Weekend Update #188
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Since the first presidential debate and after the attempted assassination of former president Donald Trump, his chances of winning the election increased from 34% to 39% (as inferred by PredictIt presidential odds). In light of this shift, investors have revived the “Trump Trade”, diversifying away from the S&P’s year-to-date winners and into more defensive names. Trump’s history as a president as well as his current campaign rhetoric suggests that, if elected, he would implement a protectionist stance that would include lower corporate taxes, higher tariffs, potential higher inflation, higher rates, and more focus on domestic investment. As a result, the S&P Information Technology index fell -5.14% this week while the indexes for energy, real estate, financials, industrials, and healthcare equities rose by an average of +1.19%. Additionally, investors appeared to favor equity small caps, as the Russell 2000 index advanced +1.68%. The week also included earnings reports from some of the United States’ largest banks.
The stock market saw significant fluctuations this week, starting with a +2.0% surge in the Russell 2000 index on Monday following an assassination attempt, causing Trump Media & Tech. Group Corp. to soar +31%, and gains in oil producers, gun makers, and private prison stocks. Trump also tapped J.D. Vance as his vice president nominee who is considered to be his successor for the younger working class right. Powell’s positive comments on inflation contributed to a modest +0.28% gain in the S&P. On Tuesday, the Russell 2000 index extended gains and closed 4.4 standard deviations above its 50 day moving average. Retail sales exceeded expectations and the S&P rose by +0.64%. However, Wednesday brought a stark contrast with US semiconductor stocks plummeting -6.8% after comments from both President Biden and candidate Trump suggested that an increase in export restrictions and a hardline stance on semiconductor shipments to China were on the horizon. Thursday's jobless claims showed the highest increase since early May, dragging down all major indexes, with the S&P falling by -0.78%. The week ended on a low note as a global IT failure led to a 15% drop in CrowdStrike Holdings, and the S&P slipped another -0.71%. Looking ahead, key economic data readouts and earnings reports from Tesla and Alphabet will be pivotal in determining if the rout in tech decline will continue to weigh on major equity indexes.
Other corporate highlights:
Meta Platforms Inc. is rumored to be seeking a minority stake in Ray-Ban sunglasses, signaling the company’s continued pursuit into wearable technology.
Apple Inc. is seeking to license more films from top Hollywood studios to add to its AppleTV+ service.
Amazon Prime day sales saw an increase of 11%, as deal seeking consumers show a persistent desire to shop during promotional events.
Weekly Index Performance
S&P 500 5,505.00 -1.95%
DJIA 40,287.53 +0.73%
Nasdaq 17,726.94 -3.65%
Key Economic Readings Next Week
July 23rd — Existing Home Sales
July 24th — MBA Mortgage Applications; S&P Global US Manufacturing PMI; New Home Sales
July 25th — GDP Annualized QoQ (2Q Advance); GDP Price Index ; Initial Jobless Claims; Durable Goods Orders
July 26th — Personal Income; Personal Spending; PCE Price Index MoM; PCE Price Index YoY; University of Michigan Consumer Sentiment Survey
Thank you Blue Room Analyst IAN CARTER
With emotions running high in U.S. politics, markets were jittery all week. Trade related rhetoric from both President Biden and Presidential Republican Nominee Trump sent semiconductor related shares lower. In fact, all of the Magnificent Seven stocks were down for the week. Fund One was not able to overcome the negative market forces and also finished the week in negative territory. We are taking solace in the shift of upward momentum into the broader market and renewed attention to small cap companies. We are hopeful that these shifts will begin to boost Fund performance.
Our big winner for the week was Coinbase which went up in tandem with the price of Bitcoin. AGCO, Shutterstock and Zuora also bucked the market direction and contributed positively to performance. In addition, our short positions in Enphase, Cadence and ARM were all down with the market, thereby adding to performance.
On the detractor side, Cameco and AMD were down but the largest negative performer was 4D Molecular. 4D unveiled interim data from an extension cohort of its 4D-150 program for a broader wet AMD population. The data surpassed Wall Street’s expectations but commentary from the sell-side sent shares lower citing a dosing regimen change that made comparisons harder across prior data and competitor programs. Data shows the dosing change led to improved and more durable patient outcomes, but a new narrative questioning continuity of the data cast a negative light on shares after a long stretch of share appreciation. We continue to be confident in 4D’s long-term prospects.
Our team prides itself on being steady even when the markets are choppy. With the presidential election noise only just beginning, we expect that the markets will continue to be volatile. We intend on taking advantage of the market dislocations by remaining focused on our deep fundamental research.
Thank you Blue Room Investing President JOHN FENLEY
Executive Summary
U.S. Bancorp beat on EPS and net interest income in Q2 2024, driven by some tailwinds in NII that should help drive positive operating leverage into 2025 as well as momentum seen in fee growth. Management reaffirmed prior FY 2024 guidance and guided to relatively flat NII into Q3 2024, which means management expects a strong rebound in Q4 2024. Similarly, expenses trended slightly higher than expected in Q2, similar to other banks that have reported this quarter, but maintaining guidance for $16.8 billion or less in expenses this year, U.S. Bancorp looks to still pull levers to gain efficiencies toward year-end.
Specifically on the NII improvement, management noted strength coming as they see stabilization in deposit rotation and rates paid while loan mix has improved and earning asset repricing continues. Management expects some rotation out of deposits in the future, but at a minimal level. Core deposit levels were stable in the quarter, with total average deposits rising 2.2% to $514 billion in Q2. Management confirmed that the noninterest bearing mix shift continues to slow but will still take time to normalize. Loan growth they expect to be modest.
Commenting on the Federal Reserve’s 2024 Stress Test, U.S. Bancorp noted the 60 bps increase to their capital buffer to 3.1%, taken by assumptions of extreme industry stress, and management messaged they remain well capitalized and prepared for any potential industry stress.
Overall, the report was a positive for U.S. Bancorp with management pointing to a path toward stability and growth into 2025. While that will be a slow process and Q3 NII is expected to remain flat, investors have digested the report in a positive light. There’s an expectation for rate cuts to be beneficial to USB results going forward and concerns remain centered around the strength of the economy and U.S. Bancorp’s ability to withstand any pressures there. Management commented positive trends on both. USB shares are trading up 4.0% to $45.03 in early trading today following the report.
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