Worry Warts: Weak Eurozone Forecast Add to Concerns About Global Growth

After a strong start to the new year as decent corporate earnings helped the market shrug at the continued overhang from global economic growth fears, fresh data from Europe seems to have ratcheted up that fretting.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/
6 min read

Key Takeaways

  • Eurozone growth forecast reduced to 1.3% from 1.9% 

  • Twitter beats on earnings, disappoints with guidance

  • Bank merger announcement adds some upbeat news

(Thursday Market Open) Wall Street appears to be back in worry mode. After a strong start to the new year as decent corporate earnings helped the market shrug at the continued overhang from global economic growth fears, fresh data from Europe seems to have ratcheted up that fretting.

The European Commission cut its growth outlook for the eurozone this year to 1.3% from 1.9%. And weak German industrial production figures for December underscored the gloomier outlook.

The news comes as growth expectations for China have been slipping and the United States remains in a protracted trade war with the Asian nation, the world’s second-biggest economy. Compounding the growth outlook for Europe is uncertainty about Britain’s exit of the European Union and political instability in Italy and France.

The downbeat outlook comes amid a mixed earnings season that has seen an increasing number of companies report disappointing guidance.

Twitter (TWTR) joined that club and said it expects increasing expenses. TWTR’ shares were down more than 7% in pre-market trading. Still, the company beat analysts’ expectations on both revenue and earnings and it appears the company has improved in monetizing its user base. Also, it may be worth keeping in mind that this quarter a year ago was quite strong for the company, making it tough for a comparison to really shine.

 In other corporate news, SunTrust Banks (STI) and BB&T Corp. (BBT) shares were up about 9% and 4% in pre-market trade after they announced a merger deal valued at $66 billion. The move will create the sixth-largest bank in the U.S. by assets. 

Meanwhile, investors were digesting Chipotle’s (CMG) quarterly report, which helped the stock jump more than 8%. The restaurant chain beat expectations on its top and bottom lines and reported same store sales growth of more than 6%.

While there certainly have been strong earnings reports this season, the overall tone of guidance hasn’t been as optimistic, apparently helping to reduce forecasts for this year’s corporate earnings.

Not All Fun and Games

Guidance helped trip up gaming stocks yesterday. Video game companies helped to snap the S&P 500’s five-day winning streak and weighed on the tech-heavy Nasdaq. Take-Two Interactive (TTWO), Electronic Arts (EA) and Activision Blizzard (ATVI) all dipped by more than double digits after disappointing forecasts from EA and TTWO. That helped drag down the S&P 500 communication services sector, with its 1.49% drop making it the biggest loser among the index’s 11 sectors.

The video game industry and its publicly listed companies are now big enough to help sway the market as a whole, perhaps creating a silver lining for anyone on the losing side of Wednesday’s trading who still wants to stay invested in the industry.

The Chips Aren’t Down

At the other end of the spectrum, semiconductor stocks got a jolt with Skyworks Solutions (SWKS) jumping more than 11% and Micron Technology (MU), Microchip Technology (MCHP), Xilinx (XLNX), Lam Research (LRCX), and Nvidia (NVDA) also doing well Wednesday. However, each of those stocks were poised to ease off their gains early Thursday, down about 1% to 1.5% in pre-market trade.

Because the semiconductor industry relies on China for a good chunk of its supply chain and sales, the rally in chip stocks may be due in part to a growing optimism that the recent pressure on equities from worries about slowing growth in China amid the ongoing trade war may have gotten overblown a bit. 

Plus, it shows that there is positive enough sentiment that corporations around the globe are still spending the money to keep chips in demand, which is another counterpoint to the doom-and-gloom scenario that helped keep stocks on the back foot for much of last month.

The gains in the chipmakers on a day when gaming stocks got hit so hard also underscores how diversified the semiconductor companies’ businesses are.

“Crazy” Anniversary Observed

As we’ve noted here before, market fear has been easing, and Wednesday’s trading was no exception, as the Cboe Volatility Index (VIX) fell further below 16. Although it’s risen a bit above that level this morning, just a few weeks ago, it was above 30. (See chart below.)

It’s particularly interesting to see the VIX so low so close to the anniversary of one of the craziest days the market ever had on Feb. 4, 2018. Around this time a year ago, if you remember, the VIX was galloping to briefly rise above 50, and the stock market was entering a very brief but sharp correction that was followed by another sharp drop in early spring. That trading came after a strong January rally and in some ways helped set the tone for what proved to be a volatile year driven in part by fear of higher interest rates and the U.S-China trade war.

Now the Fed has hit the brake pedal, but some analysts have been saying a couple more payrolls reports like the blockbuster one we saw last Friday could conceivably mean Fed Chair Jerome Powell and company end up having some second thoughts.

The perceived rate hike pause looks like the bullish storyline for Wall Street. The bearish story could be earnings expectations for Q1 and beyond. Concerns about company guidance seen this earnings season have some analysts expecting earnings to actually decline year over year this quarter. (See more on earnings expectations below.)

Figure 1: Market risk tolerance seems to be on the rise, based on declining fear levels as illustrated in this chart of the Cboe Volatility Index from late Wednesday. Although Wall Street’s main fear gauge has risen some this morning, the overall level of worry is down. We’ll have to see if that holds. Data Source: Cboe Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Lower Earnings Growth Ahead? S&P Capital IQ consensus estimates for 2019’s S&P 500 operating earnings per share (EPS) growth are now close to three percentage points lower than they were at the end of the quarter. Given that initial EPS growth estimates have been higher than actual results 60% of the time since 2000 and have overshot their mark an average of around five percentage points, that implies that EPS will grow just 1.5% for all of 2019, according to investment research firm CFRA. And the bulk of those revisions occurred during the first quarter of the year, not during the first month, according to CFRA. “The market continues to advance in price despite these reduced growth estimates, possibly indicating investors' belief that the market can withstand P/E multiple expansion, now that the Fed's rate-tightening cycle has possibly reached its conclusion,” the research firm said.

GDP Rescheduled: The government’s report on gross domestic product is one of the most widely anticipated and watched economic reports. Put out by the Bureau of Economic Analysis (BEA), the most recent data, for the first estimate of Q4 GDP, was scheduled for release on Jan. 30 but was delayed by the partial government shutdown. Although the shutdown ended a few days before the report was due out, the funding gap had still interrupted the data gathering process. But the market now has a new date to look forward to. The BEA said on Wednesday that it would release a report combining the first and second GDP estimates on Feb. 28. Those needing an estimate sooner can check out the Atlanta Fed’s GDPNow forecast. The latest estimate, also from Wednesday, shows Q4 real GDP growth coming in at a seasonally adjusted annual rate of 2.7%. That’s up from a Feb. 1 estimate of 2.5%, with the increase reflecting the contribution of net exports based on the government’s international trade report on Wednesday. For a different take, Action Economics is more optimistic, projecting Q4 GDP growth of 3.2%.

Slipping on Factory Floor:Although GDP growth of around 3% isn’t anything to sneeze at, concerns about the economy still remain and appear to have pushed the Goldilocks scenario into the rearview mirror. On this note, government data from earlier this week showed that factory orders unexpectedly decreased in November. The reading showed a 0.6% decline when a Briefing.com consensus had anticipated a 0.3% gain. And that was after a 2.1% decline in October. “The key takeaway from the report is that it showed a drop in business investment in November,” noted Briefing.com. “That raises the potential for a further decline in December since the November softness preceded the big market sell-off in December and the start of the partial government shutdown in January that were drags on business confidence.”

Good Trading, 

JJ
@TDAJJKinahan 

Helpful Educational Content and Programming

  • Check out all of our upcoming Webcasts or watch one of the many archived ones, covering a wide range of topics from market commentary to portfolio planning basics to trading strategies for active investors. No matter your experience level, there’s something for everybody.

  • Looking to stay on top of the markets? Check out the TD Ameritrade Network, which is live programming that brings you market news and helps you hone your trading knowledge. And for the day’s hottest happenings, delivered right to your inbox, you can now subscribe to the daily Market Minute newsletter here.

TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.

Economic calendar for week of Feb. 4. Source: Briefing.com
Print

Key Takeaways

  • Eurozone growth forecast reduced to 1.3% from 1.9% 

  • Twitter beats on earnings, disappoints with guidance

  • Bank merger announcement adds some upbeat news

Call Us
800-454-9272

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.  

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.

Scroll to Top