Trifecta Stocks: Fed Helps Market Build Strong Week

 | Jul 16, 2017 | 10:00 AM EDT
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The following is an excerpt from Trifecta Stocks Weekly Roundup sent to subscribers on July 14. Click here to learn about this dynamic portfolio and market information service.

Stocks put in a solid week over the last five days with all three major stock indices moving higher. The bulk of that move came after dovish testimony by Fed Chair Janet Yellen, who copped to the fact that the domestic economy is moderating. That view, which we've been talking about for some time, was also echoed by the latest Fed Beige Book.

Data later in the week, including the lack of inflation shown in the June CPI report (another sign we are seeing more deflation than inflation as energy prices fall), the slight improvement in manufacturing industrial production in June and weaker-than-expected June retail sales, point to another step down in GDP expectations for the second quarter. It also likely means we'll have even longer to wait for the Fed's next interest rate hike, especially if the Fed begins to unwind its balance sheet in September.

Digging into the June retail sales report, we noticed month-over-month declines almost across the board. The key standouts were nonstore retailers, which is a confirming bullish point for our Amazon (AMZN) shares, and building materials. Given the drop in oil prices that is flowing through to gas prices, the fall in the gas-station line item comes as little surprise. The same can be said about the drop in department store sales, down 0.7% month over month, which also signals that consumers continue to shift to digital commerce. We see that as good for both Amazon as well as our Alphabet (GOOGL) shares.

Before moving on, we'd note the June retail sales report caps the second-quarter data and, in tallying the three months, nonstore retailer sales rose 10% year over year, while department stores fell more than 3%. The only other negative category year over year was sporting goods, hobby, book and music stores. More good news for Amazon and Alphabet, far less so for Macy's (M) and its mall-anchor peers.

Also this week, citing productivity growth challenges, both Yellen and the Congressional Budget Office poured some cold water on President Trump's goal of getting the economy back to 3% growth. That's the latest blow to the administration, which is seeing its agenda slip again as healthcare reform is now more likely an August event, with tax reform sliding to after September. As these delays are baked into forecast cakes, we expect companies to offer more tempered outlooks for the second half of 2017, which means a reset to earnings expectations is likely.

Keep in mind, we have yet to see S&P 500 EPS expectations be reset to account for earnings prospects in the oil patch due to falling oil prices. With signs OPEC members are veering away from oil production cuts, we could see further price cuts. While good for gas prices and modest incremental consumer spending at the margin, it likely means oil company outlooks will be another weight on S&P 500 earnings expectations. 

We saw positive results for the banks on Friday, such as JPMorgan (JPM) , which said it saw credit card volumes rise 15% and merchant processing volumes up 12% year over year -- good news for our MasterCard (MA) shares. JPMorgan's results were also buoyed by loan growth and the benefit of higher interest rates year over year during the quarter. Among an upbeat report, we did notice the company boosted its net charge-off, which is something we'll be focusing on as it relates to the consumer and spending this earnings season, given the levels of outstanding credit card, student and automotive debt. 

Amid all that, we had a number of positive moves in the Trifecta portfolio this week. The top performers were again tech-related, including Applied Materials (AMAT) , Facebook (FB) , Universal Display (OLED) and Alphabet. We saw several other positions including McCormick (MKC) and MGM Resorts (MGM) move higher this week. We added no new positions this week, but we've been examining several of late and will look to make an opportunistic acquisition as earnings season kicks into gear. 

Turning our focus to next week, more than 280 companies will report second-quarter earnings, and that will set the tone for what's to come over the following few weeks. From a Trifecta perspective, we only have CSX (CSX) reporting next week, and we'll be tuning into results from Union Pacific (UNP) to put those results into proper context. We'll also be listening to reports from Skyworks (SWKS) , Ericsson (ERIC) , T-Mobile USA (TMUS) and Qualcomm (QCOM) for comments on mobile network capacity and capital spending plans, as well as hints for what's to come next on smartphones and other connected devices ahead of earnings from AT&T (T) and Dycom (DY) . With MasterCard hovering on our price target, we'll be looking to Visa's (V) results for potential upside to be had in the shares. 

Following this week's data-filled days, next week's helpings serve up the latest housing data, giving us a first look at regional Fed bank findings on the domestic economy in July. Simply put, we are about to enter what we call the earnings gauntlet and things are going to get busy over the next few weeks with more than 600 companies reporting the week after next and more than 1,200 during the first week of August. 

Before all that, our own Chris Versace will be sitting in for Doug Kass and his Daily Diary on Real Money Pro on Tuesday, so feel free to swing on by and say hello. 

Take our advice, enjoy your weekend and we'll see you back here next week! 

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