After a strong start to earnings season, the tempo has slowed after results from Apple failed to excite investors.
The market also just got hit with first quarter GDP that disappointed, April auto sales numbers that whiffed, and is preparing for a major jobs report on Friday.
Business Insider spoke with TD Ameritrade chief market strategist, JJ Kinahan, to discuss those topics and more.
Kinahan is an expert in retail investing. As the chief market strategist at TD, he has a unique window into 7 million brokerage accounts with more than $US750 billion in assets.
This interview was edited for length and clarity
Greg Hoffman: You said Monday that this week would “test the market’s mettle.” We are three days in and the market is flat after digesting some of the earnings and other news. What does that tell you about the state of this bull market?
JJ Kinahan: It tells me the state of a couple things. Number one, Apple is always a bell weather for retail investors. Apple failed on their primary product. However, I guess the view many people have is ‘OK, yes they did fail on the phones, but it was only because the report was just a short of a new version of the new iPhone being released and that this past iPhone did not have a ton of changes.’ There is actually now anticipation for the next version of that phone or a new product so to speak.
I think that the earnings themselves this week have been pretty good. I think the employment report takes on extra importance this month and the reason I think that is, I don’t think any of us thought we would have a rate hike today [May 3] and we didn’t.
With the probability for a hike at the June meeting being between 70-72%, depending on what time you look at the Fed funds, it means that this employment report and the next one take on great importance because we have seen a little bit of slowing in consumer numbers recently. While the Fed did call it transitory, and I tend to agree that it may be transitory, we will see.
The last thing, the thing we are seeing from this earnings season is that these earnings become “meet or beat.” The one thing that continues to happen is that these CEOs are painting a very positive picture. If you think about the calls just nine months ago, CEO calls were all about meeting expectations and keeping the pace. Now, CEO calls are about: ‘We can at least meet these expectations but, we see growth.’ I don’t think that, ‘we see growth’ was a theme we heard nine months ago on CEO calls.
Hoffman: While these CEOs have a more positive outlook, there is some other concerning data such as the March jobs report and first quarter GDP. Does the average retail investor care about those economic data points? Or do they focus on what CEOs such as Jeff Bezos and Tim Cook are telling them?
Kinahan: Well I think the market itself is telling you, look at the VIX! The market is telling you that they (retail investors) aren’t seeing as much risk as perhaps many of us that look at things that are swirling around the market (GDP, jobs, inflation, production). You know, earnings drive the market, earnings are telling us that things are pretty good. Now, maybe there are a lot of reasons to be cautious right now. In terms of something we haven’t mentioned, there’s a French election on Sunday that might change some things. As we know, polls going into elections recently haven’t been so accurate.
So with that, there is a lot swirling around the market, but what I will say is that at the end of the day, the market has bounced back from any surprise over the last couple of years. That’s not to say it can continue indefinitely.
The other thing I should mention is that theoretically, things are functioning as they should. What I mean is that as the market goes up, volatility should go lower. We’re at all-time highs on the Nasdaq, we’re at all-time highs on the S&P 500, so theoretically the VIX is performing as it should.
Hoffman: The VIX hit 10.01 yesterday, which is one of the lowest levels I have ever seen. Is there too much complacency in this market? Do you think the VIX should be higher?
Kinahan: I think this is a mistake we all make sometimes, and having been a trader for a long time, I can tell you what I think it should be doesn’t matter. This is what it is and there’s a lot of people contributing to that level. The market is telling you what it should be.
So, can it change because of an unexpected event? Of course it can. But the other thing we have learned over the last few years, and again, without sounding too much like everything is rosy and you don’t have to worry … it hasn’t paid to be long volatility. Even when volatility has gone up, those who have sold it have done pretty well. I think when the VIX does move its going to move very quickly for the first few points because not too many people are reaching out to buy it right now. So to your question, are people too complacent? I wont say that they are too complacent, what I do think they are, is tired of trying to pick a bottom and getting beaten up.
Hoffman: Going back to Apple, it’s a very popular retail stock. I know you said that many investors are looking to the next iPhone but, since it is such a large company and so popular, do you think this report will scare any investors away?
JJ Kinahan: What’s interesting, if you ever look at our IMX (Investor Movement Index) which measures our customers engagement with the market and the stocks they buy and sell, I believe Apple was a “sell” four of the last six months. Let me put that in perspective. Apple is still the number one held and number one traded stock at TD Ameritrade. So when I hear that our customers were selling it a few months ago, that tells me that our clients are being smart. People are like “oh man they sold it and then it went to all time highs” and I say no, they’re starting to think more like pros.
Professionals sell things as they go up and buy things as they go down and that’s what our clients are doing. They have been long these stocks for a long time, they’re starting to sell them as they go higher. I don’t think it ruins the confidence in the market nor in the retail public, actually I think that to your point earlier, they just saw Apple rally aggressively into earnings. So can the stock support the rally? I would have thought given those numbers there would have been a more adverse reaction. So when I look at Apple, I don’t see it being that bad, considering that if they would have missed by this much a year ago, the stock would have gotten punished! But instead, they missed, and investors said we still see great opportunities going forward.
Hoffman: You mentioned something interesting this week when you noted that in the final April consumer sentiment report from the University of Michigan there was a partisan divide, with Democrats very pessimistic about the economy, and Republicans very optimistic. I know you don’t know the party affiliation of your clients, but can you see some kind of division in your seven million brokerage accounts at TD?
JJ Kinahan: No. You know I thought that was really interesting what Michigan found, I truly did. However, when I look at our client base, one of the things that I do see is the difference in investing preferences by age group. You would think that millennials and older folks (Gen X, boomers, seniors) wouldn’t have much in common, but you want to know whats interesting? Three of their top five holdings are exactly the same.
Greg Hoffman: What are the three stocks?
JJ Kinahan: Amazon, Apple, and Facebook. The point I am trying to make, is that at the end of the day, what matters to people is “Where can I make money?” They don’t care necessarily whether they’re Democrat or Republican. When you’re investing, you ask, “What do I think is a good company? What company do I want to invest in long term?” Now, are there exceptions? Sure, but at the end of the day, I think most people put most of their portfolio where they think they can make the most money.
Greg Hoffman: Auto sales fell year-over-year for the fourth month in a row, missing analysts estimates. You talked about the importance of auto sales to understanding the American consumer. Do you think that falling auto sales in this country could be “a canary in the coal mine” for the rest of the market?
JJ Kinahan: I actually do think that is something we have to keep an eye on. I think you bring up a really important point. Now one thing about that, I want to watch that trend over a few months, I’m not going to say that one or even two months is going to make a trend, I think you have to have about a five-month trend. The reason I am saying that is we are talking about coming off of two great years of sales back, to back so it’s difficult to keep that pace when you’re making records.
However, if we do see five straight months of decline, I would say, demand has dried up, which is kind of odd considering the average car on the road is over 11 years old. So then I think it’s something we need to keep an eye on.
Greg Hoffman: Well next month will make five, so are you saying that next month is really important?
JJ Kinahan: Yes.
Greg Hoffman: President Trump releasing the outline for his tax plan sent the market higher last week. Considering that most of what we have heard so far is about corporate tax reform and deductions, how much do you think the average retail investor considers tax reform when making investment decisions?
JJ Kinahan: I think they care about tax reform deeply because it’s going to effect their investments one way or another. I think people understand that even if the personal rate does not get changed significantly, which we don’t know it will, a lot of the details remain to be seen, the corporate tax rate and in particular repatriation of taxes has the opportunity to create infrastructure jobs in the US. When companies have more money, yes they do buy backs, but also in an expanding economy, which CEOs say we are in, there is going to be spending and spending is good for jobs.