The month ahead: Strong consumer, strong companies, strong economy

As a new lineup of equities is selected for May, we consider the recent and upcoming events expected to weigh on markets this month.

  • 10-year interest rates flirting with the 3% mark: Primarily a psychological mark for investors, the difference between a 2.97% yield and 3.00% yield is nominal. The real focus is on inflation.
  • FOMC meeting: Taking place on May 1st-2nd, the market puts the chance of the Fed raising rates at only 6.7%. The focus will instead be on whether the language used suggests four rate hikes instead of the planned three. Recent indicators point to wage growth and accelerating inflation, so this is on the table.
  • Consumer confidence: Continues to reach all-time highs and beat expectations. Consumer confidence equates to increased consumer spending which drives 70% of the economy. Personal Income and Outlays will easily meet or beat expectations.
  • GDP: 2018 Q1 growth was pegged at 2.3%, besting the 2.0% consensus. The gain was largely driven by service spending, business investment, and inventory growth, which is mostly positive for the economy.
  • Corporate earnings: About 80% of companies reporting earnings in 2018 have surprised to the upside, according to FactSet. However, strong corporate earnings have recently decorrelated from stock returns.

Weekly plays:

In addition to our monthly portfolio, we also take advantage of mispricings in the market on a week by week basis. This week, we are bullish on Apple (AAPL) prior to their AH earnings report Tuesday. Priced at a $162 at the time of this writing, Apple is trading roughly 11% off of its 52-week high. Most of the anxiety heading into this week’s earnings stems from anticipated weaker smartphone demand; however, these concerns may be overblown.

Bloomberg warned of “a disappointing outlook” for smartphone sales after the earnings report from Taiwan Semiconductor Manufacturer (TSM). In this instance, it’s an exaggeration. TSM, the primary and allegedly exclusive chip provider for the iPhone 8, 8+, and X, cut its revenue growth projections for the remainder of the year from 10-15% growth to 10% growth. On the earnings call, a CEO states this is because “business is expected to be affected by continued softer demand from [the] smartphone segment.” This statement doesn’t necessarily indict Apple: smartphone sales are down on a year-over-year basis, and TSM sells chips to other phone manufacturers.

Further clarification did reveal that the smartphone weakness was coming from the premium smartphone segment, which would suggest Apple and especially the iPhone X. The magnitude of the decline is expected to be only slight. Another CEO explains, “The crystal ball we saw before, the smartphone going to give us, in 5 years, going to give us 50% growth dollar. Now it looks smaller like 40%, a little bit more than 40%…smartphone a little bit weaker than way before.”

Other iPhone parts manufacturers have also reported running at below capacity, which is indeed worrisome. In the long run, Apple needs to reduce its dependency on smartphone sales. Expect iPhone sales volume for this quarter to slightly disappoint, with reduced guidance moving forward. However, the better margin on premium devices will offset the decline in volume and boost profit overall. Coupled with growth in the service sector and plans to return more capital to investors, Apple is a buy through its earnings beat.

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