The market looks like it might be torn between good news and bad today as some weak earnings data and the end of N. Korea talks compete for attention with a better-than-expected GDP number.
GDP comes in at 2.6% for Q4, better than expected but lower than Q3
Negative sentiment grows after U.S. talks with North Korea end with no deal
Lots of earnings news hits the wire, some of it negative
(Thursday Market Open) After being wounded by negative geopolitical news, stocks began to take on a brighter hue Thursday when investors caught wind of a better than expected U.S. economic growth number. Whether the gross domestic product (GDP) data can outweigh a disappointing outcome for North Korea talks might be today’s tug-of-war.
The delayed reading on Q4 GDP showed the economy growing 2.6% during the quarter. That was well above many analyst estimates for 2% or even less, though it was down from 3.4% in Q3. The 2.6% growth isn’t a really impressive number historically, but considering the government shutdown and market meltdown going on that quarter, it’s tempting to call it a win for the market.
However, geopolitics just won’t go away. More of it rained down early Thursday, helping push stocks lower in pre-market trading before the GDP data. The end of a U.S./North Korea summit with no deal, along with growing concerns about progress in U.S./China trade talks, both weighed on sentiment as trading got started. Last week optimism was the watchword for these geopolitical events, but this week there’s uncertainty creeping in. Markets tend to dislike uncertainty.
Looking at the summit between President Trump and North Korea, it didn’t end with a deal as many had predicted, but we’ll see if having it end this way leads to a better place for China/U.S. trade talks or further China/U.S. cooperation on the North Korea situation. Politics can lead to strange bedfellows.
Back home, a bright spot came from an unlikely place, as J.C. Penney (JCP) shares surged more than 20% after the company posted stronger than expected earnings and outlined a plan to close more stores. To put things in perspective, earnings were down 68% from a year earlier and the stock is down sharply from its 52-week high even with today’s gains factored in. Net and comparable sales fell from a year ago during the quarter. So the company, which many analysts had placed on “bankruptcy watch” over the past couple years, isn’t out of the woods just yet. But this morning’s results do appear to be a lifeline, at least for the time being.
However, Keurig Dr Pepper’s (KDP) earnings were less impressive. Its shares were down about 3.5% in pre-market trade after its Q4 revenue fell short of expectations, although profit matched third-party estimates. KDP said it expects 2% sales growth for this fiscal year. Stil, KDP shares were up 44% the past year, before the report.
A few other earnings reports that were slightly disappointing came out last night, including from HP (HPQ), Fitbit (FIT), and Box (BOX). There was nothing major with these, but together they might be adding to pressure on the market early Thursday.
Fed Chairman Jerome Powell didn’t set off any major fireworks in his second day of testimony on Capitol Hill, but he did make clear that the Fed is close to a timetable for when its balance sheet reduction will end. He also tried to scotch market chatter that the Fed might have a new inflation target other than the 2% one it’s talked about for many years.
Speaking of inflation and the Fed, this week are scheduled to get a look Friday at what analysts say is the Fed’s favorite inflation metric: Personal Consumption Expenditure (PCE) prices for December. Back in November, headline PCE rose 1.8% and core PCE rose 1.9%, both below the Fed’s 2% goal. On a monthly basis, PCE rose just 0.1% in November.
It might be interesting to see what December brought for PCE prices, considering holiday shopping appears to have been slightly soft and the government shutdown and market meltdown were both happening that month. A weak PCE wouldn’t be all that surprising, considering the circumstances.
For any bullish investors watching the technicals, it’s probably seemed like a frustrating week. The S&P 500 Index (SPX), which until this week was on a roll in 2019, just hasn’t been able to get traction above the psychological 2800 level. After sniffing around above 2800 intraday earlier this week but closing below it, the SPX didn’t even hit 2800 on Wednesday, nor did it come near the old intraday high of 2814 from December that some technicians see as another point of resistance.
It’s hard to say why the market appears to be stalling out a little at these levels, though lack of major positive news catalysts could potentially be a reason. Another thought is that some investors might be keeping cash on the sidelines looking to buy dips, and others are hedging or lightening their accounts a bit.
Major indices just haven’t gone much of anywhere the last two days, but for what it’s worth, the Nasdaq (COMP) did rise slightly on Wednesday while other indices lost traction. The COMP, known for its heavy population of Info Tech and biotech names, continues to lead the SPX in year-to-date performance, perhaps a sign of investors getting more confident taking a “risk-on” attitude. Small-caps also are outpacing the other major indices, another possible sign of investor confidence.
The undercurrent continues to be trade talks with China, where more details emerged yesterday. The U.S. is going to take steps to formally abandon plans to increase tariffs on $200 billion of Chinese goods to 25%, from 10% now, while the two sides continue talking, The Wall Street Journal reported. The two sides are also discussing enforcement of any potential deal.
As long as talks continue and tariffs are off the table, that’s potentially one less thing for investors to worry about. However, if talks just go on and on without more details of how an eventual agreement might work, uncertainty could grow for corporations anxious to know the future rules. That’s one reason why the market might remain on tenterhooks as long as these negotiations continue. There’s also fear that if the two sides run into trouble, negative headlines could emerge and put some of the stock market’s recent trade-related gains at risk.
Though the major U.S. indices pretty much jogged in place Wednesday, individual sectors saw some moves. Energy was a strong performer as crude snapped back from the early-week softness after the weekly U.S. supply report showed a sharp drop in stockpiles. That can sometimes be a sign of growing demand. It didn’t hurt, either, that Chesapeake Energy (CHK) motored to double-digit gains after the company smashed Wall Street’s earnings per share projections. CHK also forecast flat sequential spending, something industry investors often like to see in a business where costs can be heavy.
In the Health Care sector, Mylan (MYL) shares fell double-digits Wednesday after the company had a rough quarter amid restructuring of a U.S. manufacturing facility and weak sales growth in Europe. Investors seemed unhappy with its guidance, as well. Health Care has been a rough neighborhood in the market so far this year, and things didn’t get any better Wednesday with MYL’s earnings and the presentation of a plan in Washington to expand Medicare (see more below).
Meanwhile, the semiconductors had a mostly lower day, with Micron (MU) a big mover as shares fell more than 3%. The company’s shares had been on a nice run until Wednesday, but the sector as whole has been pretty choppy lately. A trade agreement with China would likely be seen as positive for chip makers, and the gaming industry remains a firm part of many companies’ businesses. However, on the downside, the longer replacement times for cell phones might continue to be an overhang and chip startups are starting to nip at some of the big guys’ heels, industry watchers have said.
Over in Consumer Discretionary, some of the big stores had good days following earnings from Lowe’s (LOW) and Best Buy (BBY). Energy led all sector gains Wednesday, followed by Industrials and Financials.
Figure 1: Healthy Industrials: While Health Care (purple line) was one of the sector leaders last year as the broader market crumbled, as this six-month chart shows, Industrials (candlestick) have picked up Health Care’s leadership since the start of the year, perhaps a sign of investor willingness to embrace a more “risk-on” sector. 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.
Patience on Payrolls: It’s the first Friday of March tomorrow so let’s get ready for Payrolls…wait—not so fast. Though the Labor Department normally releases its monthly Payrolls data on the first Friday of a new month, that’s not happening this time around. Instead, the jobs data for February are due a week from tomorrow, on March 8. There’s no explanation for this on the Labor Department’s website, and it’s not shutdown related because that particular department of government wasn’t affected by the government shutdown. Instead, it’s possible that with February being a short month and the first of March landing on a Friday, the government simply needed a few extra days to compile and organize the numbers. That means investors have a few extra days to wait for their monthly data dose. Stay tuned for next Friday!
High-Flying Sector Loses Ground: Wednesday’s losses over at Mylan might be another reminder that Health Care is among the worst-performing U.S. sectors year-to-date, up just 6% compared with 11% for the S&P 500 Index (SPX). This could possibly reflect many investors embracing more “cyclical” sectors like Industrials and Info Tech amid the market’s rally. It’s a big change from late last year, when Health Care was one of the best performers in the S&P 500 as some investors rushed to find so-called “defensive” places to park their funds. Health Care also might be struggling with valuation issues, especially in the pharma space where some of the biggest firms have price-to-earnings ratios well above the SPX. Worries about a proposed “Medicare for all” plan presented Wednesday in Congress might be hurting shares of some of the health insurance firms by raising uncertainty.
Getting back to pharmas, they came under the spotlight in a negative way this week at a Senate committee hearing where top executives got called on the carpet by lawmakers expressing frustration about what they said was the high cost of medicines. CEOs defended their firms and said “price controls” wouldn’t make medicine affordable and that high prices reflect the steep cost of drug research, according to the Associated Press. Still, both parties in Washington and President Trump have made drug prices an issue, and it continues to be a possible industry challenge that pharma investors might want to keep in mind.
Yield Check: One possible boost for Health Care and other sectors with big dividends could be the continued weakness in U.S. Treasury note yields, which has the potential to make dividend stocks appear more appealing to some investors. The current SPX yield is just under 2%, compared with 2.68% for the benchmark 10-year yield as of midday Wednesday. That’s about a 70-basis point difference, down from more than 120 basis points last fall when the 10-year rose above 3.2%.
This doesn’t mean dividend stocks necessarily outweigh Treasuries yet in the minds of those seeking yield, or will anytime soon, but it’s just something to potentially consider if that spread keeps declining. Remember, too, that the S&P 500’s overall dividend yield might appear artificially low because some the highest-weighted stocks in the S&P 500 have small or no dividends. Many big companies with smaller market capitalizations than behemoths like Apple (AAPL) or Amazon (AMZN) have yields of 2% or higher. Some are even above 4%.
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