Beware the investment activity that produces applause; the great moves are usually greeted by yawns. – Warren Buffett
Even though first quarter earnings results continued to be mostly positive last week, the stock market barely budged as trading volumes were light and volatility was absent. While the technology-laden Nasdaq Composite Index posted a modest gain, the S&P 500 Index slipped 2 points for the week and finished at 2,905, 26 points shy of its all-time high close of 2,031 set back in September. Banks and financial companies continued their strong earnings performance as Blackrock, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America all beat analysts’ earnings estimates. Two prominent names in the health care sector, Johnson & Johnson and UnitedHealth, also reported better than expected revenue and earnings and issued favorable guidance for the full year. However, stocks in the health care sector continue to be weak as “Medicare for All” plans proposed by the Democrats would destabilize the country’s health system. The first quarter earnings season is still in its infancy but about 80% of S&P 500 companies have topped estimates so far. Economic data released last week was also mostly positive, both here and abroad. The Federal Reserve Beige Book disclosed that economic activity grew at a slight-to-moderate pace in March and early April and was characterized by a tight labor market, modest inflation, fairly strong consumer spending and mixed manufacturing data due to trade uncertainty with China. The world’s second largest economy surprised investors last week with better than expected first quarter GDP growth and industrial production, which was welcome news in light of recent worries that China’s economy was slowing. With continued favorable economic and earnings news, it should be just a matter of time before the S&P 500 Index breaks through the old all-time high and establishes a new one.
Retail sales in March rose a better-than-expected 1.6%, the biggest gain since September 2017, providing evidence that the economy is improving as spring begins. Leading economic indicators in March also rebounded after a lackluster February due to stronger job creation, fewer layoffs and rising stock prices. Weekly jobless claims fell 5,000 to 192,000, fewer than forecast, and at the lowest level since September 1969.
Qualcomm and Apple settled their royalty dispute and ended all litigation worldwide, agreeing on a six-year deal that will allow Apple to buy Qualcomm chips for its iPhones.
For the week, the Dow Jones Industrial Average added 0.6% to close at 26,559 and the S&P 500 Index edged slightly lower by 0.1% to close at 2,905. The Nasdaq Composite Index gained 0.2% to close at 7,998.
Both March existing home sales and new home sales are expected to be less than the number reported in February while the advance reading of first quarter gross domestic product (GDP) is expected to be 2.8%. March durable goods orders are forecast to rebound and be slightly positive after declining in February.
Among the most prominent companies scheduled to report first quarter earnings this week are Procter & Gamble, Coca-Cola, Visa, Starbucks, UPS, United Technologies, Facebook, Microsoft, Amazon, Intel, Microsoft, Verizon, AT&T, Caterpillar, Boeing, 3M, Ford Motor, Bristol Myers Squibb, Baxter International, Chevron and Exxon Mobil.
One asset class that is typically categorized as an alternative investment and has performed very well this year is real estate investment trusts or REITs. The Vanguard REIT ETF (VNQ), which invests in stocks issued by REITs, has posted a year-to-date total return of 15.4% through April 18th, only slightly less than the total return of the S&P 500 Index. These are companies that purchase real property such as office buildings, hotels, apartment buildings, shopping centers, storage facilities and health care facilities. Their stocks offer the potential for investment income, provide for some growth and usually have an above-average yield. By law, REITs must distribute at least 90% of their taxable income in the form of dividends to shareholders each year. After declining about 6% in 2018, REITs entered this year with attractive valuations and trading far below their historical averages. REITs also perform better in an environment where interest rates are either falling or stable. The fact that the Federal Reserve backed away from its tight monetary policy at the start of the year and announced that there would probably be no interest rate hikes in 2019 made REITs even more compelling. REITs also have a history of performing well during the late cycle of an economy. REITs should definitely be an integral part of any portfolio as they help diversify the risks of holding stocks and bonds.