Stocks bounce, semi's up, cyber down, earnings can't to surprise

• Stocks bounced on Monday – Tech (Semi’s) taking the lead.

• Cybersecurity still under pressure – CRWD gets blown up.

• Earnings now in full force – 80% of companies reporting beats.

• TLSA and GOOG after the bell.

• Dems raise $200 mill in the 24 hrs. AFTER JoJo pulled out!

• Try the Pan Seared Flank Steak w/Red Wine Shallot Sauce.

Good morning… I think I need to start today’s note with some basic understanding about what role the most recent political events mean to investors and the markets.  Why?  Because so many people are wondering what to do…. What it means, and should they change course? 

Yesterday our Chief investment officer and Senior Portfolio Manager with more than 30 yrs. of investment experience - Dan Payne made it clear to all at our investment committee meeting – I thought it would be helpful to share his thoughts with my readers and clients because it is clear, concise and spot on….

“The political events of the past month have run the gamut of horrifying, comical, sad, patriotic, and downright flabbergasting. I want to remind everyone that the proper investment response is the polar opposite of the speculation and hand-wringing that we’ve seen from the MSM (main-stream media) and political pundits.

While we can all make sport and somewhat lighthearted comments and predictions of what we think may come to pass, let’s be sure to not lose sight of these important truisms:

• The current stage of the economic cycle and continued growth in earnings is much more important than the sometime rough winds of political change.

• Our clients (and our) long-term investment success will be determined by the continued execution of our investment process and philosophy.  Our focus is on identifying and owning durable and resilient enterprises that have demonstrated the ability to grow cash flows and distribute such to its owners – regardless of the political environment.

• For investors – You should never buy or sell a security based on politics or any politician.  That said, some political events / outcomes do necessitate modifications in asset allocation and/or sector weights over time.

Over the coming weeks and months, we will be monitoring these “political winds” and will make modifications where appropriate. In the meantime, these next 100+ days are likely to be …… (Well, you can finish this sentence)”.

So, stocks rallied hard on Monday…. The Dow up 128 pts, the S&P up 60 pts, the Nasdaq rallied by 280 pts, the Russell up 37 pts, the Transports up 116 pts and the Equal Weighted S&P gained 54 pts. 

Broad Tech way out in front…. the XLK gaining 2.4%, sub-sectors like Semi’s +4.1% (think NVDA + 4.8%), Cybersecurity though remained under pressure…. down 0.2% (think CrowdStrike down another 13.5%!).  Behind tech – we saw strength in Industrials – XLI + 1%, Consumer Discretionary – XLY + 1.1%, Real Estate – XLRE + 1%, Utilities – XLU + 0.8%, Healthcare – XLV _ 0.6%,  Financials – XLF + 0.6%, Communications – XLC +0.4%, Basic Materials – XLB +0.3% while Energy - XLE lost 0.6%....think ongoing pressure on oil as a cease fire remains an option (removing the risk premium) as well as the idea that there is about to be an oversupply in 2025 - and while that is still a while away – the markets always react 4 – 6 months out….

Down the food chain - we saw strong rebounds in housing - XHB + 1.8%, Disruptive tech – ARKK + 2.2%, the Growth Trade – SPYG + 1.5%, Aerospace and Defense – XAR + 1.5%, Big Pharma – PPH + 0.5%, Biotech – XBI + 1.4% and the list goes on. 

Like Dan said – “The current stage of the economic cycle and continued growth in earnings is much more important than the sometime rough winds of political change.”  The latest Bloomberg Markets Live Pulse Survey expects earnings to boost the S&P 500 during this earnings cycle and beyond. 310 of the 465 survey respondents expect stocks to resume their upward trend due to the coming earnings reports.

So far, 14% of the S&P 500 companies have reported… (that’s 70), of those 80% (56) have reported a positive EPS surprise and 62% (44) of them have also reported a revenue surprise.  The earnings growth rate is on track to be +9.7% y/y and if that holds true – then it will be the highest y/y earnings growth rate since the 4Q of 2021. In terms of valuations, if we expect the S&P 500 to earn $243/sh this year – the forward 12-month p/e for the S&P is 22.8 x’s.  This is a bit rich vs the 5 yr. avg of 19.3 x’s and the 10 yr. avg of 17.9 x’s and all that means is do not be surprised to see ongoing volatility – especially as we enter the seasonally weak time of year – Aug – October.  Just fyi – last year saw an 11% decline in the S&P between August 1st and October 30th only to see it rally 16% between October 30th and December 31st – Capisce? I’m just sayin’…. 

Volatility – that surged last week – fell by 10% yesterday to end the day at 14.91 – just a hair above the trendline at 14.10…if we get those strong earnings reports with robust guidance – then I would expect the VIX to plunge right thru those trendlines to settle back in around 12.50/13.  Which is about another 14% decline – which should add about 2% to the S&P and more (maybe 3%) to the Nasdaq….

The selloff (which wasn’t really a selloff for the indexes – but was more so for individual names) took some of the fluff out and for those that sat tight and didn’t panic – you are glad you did…..Because – if you sold out and are now jumping back in – what have you really done?  Nothing other than create chaos in your investment account! – If you’re trading – then go for it, but if you want to build a long term account – get the trading mentality out of your head now….It does nothing but create noise and distraction…..and yes – sometimes you need to tweak your portfolio – but that is different from blowing it up.

Earnings today include some big economic behemoths…. UPS, GM, KMB, PM, GE, SHW, LMT, KO, PHM & HCA…After the bell – look for TSLA, GOOG, TXN, & V.  On Wednesday look for THC, NEE, GD, T, APH, ODLF, IBM and a host of others.

Eco data today includes Philly Fed Services report, the Richmond Fed’s business conditions report and Existing Home Sales - which are expected to be down 3% m/m. 

Bond prices declined just a bit – sending yields up (just a bit) nothing to get all anxious about.  The 2 yr. is now yielding 4.52% while the 10 yr. is yielding 4.26%....  All this as we await both the economic data including the FED’s favored inflation gauge – the PCE report and the FED’s FOMC meeting next week.  I do not expect bonds to do much before we hear from JJ on the 31st….  Rates are expected to remain unchanged at 5.25% as he ‘hints’ about a rate cut in September, November and December…. (As that is what mkts are expecting).  I am in the camp that they should not do anything until November – post the election – but I don’t think anyone is listening to me.

Oil – continued to decline on the Mid east ceasefire narrative as well as supposed weakened demand…. while the oil market is tight at the moment – it is expected to ‘loosen’ in the new year…. which I am not sure I really believe – as demand is expected to continue to grow.  Remember – the markets are discounting mechanisms – they are not trading on current data they are trading on data out 4 – 6 months…same way stocks trade….so the fact that prices are weakening is because of the expectations come the new year….   

Gold was all over the place yesterday – trading as high as $2460 overnight to a low of $2435 by noon time…Only to end the day down $1.50 at $2445.  I think much of that was attributed to the political drama on Sunday into Monday.  But ultimately settled down as it waits for economic clarity (GDP due out on Thursday and is expected to be +2%) and monetary policy clarity from the FED next week.  In any event – in times of uncertainty both political and economic – gold is always a winner.

US futures are mixed - Dow futures +40, S&P’s +3, Nasdaq -15 and the Russell is +6 as the market awaits the earning reports…GM announced and beat profit estimates, they raised their forecast on Truck demand and boosted fiscal year adjusted eps.  The stock is quoted UP 5% or $2.60/sh at $52.20.  And that is only the beginning….so far at 6:50 am – DHR, KMB, PHM, GE DGX all reported and beat…UPS – an economic stalwart missed amid ‘high labor costs and uneven demand’…. that stock is getting smashed – down 7.5% in the pre-mkts – trading at $134.40 – down $11. 

News that Kamala has received enough delegates to endorse her – makes her most likely ‘the candidate’ – unless of course the Democrats change the rules – the way they did to stop anyone from challenging JoJo in the primaries.  As a result, she is on her way to Wisconsin – a battleground state - to try and convince them that she is the ‘choice’ come November. (Just another reason to buy GOLD!)   In addition – we learned that the Dems pulled in over $200 million in the 24 hrs. after JoJo pulled out…. Now that’s an interesting stat – don’t you think?

The S&P closed at 5564 – up 60 pts…. leaving us in the 5500/5650 trading range.  Remember – I said I think we need to test trendline support at 5420 in the short-term…… and if last year is any indication of the seasonal trade this year – you should price in a 10% correction – just so you are not surprised – and that would take us to S&P 5000…just above long term trendline support that is currently at 4950.  Now if that does not happen – then you’re happy, and if it does – then you were ‘mentally prepared’ and you had your shopping list ready.

Pan seared flank steak with red wine shallot sauce

This is easy to make and will present like you spent hours in preparation. For this you need:

A Flank Steak, butter, garlic, s&p, Red Wine, Shallots, Balsamic Vinegar (a good thick one) and olive oil.

Begin by melting a stick of butter – now season the steak with s&p, add chopped garlic and massage. Now pour the melted butter and massage that into the meat as well. Cover and set aside.

In a small pan – melt more butter (1/2 stick) with some olive oil – so that the butter does not burn.  Now toss in sliced shallots – maybe like 4 shallots in total – sauté for 5 mins or so. Now add in ¾ cup of red wine (your choice) and 2 tblsp of the nice thick balsamic vinegar. Bring to a boil and then turn to simmer. Reduce by half – will only take a couple of min. Turn off the heat and whisk in one more tblsp of butter. (Can never have enough butter)

Preheat the oven to 400 degrees.

In a large oven proof skillet – add a touch of olive oil and heat up. When ready – add the flank steak to the pan and sear on both sides – 3 – 4 mins per side. Now place it in the oven for 5 – 8 mins (depending on thickness). Remove and cover – let rest for another 5 mins. 

Prepare you to serve platter with fresh kale – When ready – slice the flank steak across the grain and arrange on the platter with the kale. Looks good, no? Now you can spoon the red wine shallot sauce over it all or you can keep it on the side and let your guests serve themselves. Serve this dish with smashed roasted potatoes and a lg mixed salad.