April 23, 2019
We expect wave after wave of better-than-expected first-quarter announcements that will propel quality stocks significantly higher in the upcoming weeks. One example of positive sales and earnings is UnitedHealth Group (UNH), which reported last Tuesday that its first-quarter sales rose 9.3% and its earnings rose 24% vs. the same quarter a year ago. UNH beat analysts’ consensus sales estimates by 1.1% and operating earnings estimates by 3.6% and also raised its earnings guidance. The stock initially responded positively then corrected, then slowly recovered on Wednesday and Thursday trading.
In my view, UNH didn’t rise far on the good news because there has been a lot of high-volume selling pressure on health insurance companies based on unfounded fears that “Medicare for All” will pass at some point in the long-distant future (after 2020) if Bernie Sanders or any other avowed socialist candidate wins, which would effectively put most health care companies out of business.
Even if Bernie wins in 2020, I doubt this would happen. Essentially, Medicare for All would be a single-payer health care system for everyone. A George Mason University study reported that Senator Bernie Sanders’ “Medicare for All” proposal would cost $32.6 trillion over 10 years, nearly doubling the total federal expenditures for an already-bloated federal government. As soon as that huge increase in cost is revealed, it is expected that Medicare for All would fail to get any serious support in the Senate. As a result, in my opinion, UnitedHealth Group remains a great near-term buy, despite profit taking last week.
This reticence to buy a good stock reminds me of how health care stocks went into the dumpster back in September 2015 when candidate Hillary Clinton promised to stop “price gouging” by pharmaceutical and biotech companies if elected. First of all, she was not elected, and also, if elected, she may not have had the power to pass her plans through Congress, so it’s usually a mistake to anticipate political changes years in advance. The market tends to panic first and think later, giving us a great buying opportunity.
Business Confidence is Picking Up in the Spring
Today’s lower interest rate environment is starting to improve business confidence. For example, the National Association of Home Builders (NAHB) sentiment index rose to 63 in April, up from 62 in March. The NAHB index peaked at an 11-year high of 70 back in May then dropped to 56 in December and has been improving steadily since then. As the weather improves, more potential homebuyers emerge. The fact that homebuilder sentiment is improving bodes well for improving GDP growth.
The Fed announced on Tuesday that manufacturing output was flat in March and declined at a 1.1% annual pace in the first quarter. Wood products and auto parts declined over 2% in March, but as the construction and automotive sectors recover in the spring, manufacturing output should also recover.
On Wednesday, the Fed released its Beige Book survey, in which all 12 Fed districts reported “slight-to-moderate” economic activity in March and early April. All 12 districts also reported sluggish sales at retailers and auto dealers. Agriculture conditions were weak and there were continued concerns about the Midwest flooding, heavy snow, and the likelihood for more flooding as the mountain snows melt.
Home sales and tourism were the bright spots in the Beige Book survey in the “few” Fed districts that reported improving economic conditions. Overall, the Beige Book survey will likely cause the Federal Open Market Committee (FOMC) to remain “patient” and to hold off on any key interest rate increases.
The best news for GDP growth last week was that the Commerce Department reported that the trade deficit continues to shrink. In February, it reached the lowest level in eight months, declining 3.3% to $49.4 billion, vs. a revised $51.1 billion deficit in January. In February, exports rose 1.1% to $209.7 billion (a 4-month high), while imports rose just 0.2% to $259.1 billion. A 60% surge in commercial aircraft shipments and a 16% surge in soybeans were largely responsible for the export surge. The trade deficit in the first two months of 2019 is 7.6% lower than in the same period in 2018. However, Boeing’s 737 Max woes are expected to show up in the March statistics, so the recent trade gains may be fleeting.
The U.S. trade deficit with China declined to $30.1 billion in February, down from $33.2 billion in January, and the trade deficit with the European Union (EU) hit a three-year low in February.
Booming domestic crude oil production and rising U.S. crude oil exports are also helping to reduce the U.S. trade deficit. You may wonder why crude oil prices continue to rise as U.S. crude oil production soars. One reason is seasonal, since worldwide demand rises in the spring. Other reasons include a brewing civil war in Libya, sanctions on Venezuela, and the expiration on U.S. waivers on imports of Iranian crude oil. It now looks like crude prices may remain high through the summer months.
These higher gasoline prices helped boost retail sales in March. The Commerce Department announced on Thursday that retail sales soared 1.6% in March, the biggest gain in 18 months, substantially above expectation of a 1.1% rise. New vehicles sales surged 3.1% and gas station sales soared 3.5%. Excluding vehicles and gas stations, retail sales still rose a robust 0.9%. Overall, there is no doubt that improving spring weather helped to boost March retail sales, which bodes well for first-quarter GDP growth.