Weekly Wrap: Stocks Shake Off the Brexit Blues
The S&P 500 and Dow hit record highs, and JPMorgan and Yum posted better-than-expected results.
Jeremy Glaser: Earnings season kicks off as stocks hit record highs. This time on the Morningstar Weekly Wrap.
After last week's jobs report confirmed the U.S. economy is still chugging along, and with international developments and still low-inflation keeping the Fed from raising rates, stocks completely shook off their Brexit blues this week with the S&P 500 and Dow both hitting all-time record highs.
Better-than-expected earnings reports helped, too. Jim Sinegal thinks that JPMorgan's results underscore that many of the concerns surrounding U.S. banks may be a bit overblown.
Jim Sinegal: There were three big surprises in JPMorgan's earnings report this quarter. First, is the impact of Brexit--should not be a big deal in the near term. It seems like management is committed to doing business in Europe--life will go on--and they pointed out, rightfully, that it's going to be a long, involved process. Nothing that is going to disrupt business or cause a lot of additional costs in the near term. Second, credit quality--because energy companies have been running into trouble because we've seen some signs of deterioration in consumer credit, people have been worried this is the beginning of another down cycle in credit. It seems that was not the case, JP actually reported excellent results on the credit front. And they reported that consumers are starting to borrow again, so consumer confidence is really going up. That's a very encouraging sign for the banks. And third, the interest rate environment. Because general economic fears regarding China, regarding Europe, have escalated over the past quarter or two, people are worried that the banks aren't going to get the help they need from a rising rate environment. We think that's probably the case in the near term, however, over the longer term, the fact that consumers are starting to borrow again, that confidence is coming back, should be good for the economy, good for rates, and good for the banks.
Glaser: Yum Brands also had a better-than-expected quarter on the back of good results in China ahead of the spin-off of that part of the business.
RJ Hottovy: Heading into 2016 there were really three things that we were looking from an investment thesis standpoint. And each one of these has really played out so far this year. The first is a more sustained recovery in Yum's China division, where we have seen improvement in same-store sales, and giving us much more confidence in the company's ability to balance value with innovation. The second thing is more details about the company's separation of Yum China, which is expected to take place at the end of October. We think this will create two moat-worthy companies: one being a very much growth story centered on China, the other being a much more diversified, capital allocation story in Yum Brands. And finally, a better understanding of what's going on in the markets outside of China. We've seen some improvement in Pizza Hut U.S. that we think can be rolled out to other markets, while Taco Bell has felt increased pressure from some of the U.S. burger chains. We think that the company is also finding a nice balance with its value platform for the back half of the year.
Glaser: Do young investors need bonds in their portfolio? Our Karen Wallace digs into that question in this week's Short Answer.
Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.