Worry Starts To Grow Amid Geopolitical Rumblings, Earnings Misses

The market got knocked back down in a big way Thursday, upending most of the week’s early gains. Growing concerns about earnings and geopolitics seem to be raising investor worry.

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Key Takeaways

  • Major indices fell more than 1%, taking out most of the gains from earlier this week

  • Geopolitical concerns out of Europe, China and Saudi Arabia all raise investor worry

  • Some companies are missing on earnings, a new wrinkle

(Thursday Market Close) Geopolitics stormed back into the picture in a big way Thursday, helping to wipe out much of the market’s recent comeback and raising new concern about whether the recent softness might end up getting more prolonged. There’s a little more worry creeping into the market than there was a week ago.

Today’s losses seem a little more foundational than last week, when a lot of the sell-off likely reflected profit taking. This time, bad news from all over the world and even from U.S. earnings reports ganged up to send major indices down 1.2% to 2%, back to levels not far from last week’s lows. Nasdaq (COMP) got the worst of it, falling more than 2%, while the other major indices fell more than 1% but finished off their mid-session lows.

Some Context

In the face of these losses, it’s important to keep things in perspective. From a percentage basis, the losses over the last week aren’t incredibly huge. Sometimes people see the big losses in the Dow Jones Industrial Average ($DJI) and blow them out of proportion. The moves aren’t that outrageous, but the raw numbers are big compared with 10 or 15 years ago. Also, some technical support does appear to be holding for now, with the S&P 500 Index finishing right at its 200-day moving average of 2768. The 200-day has been a key support level most of the year.

International events played a big role Thursday, with three in particular seeming to cause the most concern. First, European Central Bank (ECB) President Mario Draghi said European Union budget rules have to be respected by all, Reuters reported. Though Draghi didn’t specifically mention Italy, many analysts saw his remarks as a sign that the ECB is calling out Italy for trying to get around EU budget rules. This raised new concern about the situation in Italy and how it might affect the rest of the European economy, and the dollar gained on the euro. The rising dollar might have helped smack commodity markets Thursday.

Before that, China’s market fell sharply overnight, and a survey showed consumer confidence dropping dramatically in that major economy. Rising fuel prices, a weak stock market, and the trade war between the U.S. and China all played into falling confidence, media reports said.

Closer to home, Treasury Secretary Steven Mnuchin tweeted that he wouldn’t participate in a Saudi economic conference as tensions grew over the apparent killing of a Saudi journalist. Though crude prices fell back toward one-month lows below $69 a barrel, any uptick in tension between the U.S. and Saudi Arabia is probably worth monitoring, considering they’re major trading partners.

Any one of these events might have taken some steam out of the market on a given day. To have all three hit pretty much at once really didn’t give stocks much of a chance. All this comes after the Fed’s September minutes released late Wednesday struck a hawkish tone, helping boost the benchmark 10-year Treasury note yield back above 3.2% early Thursday. The yield did retreat to 3.18% by end of day as bonds found some buyers amid the stock market washout.

Earnings Triggering Some Doubt

One positive earlier this week that might have helped play into Tuesday’s massive rally seemed to be earnings, most of which were beating analyst estimates before today. However, IBM (IBM) and some other closely-watched firms have started to change the tenor of earnings with concerns about the economy, something we didn’t see as much of the last two quarters. For instance, shares of equipment rental company United Rentals (URI) tumbled nearly 15% Thursday despite the company beating estimates. Some investors seemed to see URI’s guidance as disappointing. 

In addition, shares of Sealed Air Corp. (SEE) fell sharply after the company’s earnings came in shy of Wall Street analysts’ estimates and it said in a press release that it had been “adversely affected by currency headwinds and higher than expected raw material and freight costs.”

These kind of market losses are arguably 100% earnings related. The last two earning seasons didn’t see many of these kind of events, except perhaps in biotech where it’s hard to predict results. There have been some big misses so far, and when earnings are more predictable you don’t tend to see these kind of reactions.

All of this sets the market (and investors) up for what looks like a potentially interesting Friday. The question is whether things settle down and start to set a level with the end of the week upon us, or if there’s some kind of final blow-out as major info tech earnings loom next week. 


FIGURE 1: TECHNICAL LEVEL HELD: The S&P 500 Index (SPX) dipped below its 200-day moving average (blue line) for the second time in a week, but settled right on it. 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.


Good Trading, 

JJ

@TDAJJKinahan 

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