It took three months, but the major U.S. equity benchmarks revisited all-time highs Monday, supported by more good news on trade. Now comes the hard bard: basically every equity market breakout dating back to last year has been met with immediate selling.
Things could be different this time around because the U.S.-China news appears to be improving and this week, there’s another round of marquee earnings reports for investors to digest. Plus, the Federal Reserve meets this week and with that could come another interest rate cut.
And for good measure, the October jobs report will be delivered Friday by the Labor Department.
So all of that is to say while previous breakouts have failed, there are enough catalysts from a wide array of sources available this week to support continued upside in equities. We’ll see what the rest of the week brings, but on Monday, equities were in style.
The Nasdaq Composite added 1.01% while the S&P 500 jumped 0.56%. The Dow Jones Industrial Average advanced 0.49% with 21 of its 30 components higher in late trading.
Microsoft: Still Winning
Those invested in Microsoft (NASDAQ:MSFT) by now know the company recently scored a significant coup in beating rival Amazon.com (NASDAQ:AMZN) for a Department of Defense contract, explaining in part why Microsoft was the best-performing member of the Dow Jones today.
The size of the contract, $10 billion, isn’t overwhelming, particularly not for a company with a market capitalization north of $1 trillion, as is the case with Microsoft. The story here is that Azure, Microsoft’s cloud business, the one the company said grew by 59% in the third quarter, is becoming an indomitable force in the cloud computing space.
Yes, there’s controversy surrounding this win for Microsoft, but it’s not directly related to the company itself. Amazon seems miffed that it lost this competition because it was viewed as the leader throughout and there are rumblings that President Trump steered this agreement in favor of Microsoft due to some ill will toward Amazon CEO Jeff Bezos. There’s a lot of moving parts there, none of which involve any impropriety on Microsoft’s part, and it’s likely the company keeps the DoD contract.
As noted above, there are some bellwether companies reporting earnings this week and that includes none other than Apple (NASDAQ:AAPL), which steps into the earnings confessional Wednesday after the close of U.S. markets.
Apple has been on a torrid pace as of late and the stock can ill afford any disappointing news on the iPhone 11 or Apple + streaming, which is slated to debut in November. The stock was up 1%, so it appears some investors are buying in advance of Wednesday’s report.
“Apple’s guidance for the quarter calls for revenue of $61 billion to $64 billion, with gross margins of 37.5% to 38.5%. Analysts expect profits of $2.84 a share, which would be down from $2.91 in the year-ago quarter,” according to Barron’s.
Credit Where It’s Due
3M (NYSE:MMM) is a name I’ve been mentioning quite a bit lately due in large part to what can be described as erratic behavior by a struggling stock, but the shares gained 1.79% following an eventful week last week. Every recovery has to start somewhere, but some market participants still have plenty of reservations about 3M.
“Fundamentally more of the same, including continued weakness in auto [and] electronics [and in] China,” said JPMorgan analyst Stephen Tusa in a note out Monday. “However, there were material incremental negatives including downside at health care which many view as the “crown jewel of the portfolio” posting 2% organic on the easiest [comparison] of the year.”
Translation: bottom fishing with 3M is still a risky proposition.
Bottom Line on the Dow Jones Today
This is an eventful week in terms of earnings, macroeconomic headlines and domestic economic data points and the next few days are likely to go a long way in determining the fate of riskier assets into year end and how equities will start 2020. While there will be jitters this week, there are still reasons to remain engaged with equities.
“In hindsight, 2016 was a classic mid-cycle slowdown,” said BlackRock in a note out Monday. “We think 2019 could be similar but acknowledge this time could be riskier simply because the cycle is older and the economy has less slack to offer a buffer. Yet we don’t see this as the end of the economic expansion — or equity gains. End of cycle is usually marked by spiking commodity prices, wages that are rising too quickly, and the Fed lifting rates to avert economic overheating. None of these are evident today. In fact, it’s just the opposite. One potential upshot: A continuation of slow growth and a stock market that can grind higher.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.