It was a tough news-driven week that finally saw the market blink to the shenanigans of a bad actor.  Americans found a way to internalize savage terror attacks at home and abroad in a way where our collective pain didn’t result in large stock market declines. It wasn’t about complacency or acquiescing to a new reality. 

On the contrary, the reaction sent a rational message that these colors don’t run and that our market doesn’t crash when savages unleash their terror.

Something happened last week. There was an epiphany that a madman now has the ultimate weapon of destruction and a method of striking America and our allies. We all remain supremely confident that our military will find a way to protect everyone. However, the stakes got higher, sending the stock market lower. 

There was an uneasy calm by Friday’s close from a combination of President Trump’s firm leadership coupled with news of backroom diplomacy.  It’s the kind of one-two punch Americans voted for in November. I suspect the key is how to allow Kim Jong-un to back down without losing face. Dictators can’t seem weak in front of their subjects, so it will be interesting to see.

With that in mind, there will be intrigue for the rest of the month to see if North Korea moves ahead with announced plans to launch missiles near Guam. 

Good News is Bad News

Even before last week’s news was moving stocks lower (only in this case), it was good news. According to FactSet, 91% of S&P 500 companies already reported that this is shaping up to be one of the best earnings reporting period for the record books.  Hence, 10 out of 11 sectors have posted revenue gains well ahead of consensus coming into this earnings period (June 30, 2017).

Overall, 69% of S&P 500 companies posted revenue ahead of consensus, which is well above the five-year average of 56% and the best quarter since 4Q11 (72%).

Earnings per share were even more impressive with 73% beating the Street. The 10.2% blended-rate of growth is significantly higher than the 6.4% modeled by the Street.

Negative Bias

Herein lies the rub – overall, stocks sold off on earnings beats for the worst reaction to positive earnings news since the second quarter of 2011.  Despite the average earnings beat 6.1% above consensus, the average four-day reaction was -0.3%.  So, it was not your imagination – good news was bad news, and few stocks were spared.

There’s a negative bias in the market, in part to the longevity of the Bull Run, higher valuation, and growing angst associated with rallies. There has been very little volatility since coming off the bottom in 2009, which was a reason why many folks did not buy into this market and they were wrong. 

The one thing to remember here is that ultimately, fundamentals matter most and prevail when the dust settles. Be careful of the herd mentality and overreactions; know that taking losses are part of the experience. Last week, there was no place to hide on the equity side other than utility names. As bond yields slide, the three-decade rally continues to get new life as a haven. 

This week, there are only 18 S&P 500 company names reporting financials, although three Dow components will weigh in as well.  North Korea is still in the news; while it’s not likely to impact the stock market, the events in Charlottesville, VA will reverberate louder.

America is being tested around the world and at home.  The nation has always passed these tests. I’m confident we will once again, and a part of that victory will be reflected in the stock market.

Today’s Session

This morning, the market is taking its cue from Asia; but, it’s not China this time.  Instead, Japan has awakened, at least in the second quarter, with GDP growth of 4.0% against a consensus of 2.5%.

The move in Japan was driven by domestic demand and might embolden the Bank of Japan to stay accommodative longer than necessary as a form of a victory lap.  This is the sixth straight quarter of positive GDP growth in Japan, and it does bode well for the global economy; although, it probably won’t close the trade gap with the United States.

In 2016, US trade with Japan:

• $132.0 billion imports
• $63.2 billion exports

Meanwhile, China announced it will follow-through on UN sanctions against North Korea on iron and sea food imports just as the Trump administration announced it will follow through on investigating China’s treatment of American intellectual property.  It’s a foregone conclusion, China is ripping off the world on IT.  The only dispute is how much this is causing in billions on economic damage. The estimated economic impact of China IT theft is $225 billion to $600 billion.

The screws tighten on North Korea, and China is put on notice, and still Japan proves economies can soar even with clouds of danger and the most belligerent of neighbors.  This calm is boosting the market this morning.