ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: New high. The S&P closes at a level never seen before, as bond yields fall below a key level and investors wonder what`s next.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Hot home prices. Mortgage rates are falling but it may not be in the best interests of buyers.
HERERA: New perk. What would company is doing to help employees save for retirement and pay down student debt at the same time.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Thursday, June 20th.
GRIFFETH: And we do bid you a good evening, everybody, and welcome.
There were a number of notable movements in the markets today. On Wall Street, for example, as you heard the S&P closed a new high, with the investors cheering the idea Federal Reserve might cut interest rates next month. That seems to be how the market interpreted the Central Bank`s pledge to sustain the expansion which we told you about yesterday.
Oil prices are up more than 5 percent on geopolitical concerns and oil stocks followed suit. And finally, interest rates continued lower with the yield on the 10-year treasury, dipping below 2 percent for a time today to a three-year low.
At the close, the Dow rose 249 points for a 26,753. The Nasdaq added 64, and the S&P 500 was up 27 at that record.
Bob Pisani was following the action from the New York Stock Exchange.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: What`s behind the rally? There`s a lot of euphoria out there, euphoria about the Federal Reserve and Central Bank policy and the prospects of lower interest rates and euphoria about U.S./China trade talks.
Energy led the gains today. Crude oil spiked almost 6 percent after Iran shot down a U.S. military surveillance drone in international airspace in what U.S. officials called an unprovoked attack. This, of course, comes amid mounting tensions between Washington and Tehran and amid recent attacks on oil tankers in the Persian Gulf.
The markets took a dip briefly midday on comments from President Donald Trump saying Iran made a big mistake, quote, unquote, and hinting that the U.S. could be considering a strike against Iran, but it bounced back soon after when the president appeared to speculate that perhaps the drone was shot down in error after all.
Trade also played a part in today`s moves. Stocks moved higher on a headline coming from the “South China Morning Post” that China and U.S. negotiating teams may be meeting as early as Tuesday next week before the big G20 Summit.
So, what`s missing from this rally? We`re lacking some fundamental fire power. Just look at Carnival (NYSE:CCL) Cruise Line today. It is cutting its full-year forecast because of weaker European bookings and more travel restrictions. Carnival (NYSE:CCL) closed down 8 percent and took down rival cruise line operators Norwegian and Royal Caribbean along with it.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
HERERA: So, with parts of the market at a record, what is next for stocks?
Joining us to discuss this is Brian Levitt. He`s senior director of investment strategy at Invesco.
Welcome, Brian. Nice to have you here tonight.
BRIAN LEVITT, INVESCO SENIOR DIRECTOR OF INVESTMENT STRATEGY: Thank you. Nice to be back.
HERERA: And you make the point that we are still in a long-term bull market. There`s more to go. Why do you feel that way?
LEVITT: Yes, I mean, investors need to get used to the fact that this is a slow growth world without a lot of inflation. So ,what that means is even though this cycle has been going on for a long time, we haven`t built a lot of excesses in the economy. We`re not seeing the inflation that brings forward Fed interest rate hikes, and it is very rare for cycles to end without a series of interest rate hikes.
The reason why the markets have been responding the way they have in recent days is because the Fed has backed down off their tightening stance. And, you know, with valuations where they are and the global economy OK, this could go on a lot longer than people suspect.
GRIFFETH: And, in fact, you are among those who feel the Fed will cut rates maybe a couple of times this year before the end of the year. And I`m curious, you know, Fed chair Jerome Powell reminded everybody yesterday of the Fed`s dual mandate of maximum employment and stable prices.
What is it that`s calling for a rate cut right now do you think?
LEVITT: Well, what is calling for a rate hike right now is that —
GRIFFETH: Rate cut.
LEVITT: I`m sorry, rate cut, is inflation expectations have fallen meaningfully in the United States and around the world. And so, you know, if you think through the last number of years, the Fed tried to raise rates in 2015. While they did, they had to back off of it. They did it multiple times in 2018, slowed the economy, and now they have to back off of it.
So, every time the Fed tries to step in with a different policy stance, i.e. tighter policy, the markets react, yields go down, borrowing costs go up, the economy slows. The markets go down and the Fed backs off again.
And so, this is no different than what we saw in early 2016 and, you know, the Fed is rightfully doing it. Inflation expectations are simply too low in the United States.
HERERA: We do have some headline risks, though, do we not? We have an upcoming G20 summit. We don`t have a trade deal with China and now we have renewed tensions with Iran.
LEVITT: Well, we always have headline risk. I mean, if we`re going to wait until there`s absolute certainty to invest, we`ll never invest.
You`re right, the trade policy is disconcerting. And, you know, the big risk with trade is that it will lead to a flight to quality, strengthen the U.S. dollar and slow down the U.S. economy again. So that is a risk.
But the reality is what that means is the Federal Reserve is going to lower interest rates and stay easier for longer. So, you know, three years ago, investors would have been talking about Brexit, what did Brexit mean? Brexit meant easier policy around the world and markets that continue to go higher.
So if we get a bad outcome between the U.S. and China, that`s not good from a macro perspective, but what is more important is what does it mean for investors? I suspect you might have a battle of volatility around it but the Fed will respond and markets should likely go higher.
HERERA: On that note, Brian, thanks so much. Brian Levitt with Invesco.
LEVITT: Thank you.
GRIFFETH: As we mentioned earlier, investor optimism apparently is being driven by the hope that the Federal Reserve will lower its bench mark interest rate. But is it the right time to cut?
Steve Liesman takes a look for us tonight.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A bullish stock market reaction to the Fed`s announcement this week, suggesting a stock and bond market that are virtually certain the Fed will cut rates next month and even more beyond.
There are reasons for the exuberance. Eight Fed officials forecast at least one cut and seven of them are forecasting two. Fed chair Jay Powell said the balance sheet run-off — that is the quantitative easing that it had been reversing — could end earlier. Powell also hinted at a possible full half point cut instead of just a quarter.
And that`s the call of Morgan Stanley (NYSE:MS), which said in its Fed report, quote, a July rate cut of 50 bases points or half a point is coming. Downside risks in global growth and trade have dragged the Fed away from neutral. The federal market community will want to take an aggressive stance.
But is the market too bullish? Rate cuts generally come with a weaker economy and that could mean earnings disappointment. From the other side, there remains the possibility the cut never happens because the president strikes a trade deal with China and the economy turns out better than expected.
IAN SHEPHERDSON, PANTHEON MACROECONOMICS: With the summit with Xi, I think it will be a positive outcome. I think they both need a deal. They both need a success. I don`t think the tariffs will go up on July 1. I think the employment report on July 5 will be fine, and I think that the second quarter GDP number will be fine.
LIESMAN: And then there`s the market level. Back in 1995, the Fed cut rate when like today stocks were at or near an all-time high. That worked out well as the economy and the Dow marched on for years to come. But it cut rates near an all-time high in 2007. That ended poorly for the economy and the stock market.
So, investors have to puzzle over whether the rate come is coming, how much is coming and if it does come, will it be enough for the economy?
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in Washington.
GRIFFETH: And low interest rates have certainly been good for dividend- paying stocks this year. They have been hot and could get hotter if the Fed does, in fact, cuts rates further.
Joining us to talk about that, David Dietze, president and chief investment strategist at Point View Wealth Management and a big fan of dividend paying companies too, at the same time, right?
DAVID DIETZE, POINT VIEW WEALTH MANAGEMENT PRESIDENT & CIO: Absolutely. Yes.
GRIFFETH: Well, I was going to say, are we taking more risk — certainly you get a better yield from a lot of the stocks than you would from treasuries for example right now, but are you taking more risks because of the high prices right now?
DIETZE: Well, certainly. I mean
, now that the interest rates have fallen so much because of anticipations of Fed rate cuts, dividend stocks are looking more and more attractive as people who are traditionally in fixed income are now looking over their shoulders and looking at some of the better yielding stocks and saying, maybe this is where I can pick up some more yield. This is particularly true because credit bonds are also very tightly trading relative to treasuries.
DIETZE: What I like about dividend-paying stocks right now is if interest rates continue to go lower, they look that much more attractive. Look, we hit an all-time high today, Bill. What happens if something doesn`t work out, that there`s a breakdown in trade negotiations or the Fed doesn`t cooperate? The market could retreat.
Again, dividends give you some stability, some cushion, which gives you some protection to the down side.
HERERA: But you are particular about what you like. So you say that there — you have picked three or four stocks for us that would work in a low interest rate environment, and perhaps a lower interest rate environment.
DIETZE: Well, we like health care stocks. You know, that`s the other growth sector besides technology but it has been held back due to political concerns, Medicaid for all. So, we are looking at some of the best franchises out there, and lo and behold, they`re paying some of the best yields.
I would cite Pfizer (NYSE:PFE), which is probably the bluest of all blue chips in pharma, internationally diversified, great R&D pipeline, but you got 3.4 percent dividend which has grown over the last five years by 8 percent a year.
And I would also look at CVS (NYSE:CVS), is now very vertically integrated with its recent merger with Aetna (NYSE:AET), 10,000 pharmacy stores across the country and it`s yielding close to 4 percent. And that dividend has increased of over 20 percent per year on average for the last decade.
GRIFFETH: We also showed you like Exxon and Wells Fargo (NYSE:WFC) in the dividend-paying category. But they`re not all are created equally. There are at least a couple that you`re not looking at because they might be too expensive?
DIETZE: To characterize it quite broadly, I think you have to be careful of dividend bank stocks because the only thing worse than a non-dividend paying stock is a high dividend paying stock where they cut it and then look out below.
I`m looking at AT&T (NYSE:T) right here, which is yielding about 6 1/2 percent, significantly more than Verizon (NYSE:VZ). You have to scratch your head and say why. Well, they diversified heavily into content as well as traditional telecom. It`s hard to see how those synergies are working. They have a tremendous debt load.
Verizon (NYSE:VZ) is staying focused. So, if there`s a hiccup perhaps in the satellite business, they have trouble with the debt, they may and have to cut the dividend, look out below.
And, of course, retailers — unless, they have a great strategies against the Internet competition, their dividends are also at risk.
GRIFFETH: And Bed, Bath and Beyond is the one that you are looking at most closely there as well.
GRIFFETH: David Dietze with Point View Wealth Management, always good to see you. Thanks for stopping by.
DIETZE: Thank you, Bill.
GRIFFETH: You bet.
HERERA: Well, lower interest rates generally translate into lower mortgage rates which is what happened this week. And while that may seem like good news for the housing market, it`s not all that great for buyers.
Diana Olick explains.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Falling mortgage rates are helping more house hunters make the math work on a monthly payment. The average rate on a 30-year fixed has fallen steadily since April, lowering the payment on every home for sale. But lower rates are also bringing out more buyers, fuelling competition yet again, just as fast- rising home prices were finally slowing down.
SKYLAR OLSEN, ZILLOW SENIOR ECONOMIST: The recent drop in the 30-year mortgage rate gives you a reason to believe that the short — excuse me, the slowdown won`t last very long.
OLICK: In fact, price gains are suddenly widening again. The median price of a home sold in May rose 3.6 percent annually, the largest jump in seven months according to Redfin. Prices are gaining the most steam on the low end of the market where prices are leanest.
Builders are of little help there. Housing starts dropped over 12 percent annually in May and permits were lower as well. What the builders are putting up is largely on the higher end as they battle high costs for land, labor and regulatory compliance.
GLENN KELMAN, REDFIN CEO: The only issue is that as rates go down, you still have low inventory, and that`s going to limit sales. So prices are going to go up, sales will not be as strong.
OLICK: The supply of existing homes for sale was gaining but is now shrinking again, especially for affordable homes. Part of that is due to increased investor demand. At the end of last year, investors made up over 11 percent of home purchases, the highest rate since Core Logic began tracking in 1999.
The vast majority of those buying are small investors coming in with cash.
For regular buyers, the sting of higher prices and the increasing competition from all-cash investors are both negating the benefit of lower mortgage rates and taking the heat out of what some thought might be a hot summer for housing.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
GRIFFETH: To the economy now, the number of Americans filing for unemployment benefits is still clinging to its lowest levels in decades. Initial jobless claims fell by 6,000 last week. That was a bigger drop than expected. And the number of people already collecting unemployment benefits known as “continuing claims”, that`s near the lowest level since the early 1970s.
HERERA: And the gauge of manufacturing activity in the Philadelphia area fell this month to its lowest level since February. The report cites a decline in prices for the drop as well as a slide in new orders and shipments.
GRIFFETH: Time to take a look at some of today`s “Upgrades and Downgrades”.
We begin with shares of Hershey tonight. They were downgraded to underweight from neutral at Piper Jaffray. The analyst cited the stock`s valuation and its historically high premium compared to peers. Price target, $125. That stock fell a fraction to $137.64.
Apple (NASDAQ:AAPL) was initiated with a hold rating in new coverage of Deutsche Bank. The analyst cited a potential low in the anticipated introduction of 5G phones next year. Price target, $205. That stock closed just below the level at $199.46 today.
And Tesla`s price target was lowered sharply at Goldman Sachs (NYSE:GS), down to $158. The analyst believes volume estimates are high and he sees the stock trending lower. Goldman`s rating on Tesla does remain a sell. Shares fell 3 percent today to $219.62.
HERERA: Still ahead, health care costs are expected to rise for companies even as they put more programs in place to lower them.
HERERA: Apple (NASDAQ:AAPL) issued a warning of sorts. CEO Tim Cook says that if the next round of proposed Chinese tariffs go into effect, they would reduce Apple`s contributions to the U.S. economy and weigh on its global competitiveness. The threatened tariffs of up to 25 percent would impact nearly all of Apple`s products, including the iPhone, the iPad, air pods and repair parts.
GRIFFETH: International tax law has been a focus of U.S. lawmakers for a while now. Remember two years ago, Republican leaders in the House pushed to rewrite the code to prevent companies from shifting profits overseas. And today, two prominent Democratic senators proposed a new idea, one that they say will help American workers.
Ylan Mui has details from Washington.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Democrats unveiled a new proposal today that would raise taxes on foreign profits to help unemployed workers here at home. The idea comes from two powerful senators, Ron Wyden, the top Democrat on the Finance Committee, and Chris Van Hollen, who sits on the Banking Committee. They argue that the current tax system encourages companies to build their factories overseas.
SEN. CHRIS VAN HOLLEN (D-MD): We want to take away incentives to move jobs overseas, make sure we incentivize employers here at home, and then incentivize them to hire Americans who want to work but who are out of work.
MUI: To fix that, they call for closing those loopholes or creating a minimum tax on overseas earnings that would apply to every company.
But not everyone believes there`s a problem. Republicans overhauled the tax code last year in hopes of stopping companies from parking those profits overseas.
GORDON GRAY, AMERICAN ACTION FORUM DIRECTOR OF FISCAL POLICY: Combined with the reduction in the corporate tax rate and with the international provisions, my own view is the incentives to invest in the United States have improved, certainly improved over the old tax code.
MUI: But the senator said making sure those companies pay their fair share could raise a lot of revenue, money that could go towards subsidizing jobs for America`s long-term unemployed.
VAN HOLLEN: What is really an effort to get people back into the system, because these are individuals who once you are out of work, it is harder and harder to get a job because employers look at your work history and it becomes a chronic problem that hurts the family and hurts the whole economy.
MUI: That prospect is generating interest from presidential candidates who are both embracing ambitious, new policies, and looking for ways to pay for them.
Amy Klobuchar made tackling the international tax code part of her agenda for the first 100 days in office. And Joe Biden supported raising taxes on foreign earnings when he was vice president. So, it`s a good bet you`ll hear a lot more about these issues on the campaign trail.
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.
HERERA: Slack makes its Wall Street debut. That`s where we begin tonight`s “Market Focus”.
The workplace communication software company began trading at an opening price of $38.50, well above the $26 reference price set by the New York Stock Exchange. Slack came public in a direct listing instead of the traditional IPO, and the CEO says it was the best route for his company.
(BEGIN VIDEO CLIP)
STEWART BUTTERFIELD, SLACK CEO: I think there`s a lot of investors who are used to a model where they get a small allocation, they wanted a big one. In direct listing, at least they have the opportunity. One of the hopes for a company like us is that there`s not too much volatility, and we are hoping that this model with as many sellers, many buyers, supply and demand, we reach a market clearing price a lot earlier.
(END VIDEO CLIP)
HERERA: Slack shares rose nearly 50 percent to $38.62.
Darden Restaurants (NYSE:DRI (NASDAQ:TBUS)) beat analysts earnings expectation, but fell short in revenue and same store sales growth, because of less foot traffic to the company`s top chain restaurant, Olive Garden. Darden also gave weak guidance. But the stock was up more than 1 percent to $118.67.
Kroger (NYSE:KR) reported better than expected quarterly earnings. The grocery store chain saw same-store sales come in flat but digital sales rose. Kroger (NYSE:KR) also affirmed its full-year guidance but the shares fell more than 2 percent to $23.13.
GRIFFETH: Merck (NYSE:MRK) today held its first investor day in five years and it laid out its strategic priorities to drive value. The key is to broaden its portfolio beyond its blockbuster Keytruda.
(BEGIN VIDEO CLIP)
KEN FRAZIER, MERCK CEO: We`re here to show today is that we have great opportunities to grow revenue beyond Keytruda, with our vaccines, our animal health business, our hospital specialty business, the oncology pipeline beyond Keytruda. So, we have those opportunities to drive revenue growth, margin expansion.
(END VIDEO CLIP)
GRIFFETH: And Merck (NYSE:MRK) shares fell a fraction today to $84.60.
Walmart has agreed to pay more than $280 million to end a seven-year-long investigation into a global corruption probe. It settles charges that the retailer ignored evidence of internal corruption that helped fuel its overseas expansion. As part of that settlement, Walmart acknowledged wrongdoing. The stock rose a fraction today to $110.32.
HERERA: Rising health care costs have been a major issue for corporate America for quite sometime, and a new survey shows the headache isn`t going anywhere anytime soon.
Bertha Coombs has more.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Health care costs keep rising and next year, the growth is expected to accelerate. Private employer costs are expected to increase 6 percent in 2020 according to PWC`s Health Research Institute, up from an average of 5.5 percent growth last three years.
One big driver? High-priced specialty drugs.
BENJAMIN ISGUR, PWC HEALTH RESEARCH INSTITUTE: One of the reasons that we have the drug costs increasing is because there`s a higher proportion of drugs that employers are buying, are specialty drugs, and those tend to be more expensive than non-specialty drugs. So, over time, that will increase the cost.
COOMBS: While specialty medications to treat complex conditions like hepatitis and cancer make up one-fifth of all employee prescriptions, they account for more than 40 percent of overall drug spending. Over the last decade, employers dealt with the problem by making workers share more of the cost, but PWC says raising deductibles and co-pays isn`t working.
ISGUR: Almost one-third of employees with — with high deductible health plans actually cannot afford their deductible. So, that`s a big wake-up call for employers.
COOMBS: Employers are now focused on tackling high prices head on, pushing insurers and pharmacy benefit plans for better deals, and more large firms are contracting directly with medical providers to steer workers to the most cost effective care.
ISGUR: They`re looking at setting up their own primary care networks and primary care clinics on site to better take care of their employees at a lower cost. They`re looking to help nudge their employees to lower cost sites of care.
COOMBS: What it means for workers? A reprieve on deductible increases, but expect narrower choices for care and more of that nudging to take preventive steps to fight chronic conditions and stay healthy.
For NIGHTLY BUSINESS REPORT, I`m Bertha Coombs.
GRIFFETH: And coming up, solving a catch-22. How one company is helping employees save for retirement while still facing high levels of student debt?
GRIFFETH: As student debt levels continue to rise, some employees have been opting to pay that down instead of saving for retirement, but now some companies are offering a new perk that helps workers do both.
Sharon Epperson is in Pleasanton, California, for us tonight.
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Recent grad Harvir Humpal is building technology that could someday save heart transplant patients.
HARVIR HUMPAL, ABBOTT EMPLOYEE: Each day is a new challenge. It`s a very dynamic, complex setting but it is very rewarding.
EPPERSON: The 24-year-old biomedical engineer had three job offers coming out of grad school. He chose this one at Abbott, a global health care company. Not for the salary or medical benefits, but because it was the only one with a program that could help him save for retirement while paying off his student loans.
HUMPAL: It was the main linchpin to why I accepted an offer.
EPPERSON: Employees usually have to contribute part of their pay to their 401(k) plan in order to receive matching company funds. Abbott`s Freedom to Save program gets rid of that requirement. As long as Humpal uses 2 percent of his salary to pay off his student debt, Abbott will make a 5 percent pretax contribution to his 401(k), even though he`s not putting in a dime. The money is fully invested in two years. Abbott executive Steve Fussell says the program pays for itself.
STEVE FUSSELL, ABBOTT HUMAN RESOURCES EXECUTIVE VP: The cost to us is actually very minimal. There`s actually a five-to-one pay back because of our retained talent and avoiding of cost of turnover in this group.
EPPERSON: Nationwide, seven out of ten recent grads have taken out student loans, graduating with an average debt of about $30,000. That`s hurting their ability to save for retirement.
Research shows that college grads with student loans only save about half as much as those without loans by the time they`re 30. Some employers recognize how difficult this debt burden can be and they`re trying to help.
SCOTT DOBROWSKI, GLASSDOOR CAREER TRENDS ANALYST: We`re starting to see more and more employers offer this type of benefit because it carries a long-term monetary value for the employees.
EPPERSON: According to the Society for Human Resource Management, 8 percent of employers offer student loan assistance. The largest include Aetna (NYSE:AET), Fidelity Investments and PricewaterhouseCoopers. Right now, none except for Abbott help with retirement savings. However, next year the insurance company Travelers plans to roll out a similar program.
FUSSELL: It is a valuable benefit because people who are just beginning their careers don`t have to make a trade-off between paying off their debt and saving for their future.
EPPERSON: Humpal is taking the $150 he would have put in his 401(k) and adding it to his monthly loan payment. That`s translating to big savings.
HUMPAL: Initially, I had $60,000 in student loan debts. I will pay my loans four years faster and I will save $7,000 in principal loan interest.
EPPERSON: For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.
HERERA: Here is another look at the day`s final numbers from Wall Street. The Dow rose 249 points, the Nasdaq added 64, and the S&P 500 closed at a record.
And that is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening, everybody. See you tomorrow.
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