Markets React to Earnings Reports; Europe Deals With New Greek Government

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Market Digest – Week Ending 1/30

It was a busy week. Several major tech companies released earnings, Europe grappled with how to deal with Greece’s anti-austerity government, US GDP numbers disappointed, and oil prices continued to swing wildly. In the end, stocks fell and bonds rose as investors sought safety amid uncertainty. US interest rates are at record lows, but international yields are even lower, creating demand for dollar based assets.

Weekly Returns:

S&P 500: 1,995 (-2.8%)
FTSE All-World ex-US: (-1.1%)
US 10 Year Treasury Yield: 1.64% (-0.16%)
Gold: $1,283 (-0.8 %)
USD/EUR: $1.129 (+0.7%)

Major Events:

  • Monday – Microsoft reported sales growth of 4.6%, which was below expectations. Shares fell.
  • Tuesday – The FTC cleared the way for the merger between Safeway and Albertsons.
  • Tuesday – Yahoo announced it would spin off its Alibaba holding, worth nearly $40 billion.
  • Tuesday – Apple reported stronger than expected sales growth and earnings. Shares rose.
  • Tuesday – Obama dropped a plan to raise taxes on college 529 plans for the affluent.
  • Wednesday – Greek stocks and bonds fell as the victorious Syriza party’s actions suggested a showdown with European Union creditors.
  • Thursday – The Chinese government accused Alibaba of failing to crack down on the sale of fake goods and other illegal activities on its website.
  • Thursday – Amazon and Google reported stronger than expected earnings. Shares rose.
  • Friday – Mitt Romney announced he will not run for President in 2016.
  • Friday – Oil prices rose as much as 8% as speculators closed bearish positions and a report showed rigs were being shut at a rapid pace.
  • Friday – US GDP growth for Q4 was reported at 2.6%, below expectations and a decline from Q3.

Our take:

Apple’s quarterly earnings results were literally unprecedented. The company set a record for corporate profit in a quarter. $75 billion revenue and 75 million phones (34,000 every hour) sold in three months is almost unbelievable. While much of that is from overseas, $75 billion represents about the same amount Americans are expected to save this year from lower gas prices, and actually serves to dampen consumer spending in almost all other areas.

Those who have remained loyal to the sock have been rewarded. Shares are up nearly 50% since the start of 2014, compared with a rise of about 12% in the S&P 500. Still, since Apple’s peak in late 2012, it is lagging the S&P by a healthy margin. That goes to show the burden of high expectations – it’s hard to imagine the company could have executed better in the time since then. The stock’s gain of “only” 4% this week is another illustration.

Apple is an amazing company with an incredible story. It has generated massive wealth for its shareholders. But that means little looking ahead. We’re neither bullish nor bearish on the stock. Valuations seem reasonable by traditional thinking and the mountain of cash on the balance sheet is well known. But for the stock to advance, Apple must either introduce major new product lines or convince hundreds of millions they need a new iPhone every two years (a more aggressive return of capital might also work to some degree).

If any company can succeed in that, it’s Apple. But it’s a big challenge. There aren’t many areas that can move the needle. A product with $10 billion in annual revenues would be welcome, but not tremendously impactful. Not many companies generate that amount in total. Meanwhile, there is a delicate balance between creating new phones compelling enough to upgrade now but not so good they won’t need to be replaced in two years.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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