TSP

Lyn Alden

July was a positive month for the TSP, with most funds being in the green.

The G Fund is up a tiny fraction of a percent, while the F Fund is down a tiny fraction of a percent. All three equity funds are positive; the C Fund went up about 3.8%, the S Fund went up almost 1.5%, and the I Fund which has struggled in recent months had a solid 2.7% gain.

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Earnings Season

Earnings season is in full gear, with hundreds of companies reporting results for the previous fiscal quarter.

According to CNBC, out of the hundreds of S&P 500 (C Fund) stocks that have reported quarterly results so far, the average revenue increase compared to last year’s quarter was a strong 8.6%. Earnings have increased by 22.4% on average, with 7-8% of that being due to the corporate tax cuts passed last year.

The majority of companies are beating analyst expectations. The glaring exception to the positive trend was Facebook and a few other high-flying tech stocks. Facebook’s reported revenue was lower than analyst expectations, their reported number of daily average users (1.47 billion) also slightly missed expectations, and their guidance for the rest of 2018 was weaker than expected.

As a result, their stock dropped like a rock, falling over 20% within a day, which is the company’s biggest single-day stock price drop in history:

Chart Source: Google Finance

This shaved about $120 billion away from Facebook’s market capitalization. Even though the company continues to grow in terms of users, revenue, and profits, investors place a high valuation on Facebook and any reduction in growth rates is met with selling and sharply reduced valuations.

Facebook is the fifth largest holding out of the 500-company C Fund, with Facebook shares representing about 1.8% of the total fund. Fortunately, Facebook’s stock price drop is absorbed by the diversity of the fund and the strong earnings and results of other companies.

Twitter and Netflix are two other tech high-fliers in the C Fund that saw similar 15-20% declines in late July. Both reported decent results, but not good enough to satisfy investors with their high valuations.

Keeping an Eye on Tariff Impacts

Some companies that require considerable steel and aluminum in their operations reported softer results due to the country’s new aluminum and steel tariffs and rising material costs in general. C Fund components Harley-Davidson, Coca Cola, Honeywell, Whirlpool, General Electric, W.W. Grainger, Stanley Black and Decker, Genuine Parts, and a handful of other companies reported that they are facing higher material costs. Most of them are raising prices in response, passing the price increases onto their customers. Other companies, like Harley-Davidson, don’t expect to be able to raise prices much and instead foresee themselves absorbing most of the extra costs, reducing their profit margins.

Whirlpool has been one of the toughest hit, thanks to both declining sales and rising material costs:

Chart Source: Google Finance

On the other hand, steel producers like Nucor have been reporting great results. Higher steel prices due to tariffs on imported metal help increase the profit margins of domestic steel producers, because their selling price is higher while their expenses remain largely the same.

Chart Source: Google Finance

Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.