Week Ahead – Fed Decision | Johnson & Johnson

17 December 2018

Global markets were lower on Friday, as Wall Street's three major indexes tumbled as weak economic data from China and Europe added to the mounting number of investor concerns. All three major US market indexes closed in correction territory (down at least 10% from a recent high) for the first time since March 2016. 

For the week ahead, all eyes will be on the US Federal Reserve, which is set to make its final interest rate decision for the year. As we have discussed, major central banks around the world are removing stimulus from markets, and it will be interesting to see how markets trade without central bank support. The US Fed is raising interest rates, and sharply higher interest rates would be a negative for stock markets around the globe. As such, all year long we have been watching for signals around the pace of rate hikes closely. We expect the Fed to hike rates despite the recent volatility in financial markets this week. However, inflation remains contained and may prompt officials to revise down their interest rate projections for next year.


Stock in Focus: Johnson & Johson (JNJ:NYSE)

Shares in healthcare giant Johnson & Johnson (J&J) fell -10% on Friday (the worst one-day for the shares in a decade) as Reuters alleged that, from at least 1971 to the early 2000s, J&J knew the company's raw talc and finished powders sometimes tested positive for small amounts of asbestos but didn't tell regulators.


In response to the report, the company said “any suggestion that J&J knew or hid information about the safety of talc is false”. The company also said Baby Powder was asbestos-free and added it would continue to defend the safety of its product.

Despite delivering a few solid quarterly results which haven beaten market expectations, negative sentiment continues to weigh on the shares on the back of litigation, as the court cases continue to mount and future applicants will be encouraged to engage in legal battles given the success of others (In July, a jury ordered J&J to pay $4.7 billion in a case involving nearly two dozen women who claimed J&J products caused them to develop ovarian cancer).

The decline in shares erased a massive $40 billion from the company’s market capitalization, with investors worrying about the impact of the report as it faces thousands of talc-related lawsuits. The company has been battling more than 10,000 cases claiming its Baby Powder and Shower to Shower products cause ovarian cancer. It remains to be seen what the financial and reputational damage will be for Jonson & Johnson in what is likely to be along and drawn out court process. In saying that, while we do not want to minimize the situation, it was a large fall and the stock does appear to be oversold on the news. 

We currently have a BUY rating on J&J as a solid defensive portfolio holding. Members should look out for a full update on J&J to be released in this week’s weekly report

Australia & New Zealand Market Movers

The Australian share market sold off on Friday (ASX 200 index -1.05%) with financial stocks weighing heavily as renewed fears about a global growth slowdown gripped investors pessimistic about weak economic data from China. In stock news, Crown Resorts has scored a major win in its legal battle with the NSW Government over a planned development that would have obstructed views of the Sydney Opera House and Harbour Bridge from the gaming firm’s new Barangaroo hotel and casino.


The New Zealand market fell on Friday (NZX 50 index -0.80%) as exporters Fisher & Paykel Healthcare, A2 Milk and Comvita led declines. Metro Performance Glass shares continued to recover, and Methven shares soared 32% to $1.52 after receiving a takeover offer from ASX-listed GWA Group. Scales Corp was higher after buying a 60% stake in US petfood firm Shelby JV for US$23.2 million, and saying it plans to fund the company's growth aspirations. Infratil said it expects to invest up to another A$50 million in Canberra Data Centres to help fund its on-going growth.


3 Things Markets Will be Watching this Week

  1. Tensions between the US & China following the arrest of Huawei’s chief financial officer will likely dominate headlines.
  2. The US Federal Reserve makes its final interest rate decision for the year Thursday morning (AU/NZ time).
  3. NZ economic growth (GDP) figures and Australian employment data is also published Thursday.


Have a Great Day,


For the week ahead, all eyes will be on the US Federal Reserve, which is set to make its final interest rate decision for the year.

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