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Mixed Bag: Better Outlooks From Lockheed, United Technologies, But McDonald's Misses

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If you normally check the Dow Jones Industrial Average ($DJI) for a quick read on the market, you might get a skewed view today.

That’s because several major $DJI stocks could come under pressure from disappointing earnings and plain old fundamental news even as the broader S&P 500 (SPX) reflects what overall has been a relatively decent morning on the Q3 reporting front.

$DJI components McDonald’s Corp (NYSE: MCD) and Travelers Companies Inc (NYSE: TRV) missed the mark early Tuesday, and that—along with the possibility of continued pressure from Johnson & Johnson (NYSE: JNJ) and Boeing Co (NYSE: BA) as they wrestle with issues of their own—could mean the $DJI has a rough time getting going. The futures market backed that idea up before the open as the $DJI came under pressure while SPX and Nasdaq (COMP) futures rose.

More about MCD below, but first the good news. Among the early risers Tuesday was Procter & Gamble Co (NYSE: PG), which beat consensus estimates on top- and bottom-lines and raised its outlook.

The same basic story got told by United Technologies Corporation (NYSE: UTX), which also beat expectations and upped projections. That was also true over at Lockheed Martin Corporation (NYSE: LMT), which came in way ahead of third-party consensus projections and also hiked its 2019 earnings and revenue guidance.

Though earnings haven’t been universally positive early on, what’s really nice to see isn’t just companies coming in ahead of analysts’ projections, but positive about the future. These are encouraging signs, and it’s good to see some of the big Industrial companies raising expectations.

Another nice thing to see early Tuesday was over in the biotech space, where Biogen Inc (NASDAQ: BIIB) shares were slaying it—skyrocketing 37.5% before the opening bell after the company announced plans to pursue regulatory approval for aducanumab, an investigational treatment for early Alzheimer's disease. Biotech stocks have been under pressure a lot so far this year, so this positive news punctuates what’s been some rough times for investors.

That said, it isn’t all perfect on the earnings front. MCD, TRV, and UPS Inc (NYSE: UPS) all disappointed today, so that could muddy the waters a bit in what so far has been a basically good start to the season.

Shakes, Ribs and Packages

McDonald’s is on the breakfast menu this morning as it reports Q3 earnings. Unfortunately, things didn’t go so well for Ronald McDonald and the gang this time around, as MCD missed consensus expectations and shares fell 3% in pre-market trading.

One thing that might be worth some attention as you chew over MCD’s results today is same-store sales vs. a year ago. That’s often an important metric for restaurants, and the worldwide picture was a bright spot for MCD in Q3, rising 5.9%. That was slightly above analysts’ projections of 5.4%. However, U.S. same-store sales growth of 4.8% was below the 5.2% analysts had expected.

The other thing to consider checking is average ticket price, or what the average customer spends on a meal there. As we peel the onion back on today’s earnings, also think about margins. There’s some concern that the two-for-one deals MCD recently promoted could pull people in through the golden arches but hurt profits. Maybe that was part of the story in the earnings and U.S. same-store sales miss, but the company could shed more light in its call.

With unemployment at 50-year lows, there’s a school of thought that suggests that as people start to do a little better they start to eat a little better. MCD is arguably the “Dollar Store” of restaurants. So maybe with the economy improving, Chipotle Mexican Grill, Inc. (NYSE: CMG) starts to do better because it’s more of a mid-level of dining establishments. Some analysts also suggest that MCD’s rivals have done a better job of adding new items to their menus like plant-based burgers.

Before we start shedding tears into our fries, MCD has been an amazing story despite many people giving the stock up for dead more than once. Shares are struggling a bit lately but really sizzled over the last few years.

Another earnings delivery this morning came from UPS, which beat consensus projections for earnings per share but came up just shy on revenue. Shares fell 4% in pre-market trading. The company has done a good job vs. the competition by keeping itself open to most businesses that want to use it for shipping. Its competitor FedEx Corporation (NYSE: FDX) arguably got caught up with becoming too reliant on a handful of companies and depending on their business, which put it under pressure when those companies started to struggle.

Hello Again

After more than a month of paying regular visits to territory above 3000 but not closing there, the S&P 500 (SPX) accomplished that feat Monday, leading some analysts to talk about chances for a new all-time high. The old peak at just below 3028 got established near the end of July. Strength in Technology, led by Apple Inc (NASDAQ: AAPL) and semiconductor stocks, might have reflected growing trade hopes on Monday. Financials and Energy also did well.

Though there really hasn’t been much positive trade news over the last few days, optimism that somehow the U.S. and China can get aligned helped pave the way to 3000 Tuesday. So did hopes for continued progress with earnings in a week where 25% of S&P 500 companies report. Chances for a third Fed rate cut next week remain near 90%, another potential tailwind for equities.

At the same time, the benchmark 10-year Treasury yield climbed to 1.8% on Monday, perhaps another sign of economic optimism. Overseas, the German 10-year bund remains negative, but it’s still well off of recent lows. Back home, it’s been nice to see the small-cap Russell 2000 Index (INDEXRUSSELL: RUT) build solid gains the last two sessions after struggling to keep up for a while.

Participation Trophies

While it’s nice to see companies beating analysts’ estimates, it’s also important to keep in mind that it’s a low bar they’re beating as analyst expectations continue to point to negative year-over-year earnings results. Also, nine of the 11 S&P 500 sectors are reporting net declines in profit margin so far in Q3, FactSet reported Monday. Only Materials and Real Estate escape that particular trend.

Some of the key reports to watch after today’s close include Chipotle Mexican Grill, Inc. (NYSE: CMG) and Texas Instruments Incorporated (NASDAQ: TXN), with Boeing Co (NYSE: BA), Eli Lilly & Co (NYSE: LLY), Caterpillar Inc. (NYSE: CAT), and Waste Management, Inc. (NYSE: WM) up on deck for tomorrow morning.

Before all that, investors get a look at existing home sales for September soon after today’s opening bell. In August, existing homes data looked really strong as lower mortgage rates apparently encouraged more buyers to sign above the dotted line. Existing home sales increased 1.3% month-over-month in August to a seasonally-adjusted annual rate of 5.49 million. They were up 2.6% from a year earlier.

In September, Briefing.com’s consensus is for a slight uptick to 5.52 million in the seasonally-adjusted annual rate. We’ll know soon enough. New home sales for September are due this Thursday.

Getting back to the 3000 conversation, it’s never a bad thing to see the market close above a psychological number like that. A close above the old high—which can’t be ruled out in the coming days—would probably be more significant and possibly bring in some technical buying interest. On the other hand, it still feels like there needs to be more of a catalyst to get the market out of its long-term range.

Meanwhile, trading volume remains relatively light, and the volatility meter keeps defying seasonal trends as the Cboe Volatility Index (VIX) sank to 14 on the nose yesterday. That compares to peaks above 20 earlier this month. Seems hard to believe, but October being October, you can’t count out the chance for more bumps in the road before we tear off this calendar page.

FIGURE 1: HOLDING BACK: As this six-month chart shows, the S&P 500 Index (SPX-candlestick) is back above 3000 and not far from its all-time high reached in July. The benchmark 10-year Treasury yield (TNX-purple line), on the other hand, is up over the last few days but below recent highs and way below its highs from last spring. If strength in stocks continues, can yields once again test the waters near 2%? Time will tell. Data Sources: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Fortunes Fading? Troubles keep piling up for China’s economy, and that could be a problem way beyond its shores. If you remember four years ago when a China sneeze caused a cold around the world, you know how this sometimes works. It goes beyond the 6% quarterly growth China reported in Q3, its worst in at least 26 years. There’s the swine epidemic raving the country’s pig herd and reducing China’s demand for feed products. There’s also concern that Chinese consumers are paring back on spending, which could hurt industries across the spectrum from travel to steel.

Would a trade deal help? Not necessarily, an analyst told the Washington Post late last week. He said a deal would only provide a “modest boost” for China’s economy. Other analysts quoted in the same article said they expect China to try to right the ship with more stimulus, but the problem with that might be rising debt levels that hurt the country’s credit rating. Are we in for another winter like 2015/2016 when China’s problems spread around the globe? It’s too soon to say, but it’s definitely a negative overhang. Materials, Industrial, and Technology sector stocks here in the U.S. with big exposure to China are where any market impact might show up first.

Late Year Waiting Game for Fed? Last week, Fed Vice Chairman Richard Clarida reminded everyone that the Fed isn’t on a pre-set course with rates, something Fed Chair Jerome Powell has said in the past. Clarida also pointed out something that the data has made quite clear: Inflation is muted. That probably gives the Fed some cover to take rates down another notch. So far, it’s hard to tell if lower rates over the last three months had any effect on the economy, but typically these moves take a while to play out. So don’t be surprised if after cutting next week, the Fed indicates plans to stop for a while and watch the data.

Trade Canaries No Longer Singing: A year ago, if you wanted a barometer for China trade progress, the popular thing to do was watch Boeing and Caterpillar. The argument was that these two large industrial companies could see their fortunes rise or fall based on trade, and signal how the rest of the market should follow. How the tables have turned as both these behemoths report this week.

On the one hand, you could still argue that CAT shares sometimes reflect progress or lack thereof on trade. Witness the recent $14 rally in CAT as trade optimism grew. However, lots of other Industrial sector stocks with China exposure have done far better than CAT in the stock market this year, and so have semiconductor shares and Apple, another two businesses where China is key. CAT shares trail the S&P 500 significantly year-to-date. It’s also easy to see why BA is off course as a China indicator. Its stock fell sharply again Monday as more worries surfaced about BA’s grounded jets and how it’s managed the crisis. Seems like these days, there are better places to look if you want to canary in the coal mine for trade with Beijing.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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