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Earnings Rise, Stocks Stumble – May 1, 2018

We just finished the busiest week of 1st quarter earnings season, and although many companies shared positive results, stock indexes experienced modest declines.1https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8 The S&P 500 lost 0.01%, the Dow dropped 0.62%, and the NASDAQ gave back 0.37%.2http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-UShttp://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-UShttp://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCOInternational stocks in the MSCI EAFE decreased by 0.39%.3https://www.msci.com/end-of-day-data-search

Last week provided a variety of information for investors to take in. On Friday, we received the initial reading of 1st-quarter Gross Domestic Product (GDP). The data came in more positive than analysts expected, with the economy experiencing 2.3% growth.4 http://wsj-us.econoday.com/byshoweventfull.asp?fid=485678&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top The latest employment readings also showed costs for benefits and pay rising at the fastest pace in a decade.5https://www.marketwatch.com/story/worker-compensation-rising-at-fastest-pace-since-2008-eci-finds-2018-04-27 On the geopolitical front, the leaders of North and South Korea met for historic talks that could result in denuclearizing the Korean peninsula.6https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html

As we continue to watch these developments, we want to explore what’s behind our current corporate earnings season.

A Deeper Analysis of Corporate Earnings

So far, this earnings season is the best on record.7https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates Of the S&P 500 companies with published data, 79.4% of them beat expectations.8https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html The outperformance is significant, too. On average, companies are 7.95% higher than projected.9https://www.bloomberg.com/news/articles/2018-04-27/companies-are-beating-earnings-predictions-at-fastest-rate-ever

Despite these positive results, stock prices did not rise in reaction. Companies that beat expectations have only experienced an average of a 0.3% equity increase in the first day after their report.10https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates The disconnect between high earnings and low stock increases may be surprising. But when you look closer, lingering questions about corporate health are weighing on many investors’ minds:

No one can say for sure what is on the horizon for corporate performance. On one hand, concerns about growing costs and inflation could erode investor confidence and hamper the markets’ ability to regain previous highs.12https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8 On the other, consumer sentiment remains high—and experts predict that each year until at least 2020, S&P 500 companies will have double-digit growth.13https://www.marketwatch.com/story/consumer-sentiment-report-shows-taxes-tariffs-pulling-in-opposite-directions-2018-04-27https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates

Looking ahead, we will monitor many different details to gain more insight into what the future may hold, including bond yields, wage costs, and inflation. For now, please contact us anytime if you have questions about current market conditions or your plans for the future.   

Robert Roman
CEO, Managing Director
MGO | Wealth Advisors

ECONOMIC CALENDAR:

Monday: Pending Home Sales Index
Tuesday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending
Wednesday: ADP Employment Report
Thursday: Jobless Claims, Factory Orders, PMI Services Index, ISM Non-Mfg Index
Friday: Employment Situation


Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
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“For every reason it’s not possible, there are hundreds of people who have faced the same circumstances and succeeded.”
― Jack Canfield

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Spinach and Cheese Breakfast Pockets

Yields: 8

Ingredients:

  • 2 large eggs, divided
  • 1 cup ricotta cheese
  • 1 cup baby spinach, roughly chopped
  • 1 cup basil, chopped
  • ¼ cup sun-dried tomatoes (about 9), finely chopped
  • ¼ teaspoon red pepper flakes
  • Kosher salt
  • 2 refrigerated rolled piecrusts (from 15-ounce box)
  • Sesame seeds, for sprinkling

Directions:

  1. Preheat oven to 400°F.
  2. Overlay large, rimmed baking sheet with parchment paper.
  3. Mix 1 egg and 1 tablespoon water in a small bowl; set aside.
  4. Put ricotta, spinach, basil, tomatoes, red pepper, the other egg, and ¼ teaspoon kosher salt into a medium bowl. Combine together.
  5. After unrolling pie crusts, cut each into 4 wedges.
  6. Put the ricotta mixture on 1 side of each of the wedges, about 3 tablespoons each.
  7. Fold the wedges over the filling; press the edges with a fork to seal.
  8. Put the wedges on the prepared baking sheet. Brush the tops of the wedges with the egg mixture. Sprinkle with sesame seeds (if desired).
  9. Bake until the wedges are golden brown, 16-20 minutes.

Recipe adapted from Good Housekeeping14https://www.goodhousekeeping.com/food-recipes/easy/a47537/spinach-and-cheese-breakfast-pockets-recipe/

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You Have the Right to Challenge the IRS

The Internal Revenue Service, part of the U.S. Department of Treasury, has nearly 80,000 employees and an $11.4 billion budget. Nevertheless, the IRS grants taxpayers certain inalienable rights; one of those is the right to challenge the agency and to be heard.

Taxpayers have the right to:

  • Raise objections to agency rulings.
  • Introduce additional documentation in response to IRS decisions.
  • Expect the agency to consider their objections timely.
  • Expect to receive a response if the agency disagrees with the taxpayer’s position.

The IRS sometimes notifies taxpayers that their returns have mathematical or clerical errors. Here are taxpayers’ rights in those cases:

  • Taxpayers have 60 days to inform the IRS they disagree.
  • They should provide copies of records to help correct the errors.
  • They may call the number on the notice for help.
  • They can expect the agency to make necessary adjustments and send corrections if the IRS upholds the taxpayer’s position.

If the agency doesn’t agree with the taxpayer’s position, here is what happens next:

  • The IRS will send a tax-adjustment notice by mail.
  • The taxpayer has the right to challenge the adjustment by filing a challenge in S. Tax Court. The petition must be filed within 90 days of the IRS notice.

Understanding your rights as a taxpayer makes tax filing easier, more equitable, and less stressful.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip adapted from IRS.gov15https://www.irs.gov/newsroom/the-right-to-challenge-the-irss-position-and-be-heard-taxpayer-bill-of-rights-4

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The Driver: Setting Up for Power and Accuracy

Sending the ball exactly where you want it to go requires proper positioning before the strike.

Here are some tips for smooth sailing on the golf course:

  • Place the ball in front of you so it’s just inside the front heel, which enables you to turn behind the ball during the swing.
  • Keep your shoulders parallel to the target line. This allows you to play the ball up and helps prevent you from shifting your shoulders open.
  • Following the windup, begin the downswing from the ground up. Move your knees and hips toward the target.
  • Keep your back shoulder down and in on the downswing.

The secret to a successful strike is developing a strong upswing hit.

Tip adapted from Golf Digest16https://www.golfdigest.com/story/timeless-driver-keys-basics-on-setting-up-for-power-and-accuracy

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How to Look and Feel Younger

  1. You’ve hit the big 6-0. Or the big 7-0. How about 8-0? Maybe even 9-0. But who’s counting anymore? After you’ve reached a certain age, it’s not the number of birthdays that matter. It’s how you look and feel.

Here are 5 tips to keep you looking and feeling your absolute youngest:

  1. Hang out with your buddies. Socializing may be the top contributor to looking and feeling youthful.
  2. Go artsy. Getting creative makes you feel happy and think more clearly. It could be singing, painting, or drawing.
  3. Get moving. Everyone knows exercise is good for you. But you don’t have to go gung ho to reap its benefits. Shoot for 2½ hours of activity a week. It could be gardening or a brisk stroll around the block.
  4. Apply sunscreen. Suntan lotion will not make you look younger. But it will protect you from the sun’s damaging ultraviolet rays.
  5. Something new. Learn a new skill or develop a new habit. The change will help keep your brain fresh and energized. It could be dancing or learning another language.

Short of a dip in Ponce de Leon’s fountain of youth, a few lifestyle changes can make a big difference in turning back the clock.

Material adapted from WebMD17https://www.webmd.com/healthy-aging/ss/slideshow-feel-younger

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How Can You Waste Less Food and Become Environmentally Responsible?

It’s one of those obvious but mostly ignored facts of everyday life: wasted food. However, the statistics might surprise you.

About ⅓ of the world’s food intended for human consumption is lost or wasted. Sure, it might be easy to forget about those unfortunate leftovers, conveniently tossed in the trash. But all that wasted food is impacting this big, blue planet in a very bad way.

Wasted food generates billions of tons of greenhouse gases. Food production, processing, and transportation to grocery stores create nearly 3.3 billion tons of emissions—and that’s from wasted foods alone.

Decomposing organic waste in landfills produces methane, a greenhouse gas that holds 23 times more heat in the atmosphere than carbon dioxide.

Nearly 25% of fresh, potable water in the United States is related to wasted food. Experts say global water consumption could be reduced by more than ⅓ by eliminating food waste.

Here are 4 tips to curtailing food waste in your corner of the world:

  1. Plan your meals before you go shopping. Go through your refrigerator and your pantry before making your shopping list.
  2. Make reasonable serving sizes for your prepared meals.
  3. Freeze or reuse leftovers.
  4. Preserve produce with canning, freezing, pickling, or drying.

Tip adapted from Conservation International18https://www.conservation.org/pages/tips-to-live-green.aspx#waste-less-food

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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia.

The S&P U.S. Investment Grade Corporate Bond Index contains U.S.- and foreign-issued investment-grade corporate bonds denominated in U.S. dollars.

The SPUSCIG launched on April 09, 2013. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

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References   [ + ]

1, 11, 12. https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
2. http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-UShttp://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-UShttp://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
3. https://www.msci.com/end-of-day-data-search
4. http://wsj-us.econoday.com/byshoweventfull.asp?fid=485678&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
5. https://www.marketwatch.com/story/worker-compensation-rising-at-fastest-pace-since-2008-eci-finds-2018-04-27
6, 8. https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
7, 10. https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
9. https://www.bloomberg.com/news/articles/2018-04-27/companies-are-beating-earnings-predictions-at-fastest-rate-ever
13. https://www.marketwatch.com/story/consumer-sentiment-report-shows-taxes-tariffs-pulling-in-opposite-directions-2018-04-27https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
14. https://www.goodhousekeeping.com/food-recipes/easy/a47537/spinach-and-cheese-breakfast-pockets-recipe/
15. https://www.irs.gov/newsroom/the-right-to-challenge-the-irss-position-and-be-heard-taxpayer-bill-of-rights-4
16. https://www.golfdigest.com/story/timeless-driver-keys-basics-on-setting-up-for-power-and-accuracy
17. https://www.webmd.com/healthy-aging/ss/slideshow-feel-younger
18. https://www.conservation.org/pages/tips-to-live-green.aspx#waste-less-food