Looking for a Catalyst: With Trade Picture Muddled, Market Seems to Lack Direction

Investors appear unsure of what to make of the past couple days of trade developments, as optimism about China and the United States sitting down at the negotiating table has been tempered with some troubling signs.

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Key Takeaways

  • Nike, Micron, KB Home report earnings this week
  • Consumer, housing market, GDP among data on tap this week
  • Today’s economic lineup includes three Fed speakers

(Monday Market Open) Investors appear unsure of what to make of the past couple days of trade developments, as optimism about China and the United States sitting down at the negotiating table has been tempered with some troubling signs.

The latest of the latter came Friday on news that Chinese officials wouldn’t be visiting U.S. farms as planned. That seemed to have left investors wondering how close the two sides are to overcoming their disagreements and striking a deal.

During Thursday and Friday, deputy-level negotiators from the world’s two largest economies had been holding talks apparently aimed at smoothing the way for higher level discussions next month.

Those talks were “constructive,” according to Chinese news agency Xinhua. And the U.S. Trade Representative’s office said the two-day negotiations were “productive.” In the past, statements like these have helped boost stocks, but this time around they don’t seem to be gaining much traction. Perhaps investors are weary of all the talk about talk and are looking for more concrete signs of progress, if not a full-blown resolution.

Market Lacking Direction on Trade Situation

For now, the muddled trade picture doesn’t seem to be giving investors much of a catalyst to move stocks in a big way one direction or the other. 

Friday seemed to be a similar trading day to the previous session, with stocks near all-time highs but losing momentum as the day went on. Thursday’s sentiment may have been tempered by comments from a White House adviser in a media report that the United States could escalate the trade conflict if a deal isn’t reached soon. And a tweet from the editor of the official newspaper of the Communist Party of China said that “China is not as anxious to reach a deal as the U.S. side thought.”

While it’s probably a good sign that the market is flirting with record highs, there doesn’t seem to be a catalyst out there to push stocks meaningfully higher. Without a push higher – which might only happen if we see a resolution to the trade issue – we’ll have to see if the market has enough momentum to keep the S&P 500 at these levels around 3000 before pulling back. Until a trade deal is struck, it looks like the index might be stuck between roughly 2800 and 3000.

Some of Friday’s market action may also have been attributable to quadruple witching day, the session every quarter when futures and options on indices and stocks all expire on the same day.

Nike Earnings: Discretionary Spending and Tariff Concerns

Among the economic reports this week, investors are scheduled to get a reading on consumer confidence during the day Tuesday. From the data we’ve been seeing, the U.S. consumer has been helping the economy continue to power along. GDP isn’t going gangbusters, but it’s still pretty solid, and the consumer has a lot to do with that.

Then, after the close Tuesday, we’ll see another reading of sorts on consumer confidence in the form of quarterly results from Nike (NKE). But while the consumer confidence figures are for the United States, Nike can be viewed as a bellwether for consumer discretionary spending domestically and abroad.

China is a key area of sales for the company, which also manufactures apparel and footwear in the Asian nation. So it’s natural to wonder how the trade war, which is having an effect on the Chinese economy and could make apparel and footwear made there more expensive for U.S. buyers, might affect the company. Recall that the Trump administration postponed a 10% duty on certain footwear and apparel items until Dec. 15, with Trump saying he didn’t want the tariffs to interfere with the main U.S. holiday shopping season.

During its last quarterly release NKE continued to downplay the risk of tariffs, and said it hadn’t seen any impact to date from the trade battle. The company saw sales in China rise a solid 22% while North American sales growth was 8%.

Of course, we won’t know what the company’s exact numbers are until it releases results after the bell on Tuesday. It could be interesting to see whether management is any more concerned about tariffs impacting sales in the U.S. or the trade war harming consumer spending in China. Data earlier this month showed that retail sales in China rose 7.5% in August from a year earlier. That was below expectations and was a slower growth rate than the 7.6% rise in July.

Other Earnings, Data On Tap

In addition to NKE, investors could also get some additional insight into the tariff situation from chipmaker Micron’s (MU) quarterly results and accompanying commentary later in the week.

In other corporate earnings this week, we’re scheduled to get results from homebuilder KB Home (KBH). Investors are also scheduled to see data this week on new home sales. Recent housing market data showed that existing home sales beat expectations, helped by lower mortgage rates. Homebuilder stocks have been doing well recently, and we’ll have to see if that continues.

In addition to the consumer confidence and housing market data, this week’s slate of economic reports also includes data on consumer sentiment, personal spending, and durable goods orders, as well as the government’s third estimate of gross domestic product.

Those figures, along with the earnings reports, should help provide a nice snapshot of where the U.S. economy is at. And with the Fed meeting out of the way, board members are free again to hit the talk circuit, perhaps helping to round out a picture of the economy and provide some guidance on monetary policy.

FIGURE 1: MIRROR IMAGE. As stock indices including the S&P 500 Index (SPX - purple line) slid Friday, Wall Street’s main fear gauge, the Cboe Volatility Index (VIX - candlestick), unsurprisingly moved higher. Investor tensions increased on news that Chinese officials wouldn’t be visiting U.S. farms as anticipated, casting doubt on trade talks between the two economic powerhouses. Data source: S&P Dow Jones Indices, Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

ESG Edge? Environmental, social, and governance (ESG) investing has been on the rise in recent years as investors seek to use the power of the purse to promote issues they care about, such as the environment, social values, or better corporate governance.  And some recent data is showing companies are talking about ESG more too. FactSet found that the number of S&P 500 companies citing the term “ESG” during their Q2 earnings calls doubled from that in Q1 and was the highest overall during the past two years.

Granted, the study found only 24 companies that held earnings calls between June 15 and Sept. 14 and referenced “ESG,” but the growing number is encouraging. “It will be interesting to track the number of S&P 500 companies that cite ‘ESG’ in their earnings calls going forward to see if the rise in these citations in Q2 reflects a one-time event or an ongoing increase,” the FactSet report said.

Both Sides of the Fence: Last week, we talked about how St. Louis Fed President James Bullard explained his dissent in the Fed’s recent decision to cut its key rate by 25 basis points. Bullard had wanted a 50-basis-point cut, citing expected slowing U.S. economic growth, trade policy uncertainty, rising recession probability estimates, and a U.S. manufacturing sector that “already appears in recession.”

But it’s also worth noting that there were two other dissenting voices to the Fed’s action – both going in the opposite direction to Bullard. Boston Fed President Eric Rosengren and Kansas City Fed President Esther George wanted the central bank to stand pat on interest rates. “Additional monetary stimulus is not needed for an economy where labor markets are already tight, and risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage,” Rosengren said in a statement last week. “While risks clearly exist related to trade and geopolitical concerns, lowering rates to address uncertainty is not costless.”

Good Trading,

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Key Takeaways

  • Nike, Micron, KB Home report earnings this week
  • Consumer, housing market, GDP among data on tap this week
  • Today’s economic lineup includes three Fed speakers

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