Cautiously Optimistic

This will be the phrase that most company CEOs will use to describe the current environment and the prospects for their company’s products and services. This week the bulk of the financial community will report fourth quarter earnings and profitability and start the earnings reporting season that will be closely scrutinized for clues about the strength of the domestic economy and the effects from trade war tariffs and other international influences. In my opinion, cautiously optimistic will be taken as a good response and worthy of more inspection to ascertain whether a report points toward better growth throughout the year and suitable for investment. Companies that stand out this earnings season will obviously be the ones unaffected by trade wars that continue to deliver strong earnings with upbeat forecasts and strong revenues. Unfortunately, on the other end of the spectrum will be companies hurt by global macro concerns and uncertainties and the effects of trade wars with China and Europe and the potential drag from delayed and deferred projects. The good news is that sentiment and expectations are pretty low at this point and any stronger than anticipated results should be treated well by investors. I am eager to see how CEOs frame the current environment.

Investors continued with the Fed induced rally last week with all major indexes up 2% or more. After two strong weeks of upside response by investors to the Federal Reserve’s new wait and see approach prospects for more short term gains will be tougher with a smorgasbord of earnings to absorb and tougher technical resistance to work through from the wicked correction in December. With no help from Washington D.C. investors will be left to fend for themselves and decide where to take stocks during this critical earnings season.

One sector that is receiving renewed interest from traders and investors is the semiconductor companies within the technology sector. Because new highly programmable semiconductors are the foundational building blocks for all sorts of exciting technology innovation such as artificial intelligence, machine learning, internet of things, gaming, and autonomous driving; it is noteworthy that some nice upside buy interest from investors was notable last week in the face of more markdowns of Apple iPhones and some reduced expectations from some key semiconductor companies. It is too early to call it a meaningful reversal but typically when a company reports weak earnings and the stock goes up after the report it is a pretty good indicator that all the bad news is known and investors in that company are now looking forward to the next innovation. Let’s see if these counter moves by many key technology leaders continue over the next several weeks. If the positive surprise continues it will be a strong signal that the global economy is not falling apart and investors are stepping up to the next set of exciting products and services.

Have a great week,

Roger N. Steed

January 14, 2019

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