

SPX Resistance

The press continues to focus on the President’s stream of consciousness rhetoric which is good for a few hundred DOW points in either direction. Headlines predicting the end of NATO to those predicting the return of a 1930’s style depression failed to knock down a market that has already weathered a fair amount of bad news. Headlines can influence the short term but in the end, stocks are about the earnings and sales trends of your favorite companies.

Estimate trends

Estimate trends for this year and next are still largely favorable for S&P 500 companies. To be fair it’s early in the reporting season and investor reaction to JP Morgan’s (JPM) report was less than desired. On the heels of a top and bottom line beat along with strong commercial banking, investors seemed more focused on a slight decline in NIM (Net Interest Margins) a metric that may repeat itself as the season unfolds. A flattening yield curve has been weighing on the financial sector and for that matter a major concern for many economists. After all, the Fed’s own research reminds us that every recession since 1955 was preceded by a flat or inverted curve.


It’s hard to compare today’s financial cycle to history. QE is a relatively new phenomenon the world has embraced and for the moment, the Fed seems to be the only central bank willing to venture down a path to normalization. With German 10-year rates at just 34 basis points and the spread between US and German yields at 1 year highs, it’s difficult for the long end of our curve to move higher. With sovereign yields as low as they are it’s not surprising our 10 year yields have had trouble keeping above 3% despite the strong economic data. It’s important for investors to remember, this is the end of the experiment with potentially unintended consequences and surprises.

ETF Fund Flows

ETF Fund Flows

On a trailing one-month basis fund flows have been largely negative with redemptions out of equity and commodities moving into fixed income. Last week’s market move higher helped stop the bleeding but still there were more dollars moving into Fixed Income ETFs. 35% of the inflows were into high yield with iShares (HYG) taking the lion’s share. Over the last decade high yield has had an over 70% correlation with stocks, so something of an equity substitute. Still all in, investors remain cautious piling into the perceived safety of junk bonds.

Fixed Income HYG.png

The earnings calendar picks up steam this week with companies from just about every sector reporting. Key reports from Bank of America (BAC), Johnson & Johnson (JNJ), Goldman (GS), Union Pacific (UNP) and Microsoft (MSFT) should give us a good read on the quarter.

Prediction: The most widely used word on conference calls will be “tariffs.” If CEO’s don’t go there, you can bet the analysts will.

*At the time of this article some funds managed by David we’re long MSFT