Wakeup Call: Back From Weekend to Disappointing China, Global Growth Data

After a long weekend, the U.S. market comes back to work Tuesday facing disappointing economic data from both China and the IMF. World markets appear under pressure from the numbers.

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6 min read

Key Takeaways

  • Soft economic data appears to weigh on world markets

  • Concerns about government shutdown continue

  • J&J and IBM among companies reporting today

(Tuesday Market Open) After a long, snowy weekend across much of the country, a shortened week kicks off with the financial wheels still spinning on some icy patches despite this month’s sparkling stock market rally. 

Some of the slippery spots early Tuesday included a softer global economic growth forecast from the International Monetary Fund (IMF) and Chinese economic data that showed the lowest annual growth for the country since 1990. 

There’s also the government shutdown, now in its second month. Movement over the weekend seemed slim, judging from news reports, and investors might want to keep in mind growing concerns about how this situation might affect economic growth. With 800,000 Federal employees not collecting paychecks, the lack of cash could start to reverberate beyond those directly affected. Rents won’t be paid, people might be curbing purchases at malls and grocery stores, and airplanes won’t be full. 

Delta (DAL) said last week that the shutdown is costing it $25 million a month. Plus, about 10,000 companies hold contracts with currently-shuttered Federal agencies, according to the Washington Post, which estimated the weekly value of their work to be about $200 million.

World markets were generally lower early Tuesday, and major U.S. indices fell in pre-market trading. In earnings news, Johnson & Johnson (JNJ) reported earnings and revenue results that surpassed third-party consensus estimates, and IBM (IBM) is scheduled this afternoon.

Major U.S. indices all gained around 3% last week, and the S&P 500 Index (SPX) is up 6.5% so far in January—its best yearly start through this date since 1987. Stocks have risen four weeks in a row. The markets have been riding along partly on positive sentiment around U.S./China trade, though it’s unclear how much of last week’s news represented actual progress. Intellectual property issues continue to be a challenge in the talks, Bloomberg reported over the weekend.

China, IMF Data Fail to Impress

If you took Monday off and missed the news, there were some developments that could play into the action today. The latest batch of Chinese economic data came out Monday and it looked like a mixed bag. Consumption and factory output both rose in December, but Q4 growth fell to 6.4%, the weakest since 2009. Remember, just last week the Chinese government started taking some stimulus measures, but one analyst told Bloomberg she doesn’t necessarily think the “measured” approach China is taking will help much to spur global growth. For all of 2018, China’s economy grew 6.6%, the slowest since 1990.

Also, the IMF sees the world economy growing 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage points, respectively, from its previous estimates. “The risk of a sharper decline in global growth has certainly increased,” the IMF said. This doesn’t necessarily mean anyone should panic, but it does help reinforce some thoughts already circulating that a slowdown might be on the way.

The U.S. government might be stalled, but there’s plenty of activity overseas as the week continues. Notably, the European Central Bank (ECB) is scheduled to meet mid-week and hold a press conference Thursday. The meeting takes place as some analysts see fading momentum in the European economy. 

There are some earnings of note in the days ahead. Procter & Gamble (PG) and Ford (F) bow later this week. A bunch of consumer staples companies (PG included) are among those reporting. 

Flocking Toward More Risk-On Trades

Last week ended with growing optimism and dissipating volatility. By late Friday, it felt like the entire market was heaving a big sigh of relief. Some investors appeared to be coming back to buy things with volatility trending lower, and suddenly, belief seemed to grow that maybe things weren’t as bad as people might have thought. 

It’s a far cry from the end of December, when 71% of S&P 500 companies had reached bear-market territory, according to Barron’s. Going into Monday, the SPX had recovered about 50% of the losses it sustained between the early-autumn record high and the Dec. 24 close that some analysts now think might have been some sort of bottom, though there’s no guarantee that stocks won’t go back and re-test that low at some point.  

From a sector standpoint, many investors continued to flock toward more aggressive parts of the market like financials and energy on Friday, with financials apparently getting a lift from another rise in 10-year Treasury yields. We’ll have to see if the 10-year can continue to support financials in the days ahead. Financials had the best performance of any sector last week. Crude, another good indicator of economic strength or weakness, climbed to two-month highs Monday on what looked like hope for trade progress with China that might lead to improved demand.

The other positive takeaway from last week was the market’s ability to stay strong into Friday’s close ahead of a three-day weekend. That might speak to investors feeling a little less nervous about potential headline risk. The market’s most widely watched fear indicator, the VIX, fell to below 18 at times on Friday. That’s near the historic norm, and way down from levels above 30 seen back in late December.

As key earnings loom, consumer health still looks strong. However, a bit of concern developed Friday when the January University of Michigan Sentiment report headline number fell way short of Wall Street analysts’ expectations. The reading came in at 90.7, down from 98.3 in December and below the Briefing.com consensus of 96.0. 

The people surveyed in the report said they were concerned about the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies. This might remain something to consider if the shutdown continues and trade talks don’t accelerate toward a deal.

On a technical note, the SPX starts the week well above its 50-day moving average of 2625. It looks like that level might now form a support point, so the question is whether the SPX can spend some time above the 50-day as opposed to below it.

Figure 1: Risk Assessment: See the candlestick line in the one-month chart above? That’s the S&P 500’s performance over that time frame. All the colored lines above it show some of the sectors that outperformed the broader index the last four weeks, including energy, consumer discretionary, industrials, and financials. This helps show how some investors are embracing more aggressive territory in the market. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Leading the Pack: Back at the start of the month we mentioned the need for certain sectors to show leadership if the rally was going to grow some legs. Three weeks later, it looks like some of the key sectors have come through. Through Friday’s session, leaders so far this year included some of the key cyclicals: Energy, financials, industrials, and consumer discretionary are the top performers year-to-date. All these sectors have outperformed the S&P 500 (SPX) since the end of December, perhaps a sign that some nvestors are starting to feel more comfortable embracing risk. 

Meanwhile, some of the so-called “defensive” sectors that helped lead in Q4, including utilities, health care, and staples, all are near the back of the pack so far in January. There’s still a long way to go in Q1 and the next news about trade with China could always conceivably be negative and help make people risk-averse again, but investors’ embrace of more aggressive stocks appears to be a positive sign.

Housing Relief On Way? Last week saw 30-year mortgage rates fall back to 4.45%, the lowest they’ve been since last spring, according to MarketWatch. That’s down from nearly 5% back around Halloween, when rising interest rates seemed to spook the entire stock market. Though recent housing market news hasn’t been too positive—most recently what we mentioned Friday about weaker than expected preliminary Q4 results from paint maker Sherwin-Williams (SHW) and home construction company PulteGroup (PHM) receiving a downgrade—home buyers tend to be motivated by monthly payments. If rates keep falling, it’s possible some home buyers will make their calculations and figure out they can afford a little more home. That means higher-priced properties might start getting more traction. One thing holding back housing, according to many analysts, is the current excess of luxury homes that, with rates near 5%, started looking unaffordable to more buyers.

To put this into clearer terms: A $250,000 mortgage at 5% has a monthly principal and interest (P&I) payment of $1,343. But if the rate falls to 4.5%, the same payment would get someone a $265,000 mortgage. Maybe that gets them a home with one more bathroom or a bigger kitchen. Alternatively, you could view that interest rate drop as an extra $76 a month to be used toward DIY projects or other discretionary spending. Either way, a fall in mortgage rates could be seen as a windfall for the consumer.

The “It Happens to Everyone” File: Think you suffered a bad quarter with your trading or investing? Well, so did many of the professionals, it appears. That’s evident after the big banks reported Q4 earnings last week and cited poor performance in their trading divisions. Seems that low volatility made it hard for them to successfully trade in 2017, and high volatility in late 2018 also proved difficult for them to navigate. 

The average investor might beat themselves up about their sagging portfolios, but pros can have a tough time too. The reality is, it’s been very difficult for anyone to consistently make money in the market over the last year and a half. It’s a tough market for everyone, so investors might want to consider putting greater emphasis on staying in their game, keeping trades relatively small, and not getting over-extended. These strategies won’t guarantee success, of course, but treading cautiously in volatile markets is never a bad idea.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for week of Jan. 21. Source: Briefing.com
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Key Takeaways

  • Soft economic data appears to weigh on world markets

  • Concerns about government shutdown continue

  • J&J and IBM among companies reporting today

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