Solid Extra-Base Hit From GDP Provides Possible Spark in Otherwise Dull Week

This week falls between major events, so action has been a bit dull the last day or two and might stay that way. The GDP number looked positive and there’s hopes for progress in U.S./Canada talks.

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Key Takeaways

  • New estimate of Q2 growth rises slightly to 4.2% and beats analysts’ estimates

  • Trade talks get underway with Canada after U.S. reached deal with Mexico earlier in week

  • Flatter yield curve watched as gap between short- and long-term yields lowest since 2008

(Wednesday Market Open) We’re between earnings seasons. Between Fed meetings. Between trade negotiations. Between jobs reports. You might say this day, or even this entire week, rates as a “tweener,” like one of those “seeing eye” ground balls in baseball that dribbles past the infielders into the outfield and tends to be forgotten when the game is over and bigger plays outweigh it.

The one extra-base hit so far today appeared to be the government’s latest reading on Q2 gross domestic product, which climbed to 4.2% from the first estimate of 4.1%. The new GDP number is a touch above Wall Street analysts’ average estimate of 4%, and could give the market further assurance that the economy remained strong in the April through June period. Remember, the government gets one more crack at this one, so 4.2% isn’t final.

Of course, the Q2 GDP number is a backwards indicator by its very nature, since the Q2 ended back on June 30. For investors, the current Q3 growth probably has more meaning, and it seems to be galloping along. The Atlanta Fed’s GDP Now indicator, updated last week, pegs Q3 GDP growth at an impressive 4.6%. Still, it’s a couple months until the government weighs in with its official word.

Trade talks with Canada are on the agenda Wednesday, but this might be more of a “watchlist” item than one that really affects the market much, at least for now. Still, any sign of progress on trade could give stocks a boost. Also on the international front, European and Asian stocks put in mixed performances early Wednesday. Gold dropped, but oil climbed.

New All-Time Highs For Nasdaq and SPX on Tuesday

Though stocks didn’t make big strides Tuesday following Monday’s strong rally, the Nasdaq (COMP) and the S&P 500 Index (SPX) both posted new all-time highs, with the SPX briefly poking its head above 2900 for the first time ever before closing a touch below that round number.

The U.S. dollar hit a four-week low Tuesday, which might be helping stocks and also could be a sign that caution is starting to retreat a bit. Sometimes investors flock to the dollar in times of stress, and that looked pretty clear back a couple weeks ago when worries flared about Turkey’s debt. However, the dollar rebounded a bit early Wednesday.

Consumer Confidence Highest Since “Y2K” Era

If anyone was looking for evidence beyond the recent retail earnings season that consumers are thriving, they appeared to get it Tuesday as consumer confidence jumped to a nearly 18-year high. Yes, it’s like going back in time to the days of dial-up Internet and the “Y2K” scare in terms of how consumers feel about the economy, with the headline number climbing to 133.4. That was way above both the prior month’s 127.9 reading and the 126.5 that Wall Street analysts had expected, and the highest since October 2000. 

Consumer confidence arguably starts playing a bigger role in the economy this time of year as Halloween and then the holiday shopping seasons both loom. It looks like many Americans are in good shape to go out and spend over the next few months, but investors might want to consider carefully watching wage and inflation data in coming weeks for more clues about what consumers might do. Also, both the consumer discretionary and consumer staples sectors have been riding high recently (see Figure 1 below).

Another potential note of caution comes from the automobile industry, where U.S. demand has “topped out,” according to The Wall Street Journal. Global demand could also be under pressure as trade battles seem to be “undermining” consumer confidence outside of the U.S., the newspaper reported Tuesday.

From a technical perspective, one potentially negative note Tuesday was the S&P 500’s inability to stay above the psychological 2900 mark and close there (see more below). It just seemed like there wasn’t much buying interest at higher levels, in part because of a general lack of fresh bullish news. The positive tidings from Monday about a possible trade deal with Mexico appear to have been absorbed, and the latest consumer confidence number, while really strong, evidently wasn’t enough to push the SPX above 2900 for the full day. Profit taking might be at work.

Profit-Taking Hits Some Tech Names, But Airlines Keep Climbing

The profit-taking seemed evident in a couple of individual stocks, notably tech names Nvidia (NVDA) and Advanced Micro Devices (AMD). Both stocks took a breather Tuesday, but it didn’t look like there was any bad news. These two names have had big moves lately, especially NVDA, which climbed 13% in the last six sessions leading into Tuesday. It’s not beyond the realm of possibility that with a rally like that, some investors might have decided to take some shares off the table.

Looking at the broader tech industry, however, several sub-sectors like software, cloud computing, and semiconductors continue to show strength, Briefing.com pointed out.

Another sector that’s been mostly up over the last week is airlines, with United Continental (UAL) one of the leaders. It was up another 1% Tuesday and hit a new 52-week high. Remember, when consumer health improves, it’s not just retail stores that benefit. The travel industry, namely airlines and hotels, also can be a beneficiary. If you see airline stocks continue to move higher, that’s often a bullish sign. In a struggling economy, travel is one of the first places people—both businesses and vacationers—tend to cut back. That doesn’t appear to be happening, and many airlines have done a good job expanding their capacity.

One fear some people have about airlines is their potential vulnerability to higher oil prices, and there was some talk about that on a few of their earnings calls. But remember crude by and large has stayed mostly below $70 a barrel the last few months, not really the kind of territory that’s typically a problem for the airlines. And if crude suddenly explodes to  $100 again, as it did a few years ago, the airlines won’t be as likely to get hammered. Why not? Because they appear to be in a better place with their hedges. By getting out in front and hedging their energy costs, the airlines might have mitigated a lot of that risk. 

More Inflation Data Due Thursday

Looking ahead to tomorrow, consider keeping watch for July Personal Consumption Expenditures (PCE) prices, due at 8:30 a.m. ET. In June, this metric, which is closely watched by the Fed, rose just 0.1%. The core reading, which strips out food and energy, also rose 0.1%. On a year-over-year basis, PCE prices and core PCE prices were up 2.2% and 1.9% in June, respectively. The 2.2% is slightly above the Fed’s 2% inflation target, but below recent consumer price index (CPI) readings. Any major uptick in PCE prices might trigger some concern among investors.

Another thing to consider toward the end of this week is the possibility of low-volume trading ahead of the three-day Labor Day weekend. Sometimes thin trading can mean sharper up and down moves, so traders might want to use extra care coming into and out of the markets, and long-term investors might want to keep in mind that sudden market jolts are a bit more likely on days like these.

In addition, some investors have their eyes on the yield curve, which keeps looking flatter. Sometimes in the past a flat yield curve has been associated with recessions, but economists continue to debate whether that’s a cause or an effect. In any case, the spread between the two-year and 10-year Treasury yields remains in focus, with a gap of just over 20 points representing the lowest level in a decade.

FIGURE 1:  Clogging the Aisles: Over the last three months, both consumer staples (candlestick) and consumer discretionary (purple line) have outpaced the broader S&P 500 (blue line). One possible reason behind these sectors’ strength came into sight on Tuesday when the Conference Board reported a nearly 18-year high in consumer confidence. Data Source: S&P Dow Jones Indices.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

A Long Way From 1957: Yesterday we briefly discussed milestone numbers for the Nasdaq (COMP), which pushed above 8000 for the first time ever on Monday. It was the S&P 500’s (SPX) turn in the spotlight Tuesday, as that venerable index climbed above 2900 for the first time in its history dating back to when it debuted in its present form in 1957 at a level of around 45. The 2900 mark was the third “round number” milestone just this year for the SPX, but the first since January when it raced quickly past 2700 and then 2800 in a span of only two weeks. One caveat: The SPX reached 2900 intraday Tuesday but didn’t actually close above it, and to some market watchers a close above a round number means more than an intraday high above one.

It’s been seven months since the last time the SPX pierced a round number, but in the 61-year history of the index this kind of gap between milestones isn’t really too long. For instance, the SPX first closed above 1500 in March 2000 with the “dot.com” rally in full swing but about to burst. From there, it took more than 13 years for the SPX to close above 1600. During that long gap, three different presidents held the Oval Office (Clinton, Bush, and Obama), and the SPX swung down to below 700 during the trough of the Great Recession in early 2009. If you’re thinking 3000, it’s been just four years since the first 2000 close, and we’re roughly 90% of the way to the next triple-zero. In contrast, it took 16 years (1998-2014) for the SPX to advance from a closing price of 1000 to one of 2000. 

Jeweler Sparkles: Unlike some of the Wal-Marts (WMT) or Targets (TGT) of the retail world, Tiffany’s (TIF) caters to a specialized clientele, usually the well heeled. Because of that, TIF’s sales are sometimes viewed as kind of a barometer for how wealthy people are getting along in this economy. Based on last quarter’s results, the country club set is doing just fine, thank you. Sales in the Americas rose 8% as the company beat Wall Street analysts’ estimates for both sales and earnings per share. TIF also increased its full-year earnings outlook and cited strong jewelry sales. We’ve said before that a rising economic tide appears to be lifting most boats in retail, or, in this case, yachts.

Sticky Situation: If it seems like the U.S. 10-Year Treasury note yield hasn’t budged much recently, that’s because it hasn’t. The recent chart looks about as exciting as watching paint dry, stuck between about 2.82% and 3% since the end of May. That narrow 18-basis point range looks even narrower when you consider how yields roared from 2.4% at the start of the year all the way up to 3.1% by May, a 70-basis point rise in about five months. Like the stock market, Treasury yields appear to be waiting for the next possible catalyst now that earnings season and the Fed’s Jackson Hole meeting are over. Many investors might remain slightly cautious ahead of political season in the U.S., trade jitters, and the pending holiday weekend, and that could keep yields compressed. However, there was a sense early this week that caution might be fading a little, something that could be indicated, as we noted Tuesday, in lower stock prices for the utilities sector and a slight gain in yields.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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