The US markets still faced quite a bit of volatility during the trading session February 6, but it wasn’t anything compared to the bloodbath from Groundhog Day and the subsequent Monday. We can only hope that the worst has passed, but it probably hasn’t.
By Kris Rosemann and Brian Nelson, CFA
After overnight fears February 5/6 of a significant drop at the stock-market open–the Dow Jones Industrial Average (DIA) had been indicated down as much as 1,000 points at one point–stocks jumped between positive and negative during the trading session February 6, and the last 24-48 hours have seen more than its fair share of volatility. The CBOE Volatility Index (VIX) rose above 50 for the first time since August 2015.
A large portion of the blame for the overnight worries fell on the Credit Suisse VelocityShares Daily Inverse VIX Short Term ETN (XIV), which fell as much as 85% in after-hours trading. Credit Suisse (CS) will end trading in the ETN after February 20. CBOE Holdings (CBOE) is falling hard alongside the spike in volatility and the collapse in the XIV as it is the only exchange where VIX futures and options can be traded. We’re not anticipating any systemic worries stemming from the ETF’s demise, however.
The US trade deficit rose 5.3% in the month of December, and it hit its highest levels in December and the full-year 2017 since 2008. The deficit kept the US from recording 3% economic growth for the third consecutive quarter, which it has not accomplished since 2005. St. Louis Fed President Jim Bullard has warned against drawing conclusions from recent wage growth reports and inflation, and suggests that the correlation between wages and inflation “may be close to zero.”
While stocks are down only modestly following Monday’s drop, cryptocurrencies continue to see a mass exodus as Bitcoin (XBT, GBTC) has fallen below $6,000 after nearly hitting the $20,000 mark in December 2017. The price of the cryptocurrency has fallen more than 50% since the start of 2018, and regulators plan to ask the Senate Banking Committee to consider implementing federal oversight in digital-currency trading platforms, which have largely been operating in a state of regulatory limbo.
In earnings news, Best Ideas and Dividend Growth newsletter portfolios idea General Motors (GM) powered higher the trading session February 6, after the automaker reported record fourth quarter EBIT-adjusted of $3.1 billion. Strength in North America was key, but improvements across all operating segments and cost-reducing initiatives were also noteworthy in the quarter. Looking ahead to 2018, the company expects its leaner operations to benefit from an updated model lineup in the US that places emphasis on higher-margin SUVs and crossovers, and together with its partners, the firm expects to launch 15 models in China in 2018. GM is keeping its eye on the future as well, as it plans to allocate $1 billion of its $8 billion 2018 capital spending budget to autonomous vehicles.
Oil giant BP (BP) declared that it is “operating and firing on all cylinders” in its quarterly report before the open February 6 as the start of seven new projects in the fourth quarter helped push daily production levels up 18% from the year-ago period. As the company continues to work to reduce its break-even point to its target of $35-$40 per barrel from current levels of ~$50 per barrel, it expects to generate much higher levels of free cash flow. Management expects Brent crude to fall back to the $50-$55 per barrel range by the end of 2018, which it anticipates keeping a lid on its capital spending. Though 2017 free cash flow of ~$2.4 billion was substantially improved from negative territory in 2016, it was well short of covering annual dividend obligations of ~$6.2 billion.
Shares of Allergan (AGN) moved modestly higher February 6 after it reported a strong finish to 2017 with fourth quarter net revenues climbing ~12% on a year-over-year basis. The firm’s Facial Aesthetics franchise continues to turn in solid top-line growth as BOTOX Cosmetic revenues advanced 14.5% and the JUVEDERM Collection revenues leapt 14.7%, and the total Medical Aesthetics segment benefit from new product launches as well. GAAP net revenues in 2018 are expected to be $15.0-$15.3 billion (down from more than $15.9 billion in 2017), while GAAP net loss per share is expected to be in a range of $2.27-$1.52 (compared to a GAAP loss per share of $11.99 in 2017).
All told, we continue to watch the 10-year benchmark Treasury rate (TLT, TBT) as an indication to where broader equity market valuations may go. We also continue to remind readers that interest rates are an integral part of stock valuation, and rising rates typically translate into lower values, all else equal. Finally, we’re reiterating the view that in the event that interest rates continue to climb, utilities (XLU) and REIT (VNQ) stocks could face ongoing selling pressure, regardless of the health of their underlying fundamental operations, as investors seek risk-free Treasury assets to satisfy yield requirements instead of risky yield-oriented equities. We’ve been watching the market action closely these past few days, probably closer than we should.
Related: F, O
Disclosures: Kris Rosemann and Brian Nelson do not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.