The Wall Street Journal - 19.10.2019 - 20.10.2019

THE WALL STREET JOURNAL. ** Saturday/Sunday, October 19 - 20, 2019 |B13

Investor sentiment appears
to have risen in recent days—
and analysts say it is still flash-
ing a buy signal.
The Bank of America Merrill
Lynch Bull & Bear Indicator has
jumped to a six-week high, ac-

cording to a BofA Merrill Lynch
Global Research report released
Friday. The contrarian indicator
rose to 1.9 from 1.3, remaining
below the 2.0 threshold under
which BofA Merrill Lynch rec-
ommends buying risk assets.
The indicator runs from
zero, signifying maximum bear-
ish sentiment, to 10, signifying
maximum bullish sentiment. It
is calculated using debt and eq-
uity fund flows, investor posi-
tioning and price action in eq-
uity and debt markets.
The shift in sentiment took
place as investors cheered a
“phase one” trade deal between
the U.S. and China that pre-
vented additional tariffs from
taking effect and a preliminary
Brexit deal between the U.K.
and European Union.
Upbeat earnings reports
from companies includingJP-
MorganChase & Co.,Coca-
ColaCo.,United Airlines Hold-
ings Inc. and UnitedHealth
Group Inc. also boosted senti-
ment. Of the 73 companies in
the S&P 500 that reported
earnings through Friday morn-
ing, more than four-fifths beat
analysts’ expectations, accord-
ing to Refinitiv.
A survey of individual inves-
tors, meanwhile, showed a
jump in optimism in the week
ending Wednesday. The Ameri-
can Association of Individual
Investors found that bullish
sentiment, or expectations that
stock prices will rise over the
next six months, rose by 13.3
percentage points from the pre-
vious week to 33.6%.
Even so, the gauge of opti-
mism is below its historical av-
erage of 38% for the 22nd time
in 23 weeks, according to the
association. Bearish sentiment,
or expectations that stock
prices will fall, fell to 31.1%, a
retreat of 12.9 percentage
points.

Friday that it anticipates ac-

tivity in North America’s shale

fields to decline more than

usual in winter, even as it ex-

pects strong demand in inter-

national and offshore drilling

regions to continue.

The quarterly results of

Schlumberger, which reported

third-quarter earnings on Fri-

day, serve as a bellwether for

the energy business given its

reach across regions and in-

sight into drillers’ plans.Halli-

burton Co., which is even

more focused on the U.S. than

Schlumberger, is scheduled to

report its third-quarter results

on Monday.

Schlumberger’s North

American revenue declined

11% from the same period a

year earlier, while climbing 8%

in international markets. The

company took a $12.7 billion

write-off during the quarter.

Olivier Le Peuch, Schlum-

berger’s chief executive, said

the results “reflected a macro

environment of slowing pro-

duction growth rate in North

America land as operators

maintained capital discipline,

reducing drilling and frack ac-

tivity.”

The hydraulic-fracturing

business, which cracks open

deeply buried shale formations

to release oil and gas, has suf-

fered from customers that

have deferred or canceled

drilling plans due to budget

constraints, Mr. Le Peuch said.

The outlook is further clouded

by uncertainty over future oil

demand “in a climate where

trade concerns are seen as

challenging global economic

growth,” he said.

West Texas Intermediate,

the U.S. price gauge, closed

0.3% lower at $53.78 a barrel

on Friday. Brent crude, the in-

ternational benchmark, fell

0.8% $59.42.

Aside from a short-lived

spike last month following at-

tacks on Saudi oil-production

facilities, U.S. oil prices have

traded in a range between $50

and $60 a barrel since May.

That has not been high

enough to convince energy

producers—or their sharehold-

ers—to boost drilling activity.

The number of rigs drilling

in the U.S. has declined roughly

20% over the last year, accord-

ing to Baker Hughes, another

Schlumberger competitor.

The world’s largest oil-field
services company forecasts a
slowdown in U.S. drilling ac-
tivity due to weak commodity
prices and exhausted budgets
at the explo-
ration and
production
companies for which it works.
SchlumbergerLtd., which
helps energy producers find
and extract oil and gas, said

BYRYANDEZEMBER

Oil-Services Giant Schlumberger Expects Slowdown in Drilling

COMMODITIES

discount on the value to ac-

count for concerns such as se-

curity or geopolitical risks.

Reassuring third-quarter

results could help to diminish

that discount and encourage

more investors to buy into

Aramco’s stock market debut,

according to one person famil-

iar with the decision to delay

it.

Until Thursday’s postpone-

ment, Aramco was expected to

publish an IPO prospectus on

Oct. 25 and then hold a global

investor roadshow ahead of

listing up to 3% of the com-

pany on the Saudi stock ex-

change in November. Aramco

is now expected to launch the

IPO in early November and is

looking at listing the firm in

December or January.

Following pre-IPO meetings

with investors, Aramco and its

bankers concluded this week

that they needed to lower ex-

pectations for the company’s

valuation to boost excitement

for the offering, according to

people familiar with the pro-

cess. Prince Mohammed values

the firm at $2 trillion, but ad-

visers this week guided that

investors would buy in at a

valuation of between $1.3 tril-

lion and $1.7 trillion—hun-

dreds of billions short of the

monarch’s goal.

Investors already had ex-

pressed skepticism about the

IPO’s timing, given geopolitical

tensions and worries about

global trade. Drone and mis-

sile attacks on Sept. 14 took

out half the kingdom’s produc-

tion for a few weeks. Saudi

Arabia blamed Iran for orches-

trating the attacks. Tehran de-

nied involvement.

Aramco has said the strikes

had little impact on its sales

as the firm used inventory to

continue to serve customers.

Aramco also has faced diffi-

cult questions about its listing.

In a pre-IPO investor meeting

on Sept. 30 with Fidelity In-

vestments, Aramco executives

didn’t provide what fund man-

agers considered standard in-

formation, including a deeper

understanding of how the

company determined its value,

The Wall Street Journal has

reported.

—Ben Dummett

contributed to this article.

Saudi Aramcois awaiting

third-quarter earnings figures

to better sell its planned IPO

to investors and boost the

firm’s valuation closer to

Crown Prince Mohammed bin

Salman’s goal of $2 trillion,

according to people familiar

with the company.

Aramco on Thursday de-

layed announcing the launch

of the initial public offering in

hopes that the oil giant’s quar-

terly financial results will

show that strikes last month

on Saudi oil facilities had a

limited impact on its net in-

come, these people said.

The firm wants to publish

the figures to show the resil-

iency of its operations before

drawing investors to the

world’s largest IPO, they

added.

A fresh setback for the

long-planned IPO, the delay re-

flects eagerness atSaudi Ara-

bian OilCo., as Aramco is offi-

cially known, to achieve the

best valuation possible at a

fragile time for the global

economy and amid heightened

tensions in the Middle East.

Investors typically use

earnings, dividend payments

and other metrics to calculate

a company’s value ahead of an

IPO. Often, they also apply a

Aramco Bets Post-Attack Results Can Lift IPO

BySummer Saidin

Dubai,

Rory Jones

andAvantika Chilkoti

in London

The oil giant, which has delayed a public listing, hopes its third-quarter results willprove its resilience after strikes on Saudi facilities.

MAXIM SHEMETOV/REUTERS

BYKARENLANGLEY

Investor

Sentiment

Jumps as

Fears Ease

at with earnings is whether

they’re selling more product

or if they’re more profitable in

terms of operations in a mean-

ingful sustained way.”

Federated is considering

buying more stocks again, but

only if there is more clarity on

U.S.-China trade negotiations,

Brexit and the pace of U.S.

economic activity.

David Lefkowitz, a senior

equity strategist at UBS

Wealth Management’s chief in-

vestment office, said the dol-

lar’s overall impact on third-

quarter earnings will be less

severe than in previous quar-

ters. He added investors

should be paying closer atten-

tion to other issues, such as

whether product demand is

weakening or uncertainty on

trade as economic activity

slows in Europe and Asia.

“It’s a pretty modest

driver” of weaker earnings,

Mr. Lefkowitz said of the dol-

lar. He estimates the dollar

will shave about 0.5% from

S&P 500 earnings versus the

same period a year ago. The

impact was bigger earlier this

year, erasing 1% from profits

in the first and second quar-

ters, he added.

Still, a strong dollar can be

a drag on stocks. A 2018 study

by S&P Dow Jones Indices

showed that although stocks

tend to rise whether the dollar

advances or declines, shares

are more sensitive to a falling

greenback.

period. Delta cited the dollar,

tariffs and lower leisure-travel

demand to and from China as

challenges in the last quarter.

“When the dollar is strong,

companies will talk about it,”

said Steve Chiavarone, a port-

folio manager with Federated

Investors, which cut its stock

allocation in the second quar-

ter. “Really what we’re looking

year earlier, according to a

FactSet consensus of analysts’

estimates. Of the 75 compa-

nies to report so far, earnings

aredown4.8%fromayear

earlier. That followed contrac-

tions of 0.3% and 0.04% in the

first and second quarters, re-

spectively.

Companies, especially mul-

tinationals, have been blaming

the dollar for hurting profit

margins all year. A stronger

dollar generally makes U.S.

products less competitive

overseas and raises the costs

of converting foreign revenue

back into local currency. The

S&P 500’s technology sector

makes more than half its reve-

nue overseas, leaving it most

exposed to a burgeoning dol-

lar, followed by materials

firms, energy companies and

consumer staples.

The dollar is just one factor

behind the tepid forecast for

the quarter.NikeInc., for ex-

ample, lowered its outlook for

the year due to trade tariffs,

but it also said the dollar

damped currency-neutral reve-

nue growth by 3% for the latest

A strong dollar continues to

eat into the profit margins of

American companies, contrib-

uting to what is expected to be

2019’s weakest quarter for

corporate earnings.

Third-quarter earnings sea-

son has just begun, but at least

16 companies in the S&P 500,

includingDelta Air LinesInc.,

Johnson & JohnsonandGen-

eral MillsInc., have already

blamed a strong currency for

denting profits, according to

company earnings calls.

That number is likely to

grow in the weeks ahead as

technology companies, con-

sumer staples and others that

get a significant portion of

their sales from overseas re-

port. The WSJ Dollar Index,

which tracks the dollar against

16 other currencies, rose to its

highest level since 2017 last

month. It is up nearly 1% so

far this year after rising 4.3%

in 2018.

Corporate profits are esti-

mated to have shrunk by 4.6%

for the third quarter from a

BYMICHAELWURSTHORN

Strong Dollar Is a Drag on Corporate Profits

The dollar has strengthened over the past 18 months,

while stocks have climbed through stretches of volatility.

Sources: Dow Jones Market Data (WSJ Dollar Index); FactSet (S&P 500)

15

–15

–10

–5

0

5

10

%

2018 ’19

WSJ Dollar Index

S&P 500

a Saudi Arabian oil facility last

month but soon recovered.

Markets also barely budged

Wednesday when U.S. retail

sales data for September came

in weaker than expected—

though investor expectations of

a rate cut rose by nearly 15 per-

centage points on the Chicago

Mercantile Exchange that day.

Overall, the S&P 500 has

moved an average of 0.8%

each day going back to its July

high, according to Dow Jones

Market Data. The index is up

19% for 2019 but less than 5%

from January 2018.

Sandy Villere, portfolio man-

ager at the $2 billion Villere

Balanced Fund, said he believes

the Fed’s support will limit the

stock market’s declines to

around 10%. He’s hoarding cash

to bargain-hunt during dips.

“When you see those chinks in

the armor, you feel the Fed will

be there even longer,” he said.

MARKETS NEWS

Stocks See Gains

For Second Week

U.S. stocks fell Friday on

global growth worries, but the

S&P 500 still closed the week

with gains after a strong kickoff

to corporate earnings season.

The declines came after

fresh Chinese growth data

sparked concerns about the

world’s No. 2 economy and a

slew of negative headlines

pummeled some of the biggest

U.S. companies.

The broad stock market in-

dex fell 11.75 points, or 0.4%, to

2986.20. Its 0.5% increase for

the week marked the second

consecutive week of gains and

was largely tied to upbeat

quarterly earnings reports from

banks like JPMorgan Chase and

Citigroup.

The Dow Jones Industrial

Average dropped 255.68 points,

or 0.9%, to 26770.20, dragged

down by sharp drops in Boeing

and Johnson & Johnson. The

Nasdaq Composite declined

67.31 points, or 0.8%, to 8089.54.

Among Friday’s movers, Boe-

ing shares tumbled $25.06, or

6.8%, to $344 after the disclo-

sure of instant messages from

2016 suggesting that the air-

craft maker unintentionally mis-

led regulators over the safety of

a key system on its 737 Max.

Johnson & Johnson shares

slumped $8.47, or 6.2%, to

$127.70 after the company said

it was recalling one lot of baby

powder—about 33,000 bot-

tles—after tests found small

amounts of chrysotile asbestos.

Technology stocks were

broadly lower, with Netflix

down $18.05, or 6.2%, to

$275.30 after several analysts

cut their price targets for the

streaming-video company.

ing costs will drop, potentially

giving the economic expansion

more room to run even if

trade policy and foreign af-

fairs seem murky.

Many investors are also

choosing not to try to trade geo-

political events because they say

it is hard to quantify how events

from the Hong Kong protests to

the rise of nationalism in Europe

will affect asset prices.

“We may have gotten to a

point where investors ignore

fundamentals because central

banks will always step in with

more stimulus and easy money

when credit spreads widen or

stocks fall,” said Torsten Slok,

chief economist at Deutsche

Bank Securities.

The S&P 500 closed down

just 0.5% on Sept. 27 after a re-

port that the White House was

weighing limiting investment

in China. It was down 0.8% on

Sept. 24 when callsfor Presi-

dent Trump’s impeachment

gained momentum. Oil prices

shot higher after an attack on

Investors may have already

priced in many geopolitical

risks, said Chris Verrone, a

partner at Strategas. For in-

stance, last fall’s selloff sent

the S&P 500 down nearly 20%

in less than three months,

making the market’s double-

digit percentage gains in 2019

look like a game of catch-up.

“The market, I think, is say-

ing all this bad news is already

priced in,” Mr. Verrone said.

Meanwhile, many long-term

asset managers say they aren’t

trying to make swift bets on

geopolitical events.

Back when the Brexit refer-

endum and U.S. presidential

election loomed in 2016, GAM

Investments traded options in a

bid to benefit from rising mar-

ket volatility. “It didn’t work,”

said Larry Hatheway, head of in-

vestment solutions at the Swiss

asset manager. Now, the firm

only owns stocks that it thinks

will perform well regardless of

how or when the U.K. leaves the

European Union, he said.

The world seems more tu-
multuous than it has in years.
Congress is weighing impeach-
ment, the U.K. is on the verge
of a momentous vote regard-
ing its role in Europe, and the
U.S. and China are still mired
inatradewar.
Yet, the S&P 500 is within
about 2% of its all-time high.
What’s going on with Wall
Street?
For many money managers,
the answer has a lot to do with
the Federal Reserve. The cen-
tral bank has already lowered
interest rates twice this year
and is widely expected to do
so at least once more in 2019.
Bets that the Fed will step
in if markets become too vola-
tile or economic data contin-
ues to decline are helping
many investors shrug off what
they say are increasingly dire
signals. Their rationale: If in-
terest rates are lower, borrow-

BYIRAIOSEBASHVILI
ANDAKANEOTANI

Markets Are Rising Despite Uncertainties

The rise happened as

investors cheered a

trade deal between

the U.S. and China.