2018 Equity Market Recap

 

Equities were expected to outperform other major asset classes in 2018 as they were to benefit from synchronized global growth and an increase in profits due to the Tax Cuts and Jobs Act passed in 2017. While major U.S. equity indices spent the majority of the year in the green, their gains were erased in December due to a combination of factors. These factors included investor’s expectation of a weakening global macroeconomic backdrop and an unpopular decision by the Federal Reserve to increase their federal funds rate between 2.25% and 2.50%. The federal funds rate is a measure used by the central bank that controls the country’s money supply and in turn, can influence growth. With increasing interest rates, investors were worried that the Federal Reserve was raising rates too quickly and that the economy could overheat. As a result of these developments, major equity indices posted their worst year in ten years with the S&P 500 falling 6.2%, the Dow Jones Industrial Average falling 5.6%, and the NASDAQ falling 4%.  

In comparison to 2018, 2019 is a year in which analysts expect growth in corporate profits to slow as they have reaped the benefits of the tax cut and will continue to suffer from an increase in expenses due to the ongoing U.S.-China trade war. However, with approximately 50% of S&P 500 companies already having reported 2018 fourth-quarter earnings, major U.S. equity indices have been able to bounce back from their December lows as growth in corporate profits have been better than initially expected. For January, the S&P 500 gained 9.16%, the Dow Jones Industrial Average gained 8.11%, and the NASDAQ gained 10.23%. Although each sector had seen certain companies that failed to meet analyst’s earnings expectations, the following two retail companies have posted some of the strongest earnings for the quarter.

Estee Lauder Companies Inc. (NYSE: EL)

Estee Lauder Companies Inc. is one of the world’s leading manufacturers and markets quality skin care, makeup, fragrance and hair care products that are sold in upscale department stores. Currently, Estee Lauder Companies Inc. offer these products under brand names such as Aveda, Bobbi Brown, Jo Malone London, and Tom Ford Beauty. In recent years, Estee Lauder Companies Inc. has been able to benefit from an increase in spending towards discretionary goods as well as an overall trend in which consumers have become more concerned about their image.

On Tuesday, February 5, EL released earnings for the quarter in which investors were reassured that the company continues to benefit from the same trends it did a year ago. For the quarter, EL reported earnings per share of $1.86 which is better than last year’s earnings per share of $1.52 and Wall Street’s estimate of $1.54 for the quarter. Additionally, EL’s revenue was reported to be $4.01 billion for the quarter in comparison to the $3.92 billion expected by analysts. The company’s better-than-expected performance was primarily driven by a strong holiday season, increased sales from premium products, and solid results from its Asia-Pacific operations. As a result of this strong quarter, EL has raised their outlook for the first six months of the year and had experienced a 12% gain on the day.

Clorox Co. (NYSE: CLX)  

Clorox Co. is a $19.6 billion company that manufactures and markets consumer and professional products under notable brand names such as Clorox, Tilex, Glad, Burt’s Bees, and Kingsford. As a company that predominately offers household consumer products, Clorox tends to perform best in times of an economic slowdown as their products are a constant necessity within consumer’s lives.  

On Monday, February 4, Clorox Co. posted better-than-expected earnings for the quarter that resulted in the company’s shares gaining 6% on the day. For the quarter, Clorox Co. reported adjusted earnings per share of $1.40 which beat analyst’s expectations of $1.30. The company’s increase in profitability was driven by a greater-than-expected decrease in costs under the company’s cost-cutting plan. Similar to Estee Lauder Companies, Inc., Clorox Co. increased their guidance for the year as the company expects to continue cutting costs under their current plan.

With Estee Lauder Companies Inc. and Clorox Co. posting better-than-expected earnings for the quarter, investors who are bullish on the retail sector have been provided with a glimpse of what can be expected from future earnings releases in the coming weeks.


By Dominik Sochon - Consumer Goods & Retail Director, Baruch IMG